Edited version of private advice

Authorisation Number: 1051976612728

Date of advice: 13 May 2022

Ruling

Subject: Loss carry back tax offset

Question 1

Can the company claim the loss carry back tax offset in the 20XX financial year and carry back losses to the 20XX financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a corporate tax entity.

You registered to report your income tax obligations commencing from 20XX.

As at 1 July 20XX you commenced with a nil franking account balance.

You had taxable income of $X in the 20YY financial year and paid $X income tax in respect of that assessment, resulting in $X franking credits arising in your franking account.

You incurred $X tax loss in the 20ZZ financial year which you carried forward.

You deducted the previous year's tax loss in the 20AA financial year and had $X taxable income in that financial year, however you had no tax liability in that year due to the application of refundable R&D tax offsets to the assessment. This resulted in $X deferred franking debits arising in your franking account.

You had taxable income of $X in the 20BB financial year however you had no tax liability in that year due to the application of refundable R&D tax offsets to the assessment. This resulted in a further $X deferred franking debits arising in your franking account.

You incurred $X tax loss in the 20CC financial year which you carried forward.

You incurred $X tax loss in the 20DD financial year, resulting in $X total tax losses carried forward to later income tax years as at 30 June 20DD.

At 30 June 20DD your franking account had a credit balance of $X and deferred franking debits of $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 67-30

Income Tax Assessment Act 1997 Division 160

Income Tax Assessment Act 1997 section 160-5

Income Tax Assessment Act 1997 subsection 160-5(d)

Income Tax Assessment Act 1997 paragraph 160-5(d)(i)

Income Tax Assessment Act 1997 paragraph 160-5(d)(ii)

Income Tax Assessment Act 1997 Division 205

Income Tax Assessment Act 1997 section 205-15

Income Tax Assessment Act 1997 subsection 205-15(1)

Income Tax Assessment Act 1997 subsection 205-15(4)

Income Tax Assessment Act 1997 section 205-30

Income Tax Assessment Act 1997 subsection 205-30(1)

Income Tax Assessment Act 1997 paragraph 205-30(2)(b)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Deferred franking debits

The operative provisions for franking accounts are found within Division 205 of the Income Tax Assessment Act 1997 (ITAA 1997.)

Subsection 205-30(1) provides a table which sets out when a franking debit arises in the franking account of an entity. Paragraph 205-30(2)(b) specifically provides that no franking debit arises on that part of the refund that is attributable to a tax offset that is subject to the refundable tax offset rules because of section 67-30 of the ITAA 1997 (about R&D). In other words, no franking debit arises for R&D offset refunds.

Subsection 205-15(1) provides a table which sets out when a franking credit arises in the franking account of an entity.

Subsection 205-15(4) provides a method statement for working out if the entity's franking credits which arise from payment of PAYGI or income tax (items 1 and 2 of the table in subsection 205-15(1) respectively) are to be reduced. Step 2 of subsection 205-15(4) refers to R&D offsets. These are special rules that ensure that the amount of R&D tax offset refunded is not immediately clawed back as a result of the entity becoming liable to franking deficit tax, due to a debit normally arising in an entity's franking account at the time of receiving a refund of income tax. The franking debit that usually arises when a refund of income tax is received is effectively deferred (deferred franking debits) in relation to refundable R&D tax offset amounts. In other words, the franking debit is effectively deferred and applied in reducing the amount of a franking credit otherwise arising from payment of PAYGI or income tax.

A corporate tax entity receiving the R&D refundable tax offset will not record any franking credit in its franking account for either future PAYG instalments, or payments of income tax until such time as any prior deferred franking debits are effectively offset by these types of franking credits. Other types of franking credits are not affected by these rules.

The method statement in subsection 205-15(4) sets out how to apply franking credits from payments of PAYGI or income tax to a deferred franking debit resulting from an R&D offset received by an entity. In other words, franking credits which arise from payments of PAYGI or income tax are reduced by the deferred franking debits worked out under subsection 205-15(4) - including refundable R&D offsets - but they are not reduced to below 0. The R&D tax offset arises from operation of other tax laws, and not from a payment made by the entity in satisfaction of an income tax liability.

Loss carry back tax offset

The loss carry back tax offset provisions are contained within Division 160 of the ITAA 1997. Section 160-5 provides the eligibility requirements for entitlement to the loss carry back offset.

Relevantly, subsection 160-5(d) requires that:

the entity had an income tax liability for any or all of the following income years:

(i) the 2018-19 income year;

(ii) the 2019-20 income year;

It is noted that "income tax liability" referenced in subsection 160-5(d) is a defined term in section 995-1 of the ITAA 1997:

income tax liability, of an entity for an income year, is the amount assessed as being the amount of income tax that the entity owes (as mentioned in step 4 of the method statement in subsection 4-10(3)) for the financial year applicable to the entity under subsection 4-10(2).

Referring to step 4 in the method statement in subsection 4-10(3) of the ITAA 1997:

Subtract your tax offsets from your basic income tax liability. The result is how much income tax you owe for the financial year.

In other words, income tax liability refers to net tax liability after the application of tax offsets, such as the R&D offset.

Application to your circumstances

The $X in franking credits that arose from the company's payment of the 20YY financial year tax liability remained in the franking account. No franking credits arose for tax payable in 20AA or 20BB financial years because there was no tax liability in those years, and therefore no tax paid. The franking account balance hasn't been affected by 20AA or 20BB financial year assessments that resulted in refunds due to the R&D tax offsets. As at 30 June 20DD, the franking account remains in a credit of $X.

Taxable income was reported in the company's 20AA and 20BB income tax returns. The tax on that taxable income (label T1 on the company tax return calculation statement) however was reduced to 0 due to the company's refundable R&D tax offsets. Ultimately, there was no tax liability (label T5 on the company tax return calculation statement), and no tax amount was paid at any time in respect of those assessments. There are deferred franking debits from the R&D tax offsets totalling $X, and they will continue to be reduced by future payments of PAYGI or income tax.

The company reported tax losses in the 20ZZ, 20CC and 20DD financial years. As at 30 June 20DD your tax losses carried forward to later income years totalled $X.

The company did not have a tax liability in the 20BB or 20CC financial years. Therefore, subsection 160-5(d) is not satisfied by the company and it is not entitled to the loss carry back tax offset in the 20DD financial year.