Accounting for loss carry back announced as part of Federal Government’s October 2020 and May 2021 additional COVID-19 stimulus measures

The Federal Government announced additional COVID-19 stimulus measures as part of its October 2020 Budget. One of these is the ability of eligible corporate entities (companies, corporate limited partnerships and public trading trusts) to carry back losses against income tax paid in a prior period and effectively receive a refund of income tax paid in previous years. This measure is referred to as the ‘loss carry back’ and interacts with the Government’s plan for certain entities to instantly write-off various assets acquired for tax purposes, thus generating tax losses which can be carried back to generate tax refunds.

How does the ‘loss carry back’ work?

The ‘loss carry back’ provisions apply to eligible corporate entities who are carrying on a business and which has less than $5 billion aggregated turnover in a relevant loss year.

How does it work?

Where a corporate tax entity elects to carry back an income tax loss (only income tax losses can be carried back), the amount of the loss carried back is multiplied by the prevailing corporate income tax rate that applies to the entity for each loss year.  For example, if an entity elects to carry back $1,000,000 of losses and its corporate income tax rate is 30% for that year, the amount of the offset that would be refunded to the entity is $300,000, subject to the limits discussed next.

Is there a limit on the ‘loss carry back’?

Yes. The amount of the ‘loss carry back’ (tax offset) is limited to:

• The corporate entity’s income tax liabilities in the relevant income years,
• The aggregate of the entity’s losses that may be carried back, and
• The balance on its franking account at the end of the year in which the entity lodges its income tax return claiming the loss carry back tax offset (e.g. for a 30 June 2021 tax year this would be franking account balance on 30 June 2021).

When can the ‘loss carry back’ be claimed and refunded?

The law commences on 1 January 2021. Therefore, eligible entities can claim the tax offset in their income tax returns for the 2020–21, 2021–22 and 2022-2023 income years, i.e. in most cases this will be for the 30 June 2021, 30 June 2022 and 30 June 2023 income tax returns. Assuming a tax year ending 30 June, losses can be carried back in the following tax returns:

Is it compulsory to claim the ‘loss carry back’?

No. If they so wish, entities can choose to carry forward income tax losses to claim against taxable profits in future financial years.

Accounting implications for the ‘loss carry back’ provisions

When an entity incurs tax losses, deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilised (IAS 12 Income Taxes, paragraph 34).

Entities incurring ‘COVID-19’ tax losses are likely to view these as a temporary ‘blip’ during the pandemic period if, absent COVID-19, they run profitable businesses. As such, they are likely to have recognised deferred tax assets for these COVID-19 tax losses at 30 June 2020.

If tax losses meet the requirements of the ‘loss carry back’ provisions to be offset against previous income tax payable, and the entity elects to use the ‘loss carry back’ provisions, adjustments need to be made in 30 June 2021 financial statements to reflect the tax refund rather than a deferred tax asset to be recovered via a reduction to future income tax payable, i.e.: 

Note that this journal entry is only processed once an entity has established that it is eligible for the tax offset. Therefore, no retrospective adjustments are made to prior year comparatives in 30 June 2021 financial statements (i.e. back to 30 June 2020).

Example 1 – Tax losses for one income tax year set off against tax liabilities for one particular year

ABC Limited had taxable profits of $2 million for the tax year ended 30 June 2019. Its income tax liability was therefore $600,000 (assume a tax rate of 30%). No dividends were paid out and the balance on the franking account at 30 June 2021 is $600,000.

ABC Limited incurred $1 million of tax losses due to COVID-19 shutdowns for the year ended 30 June 2020. ABC Limited wishes to apply the ‘loss carry back’ provisions but can only do so in its 30 June 2021 tax return as noted above.

ABC Limited is able to ‘carry back’ $1 million of tax losses for the tax year ended 30 June 2020 against the $2 million taxable profits from 30 June 2019. The tax offset is calculated as being $300,000 (i.e. $1 million losses X 30%). The full offset will be refunded because:

• It is less than the income tax liability paid for the year ended 30 June 2019 of $600,000, and
• There is sufficient balance on the franking account on 30 June 2021.

ABC Limited still has $300,000 income tax liabilities available to be offset against any tax losses incurred for 30 June 2021 or 30 June 2022. 

Example 2 – Tax losses for one income tax year set off against tax liabilities for multiple years

ABC Limited had taxable profits of $1 million for the tax year ended 30 June 2019 and $1 million for the tax year ended 30 June 2020. Its income tax liability was therefore $300,000 (assume a tax rate of 30%) in each period. No dividends were paid out and the balance on the franking account at 30 June 2021 is $600,000.

ABC Limited incurred $2 million of tax losses for the year ended 30 June 2021 due to delayed COVID-19 shutdowns. It is able to carry back the full amount of these tax losses and claim a tax offset of $600,000 against the income tax liabilities of $300,000 in the 30 June 2019 and 2020 tax years.

Example 3 – Tax losses for multiple income tax years set off against tax liabilities for one particular year

ABC Limited had taxable profits of $2 million for the tax year ended 30 June 2019. Its income tax liability was therefore $600,000 (assume a tax rate of 30%). No dividends were paid out and the balance on the franking account at 30 June 2021 is $600,000.

ABC Limited incurred significant losses due to COVID-19 shutdowns and incurred tax losses as follows:

• Income tax year ended 30 June 2020 - $1 million
• Income tax year ended 30 June 2021 - $500,000.

ABC Limited decides to apply the ‘loss carry back’ provisions in its 30 June 2021 tax return and receive a tax offset for tax losses incurred for tax years ending 30 June 2020 and 30 June 2021. The offset is calculated as $1.5 million X 30% = $450,000.

The full offset of $450,000 will be refunded because:

• It is less than the income tax liability paid for the year ended 30 June 2019 of $600,000, and
• There is sufficient balance on the franking account on 30 June 2021.

ABC Limited still has $150,000 income tax liabilities available to be offset against any tax losses incurred for 30 June 2022. 

Example 4 – Tax offsets limited to balance on franking account

ABC Limited had taxable profits of $2 million for the tax year ended 30 June 2019. Its income tax liability was therefore $600,000 (assume a tax rate of 30%). ABC Limited paid a dividend of $600,000 on 1 October 2019. As such, the balance on the franking account at 30 June 2021 is Nil.

ABC Limited incurred $1 million of tax losses due to COVID-19 shutdowns for the year ended 30 June 2020. ABC Limited wishes to apply the ‘loss carry back’ provisions but can only do so in its 30 June 2021 tax return as noted above.

ABC Limited is unable to carry back any of its tax losses for the year ended 30 June 2020 because the amount of the tax offset is limited to the balance on the franking account at 30 June 2021, which is Nil.

More information

This article focuses on the accounting for the ‘loss carry back’. There are some complex tax rules for working out the amount of the ‘loss carry back’. For more information on these rules and the mechanics of calculating refunds, please contact your local BDO Tax or Business Services advisor.

For assistance with the accounting for these tax offsets, please contact a member of BDO’s IFRS Advisory team.