Loss Carry-Back Tax Offset – Why planning before 30 June is so important to this year and future years

By Chris Smith

On 6th October the Government released the Federal Budget for 2020/21.

A key announcement is the Loss Carry-Back Tax Offset that allows tax losses incurred in FY 2020, FY 2021, and FY 2022 to be offset against tax profits in FY 2019, FY 2020 and FY 2021.

Summary:

  • Only applies to companies
  • The offset cannot exceed the available franking credits
  • Different tax rates for applying to loss years will impact the $ value of the credit available

Tax Planning – Why it is so important for the Loss Carry-Back Tax Offset:

  • Interaction with the Temporary Full Expensing of Depreciating Assets may mean you are eligible for this offset even though the business is otherwise trading profitably
  • Franking credits are required to access the offset:
    • Critical to review current franking account balance
    • Review dividends that will be declared at 30 June for profit share / remuneration purposes
    • Review dividends required for Div 7A loan repayments
  • Implications of depleting franking credits for FUTURE dividends – may not be in the shareholders’ best interests to access the loss carry-back (this is particularly IMPORTANT when dividends are used to repay Div 7A loans as it would be a terrible outcome to have unfranked dividends in future years)
  • Review and adjust Director remuneration strategy (for example, is a salary this year preferable to dividend profit share?) – consider the impact on both the loss AND franking credits
  • Are you taking advantage of other strategies to maximise tax deductions in FY 2021 that will increase your eligibility for the Loss Carry-Back Tax Offset?

 

For more information on the planning opportunities, please contact our office on (08) 6212 7200 to discuss further.