How will the new loss carry back tax offsets affect your tax accounting

As part of its May 2026 Budget, the Federal Government announced new tax relief measures for businesses and start-ups in the form of new loss carry back tax offset rules. This article explains how choices entities make regarding the loss carry back rules will affect how losses are accounted for under IAS 12 Income Taxes.

When will the new measures apply?

Entities will be able to choose to carry back a tax loss for an income year commencing on or after 1 July 2026, i.e. tax years ending on or after 30 June 2027.

Who is eligible to apply the loss carry back rules

An entity is only eligible to apply the loss carry back rules if all the following conditions are satisfied:

The entity was a corporate tax entity throughout the current income year, disregarding any period in which the entity did not exist
The entity is not a significant global entity in the year of the loss (broadly, this means the entity has an annual turnover of less than $1 billion)
The entity incurred a tax loss in the relevant income year commencing on or after 1 July 2026
The entity had a tax liability in either or both of the two previous income years
For the current and each of the previous five income years, the entity had either lodged an income tax return, was not required to lodge a tax return, or the Commissioner had assessed the entity’s income tax for that year.

How will the loss carry back tax offsets work?

Eligible entities will be allowed to carry back a tax loss and apply it against tax paid in either or both of the two previous profitable income years. This will result in the entity receiving a cash refund through a refundable tax offset.

How is the refundable tax offset calculated?

The amount is based on the entity’s tax rate in the loss year, but cannot exceed:

The actual amount of tax paid by the entity in the two previous income years, and
The entity’s franking account balance at the end of the income year for which the refundable tax offset is being claimed.

In addition, if the entity has net exempt income in an income year in which it carries back a tax loss, the tax loss carried back is reduced by the amount of net exempt income.

Is it mandatory to carry back the tax loss?

No, applying the loss carry back rules is optional. If eligible, an entity may claim the refundable tax offset when it lodges its tax return for the relevant loss year. Otherwise, it will carry the tax loss forward and deduct it from taxable income in future income years.

Can tax losses not carried back be carried forward and used to set off taxable income in future years?

Yes. Tax losses not used for loss carry back in the current income year are available to reduce any taxable income of a future income year, according to the usual rules for deducting prior year tax losses.

Steps for calculating the loss carry back tax offset component

The loss carry back offset component is the amount of the tax loss for which the entity can obtain a refundable tax offset. In other words, it cannot exceed the amount of income tax paid in the two previous years, nor can it exceed the balance on the franking account at the end of the year for which the refundable tax offset is being claimed.

An entity choosing to carry back its tax losses for a particular year first applies the following three steps:

Step 1:

Work out the amount of loss to be carried back

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Step 2:

Reduce Step 1 amount by net exempt income

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Step 3:

Convert Step 2 amount to tax equivalent (e.g. X 30%)

Step 1 essentially involves calculating the tax loss for the current income year and determining how much of it to carry back to the two prior income tax years. This amount is then reduced by any net exempt income (see Step 2) and then converted into a tax equivalent amount by multiplying the Step 2 amount by the relevant tax rate.

The entity then calculates the loss carry back tax offset component, i.e. how much of the tax loss can be carried back against tax paid in the two previous years:

Not carrying back any tax losses: NIL
Carrying back tax losses: The amount determined in Step 3, limited to the sum of the tax liability in the previous income year and the income year before that. In addition, it cannot exceed the franking account balance for the current financial year.

How does an entity elect to carry back a tax loss?

Entities must make a loss carry back choice, specifying how much of the entity’s current year tax loss is to be carried back to the most recent income year and the next most recent income year.

The choice must be made in the ‘approved form’ as defined in the Income Taxation Administration Act 1953 (see section 388-50) by:

The day the entity lodges its tax return, or
A later day that the Commissioner allows.

Can an entity change its loss carry back choice?

Yes. An entity can change its loss carry back choice by giving notice to the Commissioner in the approved form. However, the notice must be given within the limited amendment period within the meaning of section 170 of the Income Tax Assessment Act 1936. This is usually two years after the day on which the Commissioner gives notice of the assessment.

