Treasury Laws Amendment (Tax Reform No. 2) Act 2026 (71 of 2026)

Schedule 1   Loss carry back tax offset

Part 1   Main amendments

Income Tax Assessment Act 1997

1   Division 160

Repeal the Division, substitute:

Division 160 - Corporate loss carry back tax offset for businesses that are not significant global entities

Table of Subdivisions

Guide to Division 160

160-A Entitlement to and amount of loss carry back tax offset

160-B Loss carry back choice

Guide to Division 160

160-1 What this Division is about

A corporate tax entity can choose to "carry back" a tax loss it had for an income year against the income tax liability it had for either or both of the previous 2 income years.

The entity gets a refundable tax offset as a proxy for the tax the entity would save if it deducted the loss in the income year(s) to which the loss is "carried back".

The refundable tax offset:

(a) is capped at the entity's franking account balance; and

(b) is only available if the entity is not a significant global entity for the loss year.

Subdivision 160-A - Entitlement to and amount of loss carry back tax offset

Table of sections

160-5 Entitlement to loss carry back tax offset

160-10 Amount of loss carry back tax offset

160-5 Entitlement to loss carry back tax offset

(1) An entity is entitled to a *tax offset (the loss carry back tax offset ) for the *current year if the following conditions are satisfied:

(a) the current year starts on or after 1 July 2026;

(b) the entity is a *corporate tax entity throughout the current year (disregarding any period when the entity is not in existence);

(c) the current year is a *loss year;

(d) there is at least one *eligible carry back year for the current year;

(e) the entity is not a *significant global entity for the current year;

(f) any of the following requirements are satisfied for the current year and each of the 5 income years before the current year:

(i) the entity has lodged its *income tax return for the year;

(ii) the entity was not required to lodge an income tax return for the year;

(iii) the Commissioner has made an assessment of the entity's income tax for the year;

(g) the entity makes a *loss carry back choice for the current year in accordance with Subdivision 160-B.

Note 1: The entity can be entitled to only one loss carry back tax offset for the current year. However, that offset can have one or 2 components: that is, one for each eligible carry back year (see section 160-10).

Note 2: The loss carry back tax offset is a refundable tax offset (see section 67-23).

Meaning of eligible carry back year

(2) An income year is an eligible carry back year for the *current year if:

(a) the income year is one of the 2 most recent income years before the current year; and

(b) the entity has an *income tax liability for the income year; and

(c) the entity is a *corporate tax entity throughout the income year (disregarding any period when the entity is not in existence).

160-10 Amount of loss carry back tax offset

(1) The amount of the entity's *loss carry back tax offset for the *current year is the lesser of the following amounts:

(a) the sum of the *loss carry back tax offset component for each *eligible carry back year;

(b) the entity's *franking account balance at the end of the current year.

Note: There may only be one eligible carry back year.

Meaning of loss carry back tax offset component

(2) For the purposes of working out the amount of the entity's *loss carry back tax offset for the *current year, the entity's loss carry back tax offset component for an *eligible carry back year is:

(a) if the entity does not, in its *loss carry back choice for the current year, *carry back any *tax losses to the eligible carry back year - nil; or

(b) otherwise - so much of the entity's *income tax liability for the eligible carry back year as:

(i) has not previously been included in a component under this subsection for the purposes of working out the amount of the entity's loss carry back tax offset for an income year before the current year; and

(ii) does not exceed the amount worked out at step 3 of the following method statement for the eligible carry back year.

Method statement

Step 1. Start with the amount of the *tax loss the entity *carries back to the *eligible carry back year.

Step 2. Reduce the step 1 amount by the entity's *net exempt income for the *eligible carry back year.

Note: Do not reduce the step 1 amount by the entity's net exempt income to the extent the net exempt income has already been utilised (see section 960-20).

Step 3. Multiply the step 2 amount by the *corporate tax rate for the *loss year.

Example: Company A (which is not a base rate entity under the Income Tax Rates Act 1986) has at the end of the 2026-27 income year:

(a) a tax loss of $900,000 for that year and a franking account balance of $280,000; and

(b) for the 2024-25 income year - an income tax liability of $120,000 and net exempt income of $5,000; and

(c) for the 2025-26 income year - an income tax liability of $210,000.

Company A chooses to carry back $405,000 of its tax loss for the 2026-27 year to the 2024-25 year and $495,000 of that loss to the 2025-26 year.

Company A's loss carry back tax offset for the 2026-27 year is $268,500, worked out as follows:

(a) an offset component for the 2024-25 income year of $120,000, calculated by starting with the $405,000 carried back, reducing that at step 2 by $5,000, and multiplying the result by 30%;

(b) an offset component for the 2025-26 income year of $148,500, calculated by starting with the $495,000 carried back and multiplying the result by 30%.

