By Chris Smith
Important planning considerations BEFORE choosing to use the Loss Carry Back Tax Offset in your 2021 Tax return
The temporary loss carry back rules allows companies to carry back losses as far back as the 2018-19 income year to generate a tax refund.
As a number of companies have recently taken advantage of the temporary full expensing of depreciable assets, we are seeing a number of otherwise profitable companies now reporting tax losses.
This provides an opportunity for some of those companies that paid tax in FY 2019 and FY 2020 refunded.
HOWEVER, there are some important planning risks to be aware of before making the choice to take advantage of this offset
Calculation of the tax offset:
You must use the tax rate in the year that you made the loss.
For FY 2021 that is at 26% for base rate entities, and for FY 2022 it is 25%.
This is even the case if the tax was paid at the higher 27.5% in FY 2019.
The loss carry back offset reduces the companies Franking Account balance.
If the business owners are paid via dividends, OR, managing Div 7A Loans – then they run the risk of paying out unfranked dividends or incurring franking deficit tax which should be avoided with appropriate tax planning.
With generous tax deductions for capital equipment, it may be a number of years until some companies are actually required to pay tax and restore the franking account balance into a position to pay dividends and careful planning is required.
Be careful to review the Continuity of Ownership Test or the Business Continuity Tests.
Companies that have undertaken acquisitions from related parties should also ensure that acquisition was not undertaken for the primary purposes of accessing an immediate deduction to take advantage of the loss carry back offset.