Example 1: All tax losses carried back to the previous income year

Company A makes a tax loss of $2.2 million in the 2026-27 income year.

Company A’s franking account balance at the end of the 2026-27 income year is $500,000.

In the 2025-26 income year:

Company A had taxable income of $5 million
Company A had no net exempt income
Company A’s tax rate is 30%
Company A, therefore, paid income tax of $1,500,000 for the 2025-2026 income year.

Company A makes a choice to carry back the tax loss of $2.2 million for the 2026-27 income year to the 2025-26 income year.

The loss carry back tax offset component is calculated by applying the three steps as follows:

Step 1: The amount of the loss carried back is $2.2 million
Step 2: The net exempt income is NIL, so the loss carried back is $2.2 million
Step 3: $2.2 million X 30% = $660,000.

The loss carry back tax offset component of $660,000 is less than the tax liability for the 2025-2026 year of $1,500,000. However, it cannot exceed the franking account balance of $500,000.

When Company A lodges its income tax return for the 2026-27 income year, it will be entitled to a refundable loss carry back tax offset of $500,000 (that is, the lesser of $660,000 and the balance in Company A’s franking account of $500,000 at the end of the 2026-27 income year).

In this example, Company A should have elected to only carry back $1,666,667 of the $2.2 million tax loss incurred for the 2026-2027 income year (i.e. $1,666,667 X 30% = $500,000 maximum carry back calculated above). If they elected to carry back only $1,666,667, the remaining $533,333 tax loss in the 2026-2027 income year could be carried forward to be deducted against taxable profits in future years. If Company A submits its tax return electing to carry back the full $2.2 million losses, it generally won’t be able to carry forward the remaining $533,333 for use in future years unless it amends its carry back choice in the approved form given to the Commissioner within a limited amendment period noted in section 170 of the Income Tax Assessment Act 1936.

Example 2: Carry back tax losses against two previous income years

Company B is a corporate tax entity and has the following taxable income/losses:

2024-25 income year: Taxable income of $1 million ($300,000 income tax payable)
2025-26 income year: Taxable income of $500,000 ($150,000 income tax payable)
2026-27 income year: Tax losses of $1.5 million.

Company B’s tax rate is 30%.

Company B chooses to carry back its $1.5 million tax loss from the 2026-2027 income year as follows:

$500,000 to the 2025-26 income year, and
$1 million to the 2024-25 income year.

Company B’s franking account balance at the end of the 2026-2027 income year is $400,000.

The sum of the loss carry back components for each carry back year is $450,000, calculated by the sum of:

$150,000 for the 2025-26 income year (500,000 loss carried back x 30% tax rate)
$300,000 the 2024-25 income year ($1 million loss carried back x 30% tax rate).

The loss carry back tax offset components exceed Company B‘s franking account balance at the end of the 2026-27 income year. Therefore, the loss carry back tax offset will be limited to the franking balance of $400,000 ($1,333,333 pre-tax).

As Company B has made a choice to carry back the full $1.5 million of losses for 2026-27, these losses will not be available to be carried forward, notwithstanding that the offset has been limited by the franking account.

As noted in Example 1 above, if Company B submits is tax return electing to carry back the full $1.5 million losses, it loses the ability to deduct the ‘unused carry back’ of $166,667 losses in future years unless it amends its carry back choice in the approved form given to the Commissioner within a limited amendment period noted in section 170 of the Income Tax Assessment Act 1936.

Accounting entries

Usually, an entity recognises a deferred tax asset for the deductible temporary difference for unused tax losses to the extent that it is probable that the entity will have a taxable profit in future against which the deductible temporary difference can be utilised. The journal entry for this is:

Dr Deferred tax asset

Cr Deferred tax income (profit or loss)

To recognise the deferred tax asset for unused tax losses

However, to the extent that the entity chooses to carry back tax losses against income tax payable in previous periods, the entry will instead be:

Dr Income tax receivable - ATO

Cr Current income tax income (profit or loss)

More information

Please refer to the Treasury Laws Amendment (Tax Reform No. 2) Bill 2026 for more details about how the loss carry back rules work, or contact your local BDO Tax or Business Services team member for more information.

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