The sum of the 2 components is $268,500 (which is less than Company A's $280,000 franking account balance at the end of the 2026-27 year). If that sum had exceeded that balance, the amount of the offset would have been limited under paragraph (1)(b) of this section to that balance.

Foreign residents

(3) Paragraph (1)(b) does not apply if the entity was a foreign resident (other than an *NZ franking company) for:

(a) if the entity carries back an amount to the most recent *eligible carry back year - more than half of that eligible carry back year; and

(b) if the entity carries back an amount to the next most recent eligible carry back year - more than half of that eligible carry back year.

Subdivision 160-B - Loss carry back choice

Table of sections

160-15 Loss carry back choice

160-20 Changing a loss carry back choice

160-25 Transferred tax losses, income tax liabilities etc. not included

160-30 Integrity rule - no loss carry back tax offset if scheme entered into

160-15 Loss carry back choice

(1) The entity may make a loss carry back choice for the *current year that specifies:

(a) how much (expressed as a specified amount) of the entity's *tax loss for the current year is to be *carried back to the most recent income year before the current year; and

(b) how much (expressed as a specified amount) of the entity's tax loss for the current year is to be carried back to the next most recent income year.

Note 1: To be carried back to an income year, the income year needs to be an eligible carry back year (see subsection 160-10(1)).

Note 2: The choice must also be consistent with sections 160-25 and 160-30.

(2) The choice under subsection (1) must be made in the *approved form by:

(a) the day the entity lodges its *income tax return for the *current year; or

(b) such later day as the Commissioner allows.

160-20 Changing a loss carry back choice

(1) An entity may change a *loss carry back choice for the *current year by notice, in the *approved form, given to the Commissioner.

(2) The notice must be given to the Commissioner within the limited amendment period (within the meaning of section 170 of the Income Tax Assessment Act 1936) for an assessment for the *current year.

(3) To avoid doubt, the change takes effect from the day the entity made the original *loss carry back choice under section 160-15.

160-25 Transferred tax losses, income tax liabilities etc. not included

(1) The entity cannot *carry back an amount of a *tax loss for an income year, to the extent that the loss:

(a) was transferred to or from the entity under Division 170 or Subdivision 707-A (about certain company groups); or

(b) exceeds the amount that would be the entity's tax loss for the year if section 36-55 (about excess franking offsets) were disregarded.

(2) For the purposes of this Division, disregard the *income tax liability of the entity for an income year to the extent that it consists of an income tax liability of a *subsidiary member of a *consolidated group or *MEC group that is taken to be an income tax liability of the entity because of section 701-5 (the entry history rule).

160-30 Integrity rule - no loss carry back tax offset if scheme entered into

No loss carry back tax offset if scheme entered into

(1) The *corporate tax entity cannot *carry back an amount of a *tax loss to an income year (the gain year ) if:

(a) there is a *scheme for a disposition of *membership interests, or an *interest in membership interests, in:

(i) the corporate tax entity; or

(ii) an entity that has a direct or indirect interest in the corporate tax entity; and

(b) the scheme is entered into or carried out during the period:

(i) starting at the start of the gain year; and

(ii) ending at the end of the *current year; and

(c) the disposition results in a change in who controls, or is able to control, (whether directly, or indirectly through one or more interposed entities) the voting power in the corporate tax entity; and

(d) an entity receives, in connection with the scheme, a *financial benefit calculated by reference to one or more *loss carry back tax offsets to which it was reasonable, at the time the scheme was entered into or carried out, to expect the corporate tax entity would be entitled; and

(e) having regard to the relevant circumstances of the scheme, it would be concluded that an entity, or one of the entities, that:

(i) entered into or carried out the scheme; or

(ii) entered into or carried out any part of the scheme;

did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of obtaining or realising a financial benefit referred to in paragraph (d).

Relevant circumstances

(2) For the purposes of paragraph (1)(e), the relevant circumstances of the *scheme for a disposition include the following:

(a) the extent to which the *corporate tax entity continues to conduct the same activities after the scheme as it did before the scheme;

(b) the extent to which assets that the corporate tax entity uses before, and continues to use after, the scheme are assets for which equivalents are not readily available at the time of the scheme;

(c) the matters referred to in subsection 177D(2) of the Income Tax Assessment Act 1936 (applying paragraph 177D(2)(d) as if the reference in that paragraph to Part IVA of that Act were instead a reference to this section).

Application of this section to non-share equity interests

(3) This section:

(a) applies to a *non-share equity interest in the same way as it applies to a *membership interest; and

(b) applies to an *equity holder in the same way as it applies to a *member.