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  • Working out the tax offset

    Loss carry back provides a refundable tax offset. Refundable tax offsets can reduce the amount of tax you are liable to pay to zero which may result in a refundable amount.

    The amount of tax offset may be affected by your net exempt income, income tax liabilities and the surplus in your franking account.

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    Watch: Your guide to calculating the loss carry back tax offset

    Media: Your guide to calculating the loss carry back tax offset
    http://tv.ato.gov.au/ato-tv/media?v=bi9or7odetoe7qExternal Link (Duration: 07m:01s)

    You can find more information on some of the topics mentioned in the video.

    Find out about:

    Exempt income

    In working out the amount of your tax offset, you must reduce the amount of loss you are carrying back by any (unutilised) net exempt income you had for the income year you are carrying back the loss to.

    Once the exempt income has been used to reduce a loss you are carrying back, you do not use it to reduce another loss carried back to that same income year.

    Example: exempt income

    In the 2018–19 income year, MNO Pty Ltd had net exempt income of $20,000.

    MNO Pty Ltd has a tax loss of $100,000 in the 2019–20 income year and $50,000 in the 2020–21 income year. In the 2020–21 income year, it chooses to carry back all these amounts to the 2018–19 income year.

    The $100,000 it carries back from the 2019–20 income year is reduced by the $20,000 of net exempt income in the 2018–19 income year to be $80,000 when calculating the tax offset.

    It does not need to reduce the $50,000 it carries back from the 2020–21 income year because its exempt income in the 2018–19 income year has been fully used to reduce the loss carried back from the 2019–20 income year.

    End of example

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    Tax liability in the year carried back to

    The amount of your tax offset cannot exceed your income tax liability for the income year you are carrying the loss back to.

    Once the amount of your income tax liability for an income year has been fully used to claim tax offsets, you cannot claim any further offset amounts by carrying back losses to that year.

    Example: tax liability used entirely

    In the 2018–19 income year, ABC Co had an income tax liability of $100,000 and no net exempt income.

    ABC Co makes a tax loss in the 2019–20 income year and carries that loss back to the 2018–19 income year. It works out the amount of its tax offset for the 2019–20 tax loss would be $100,000. ABC Co has used all of its $100,000 income tax liability in the 2018–19 income year.

    If ABC Co also made a tax loss in the 2020–21 income year, it cannot carry back that loss to the 2018–19 income year because the tax liability in that year has been fully used.

    End of example

    Franking account

    The amount of your tax offset is also limited by the surplus in your franking account on the last day of the income year in which you are claiming the tax offset.

    A franking credit is recorded in the account if you pay a PAYG instalment. Please note, paying your Quarter 4 PAYG instalment on or before the last day of the income year will not result in a credit to your franking account on that day. The credit will occur in the subsequent income year.

    A franking debit is recorded in the account if you receive a refund of income tax. A debit will arise in your franking account if you get a tax refund because you claimed the tax offset. This will happen on the day you receive the refund.

    These rules do not apply if you are a foreign resident for more than half of the income year you are carrying the loss back to. The exception is if you are a New Zealand company that has chosen to enter the Australian imputation system.

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    Losses can only be used once

    To the extent that you have carried back a tax loss, you can only use it once. This means you cannot:

    • carry the same tax loss back again
    • carry it forward to use it in a future income year.

    This includes any losses that have been used to reduce your exempt income.

    Example: loss used entirely

    XYZ Co has a tax loss of $50,000 in the 2020–21 income year. It chooses to carry back all the $50,000 tax loss to the 2018–19 income year and receives a tax offset in the 2020–21 income year.

    XYZ Co cannot carry forward and use the tax loss of $50,000 incurred in the 2020–21 income year as it has chosen to carry back that loss to the 2018–19 income year.

    End of example

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    How to calculate the amount of tax offset

    To calculate the amount of your tax offset for an income year follow these steps:

    1. For each tax loss you are carrying back to an earlier income year       
      1. determine the amount of the tax loss you are carrying back
      2. work out the net exempt income, that has not previously been used, in that earlier income year
      3. subtract the amount at step 1b from the amount at step 1a
      4. multiply the result from step 1c by your tax rate for the income year in which you made the loss.
       
    2. If more than one tax loss is being carried back to the same earlier income year, add the step 1d results together. The amount you can claim is capped at the amount of your income tax liability for that earlier income year.
    3. If you are carrying back losses to more than one earlier income year, apply steps 1 and 2 for all years the losses are being carried back to and add the results together.
    4. If the amount calculated under step 3 is greater than your franking account surplus at the end of the income year in which you are claiming the tax offset, your offset is limited to your franking account surplus. Otherwise, the amount of your tax offset is the amount calculated under step 3.
      Note: Step 4 does not apply to foreign residents (other than New Zealand franking companies).

    Example: calculating the amount of the tax offset

    GHI Pty Ltd has a tax loss of $100,000 in the 2019–20 income year and an income tax rate of 30%.

    At the end of its 2020–21 income year, it has a franking account balance of $25,000 and chooses to carry back all its tax loss from the 2019–20 income year to the 2018–19 income year.

    In the 2018–19 income year, GHI Pty Ltd had an income tax liability of $40,000 and no exempt income.

    GHI Pty Ltd calculates the amount of its tax offset for the 2020–21 income year as follows:

    • Step 1a: $100,000 of loss carried back to the 2018–19 income year
    • Step 1b: $0
    • Step 1c: $100,000
    • Step 1d: $100,000 × 30% tax rate for the 2019–20 income year = $30,000
    • Step 2: No adjustment is required as the tax liability in the 2018–19 income year ($40,000) is greater than the $30,000 from step 1d
    • Step 3: As the loss is only being carried back to one earlier income year, the result of step 3 is $30,000
    • Step 4: As $30,000 is greater than GHI Pty Ltd's franking account balance at the end of the 2020–21 income year ($25,000), the amount of its tax offset is limited to $25,000.

    GHI Pty Ltd calculates the amount of its refundable tax offset from loss carry back as $25,000.

    End of example

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    Last modified: 01 Sep 2021QC 66109