Loss carry-back scheme to encourage investment

To stimulate investment and risk-taking in new businesses, companies will be permitted to carry-back up to $1 million of losses annually, against taxable income arising in the prior two years. This enables the companies to receive a refund against tax previously paid.

The measures will provide some relief for companies that suffer temporary losses. Whilst this may be seen as a positive step for business owners, there are some factors that must be taken into consideration before being able to take full advantage of the new rules.

A one year loss carry-back will apply in 2012/2013, where tax losses incurred in that year can be carried back and offset against tax paid in 2011/2012.

For 2013/2014 onwards, tax losses can be be carried back and offset against tax paid up to two years earlier.

Companies will be able to carry back up to $1 million of losses each year. This measure may provide a cash benefit of up to $300,000 a year.

An additional important limitation to the availability of any loss carry-back is that it will be capped at the balance of a company’s franking account.

In effect, this will ensure that a company is only able to claim a refund of tax that it has already paid and that it has not used to frank dividend payments.

It also avoids potentially troublesome interaction with franking deficit tax (which hits a company when its franking account balance becomes negative).

The loss carry-back tax reform is a recommendation of the Business Tax Working Group. The Government is expected to hold further discussions in the near future.