Loss carry back provides a much needed boost to private companiesDOWNLOAD
26 June 2013: Legislation passed in Parliament yesterday allows companies to ‘carry back’ up to $1 million of losses, against profits booked in the previous tax year. This enables losses from the current financial year to be offset against tax already paid to the ATO during more profitable years, up to a limit of $1 million for each year. This could provide a cash injection for companies of up to $300,000.
The new loss carry-back rules will come into effect for companies lodging their tax return for the current financial year, ending 30 June 2013.
A transitional one-year carry-back period will apply for the 2012-13 income year. From 2013 onwards, a two-year carry-back period will be implemented.
Commenting, Deloitte Private Tax partner David Pring said: “This change was originally announced 13 months ago in the 2012 Federal Budget, and private companies have been somewhat frustrated by the delay. Their patience has now been rewarded and they can utilise the new rules to help them through a very challenging economic environment.
“Business owners will receive their benefits in their 2013 return, which is not due for lodgement and payment until December 2013 or February 2014,” said Mr Pring.
“The loss carry-back will be limited to the balance of a company’s franking account, which will limit the benefit to those companies that have not paid out prior-year profits,” said Mr Pring.
“Additionally, the $1 million cap on the amount of losses that a company is able to carry back translates to a maximum benefit of $300,000 at the current 30% company tax rate per year.”
The rules can be illustrated by way of a simple example:
Last year Company A paid $300,000 in corporate tax on profits of $1 million, as Company A did not pay a dividend last year it has franking credits of $300,000.
This year Company A made a loss of $1 million.
Prior to the change in loss carry back legislation, the loss of $1 million would be carried forward to be offset against any future income generated (subject to the company satisfying the continuity of ownership or same business tests).
Under the new law, Company A would be entitled to an offset of $300,000 in respect of the $1 million loss incurred this year. The company’s franking account will be reduced by the amount of the offset.
Although the changes are welcome news for small business owners, taxpayers should be wary that the carry-back losses initiative will only be available to corporate tax entities. This includes companies, corporate limited partnerships, corporate unit trusts and public trading trusts.
“This means that those operating their businesses through other entities (such as sole traders, trusts and partnerships) will not be eligible to carry back their losses,” said Mr Pring.
Mr Pring added that, “Taxpayers should not forget that the eligibility to claim carry-back losses will still be subject to integrity rules in the form of a modified continuity of ownership test and same business test.”
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