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Worked example: Loss carry-back tax offset

Worked example: Loss carry-back tax offset


Issue

Bywater Garments Pty Ltd is a clothing manufacturer located in Melbourne. The company started with humble beginnings in 1994 and has enjoyed a steady diet of growth throughout its life. In recent years the company’s aggregated turnover has been in the $10m to $15m range, making them a base rate entity.

They have been severely impacted by COVID-19 restrictions throughout the 2019/20 and 2020/21 income years. These restrictions were from both customer demand and an inability to trade.

The following table identifies income, losses and taxes for Bywater Garments over the three income years to 30 June 2021.

2018/2019 Taxable Income $5m Tax$1375000(27.5%)

2019/2020  Loss $2M

2020/2021 Loss $500,000


As at 30 June 2021, the company’s franking account balance is $550,000. All lodgments are up to date.

Calculate the loss carry-back tax offset available to Bywater Garments Pty Ltd in the 2020/21 income year. Determine whether Bywater Garments Pty Ltd has any tax losses to carry forward to 2021/22 and later income years.


Solution

The entity is a company and has lodged all the relevant prior year tax returns. Therefore, it is eligible to utilise the loss carry-back tax offset for the 2020/21 income year.

Bywater Garments was unable to make a claim for the loss incurred during the 2019/20 income year until lodgment of the 2020/21 tax return (ITAA 1997 s 160-5).

The calculation of the loss carry-back tax offset is a four-step process.


Step 1: Work out the amount of the loss to be carried back

Only losses from the 2019/20, 2020/21 and 2021/22 income years are eligible for the loss carry-back tax offset (s 160-5(c)).

As Bywater Garments incurred a taxable loss during both the 2019/20 and 2020/21 income years, they are both eligible.

$2,000,000 + $500,000 = $2,500,000

The total tax loss eligible for carry-back is $2,500,000.


Step 2: Reduce the step 1 amount by net exempt income

Bywater Garments has no net exempt income for any of the years in question.

The amount eligible for carry-back remains at $2,500,000.


Step 3: Convert the step 2 amount to a tax equivalent amount

The conversion to use is the tax rate in the necessary loss year (s 160-10).

As Bywater Garments Pty Ltd is a base rate entity (BRE), the company had a tax rate of 27.5% in 2019/20 and 26% in 2020/21.

The conversion is as follows:

Income year

Tax rate (BRE) Calculation Amount

2019/20 27.5% $2,000,000 × 27.5% = $550,000

2020/21 26% $500,000 × 26% = $130,000


Adding the amounts from 2019/20 and 2020/21, the total possible loss carry-back tax offset is $680,000.


Step 4: Work out the amount of the loss carry-back tax offset for an income year

Under s 160-10(1), Bywater Garments Pty Ltd’s loss carry-back tax offset is the lesser of:

(1) the sum of the loss carry-back tax offset amounts calculated at Step 3, and

(2) the company’s franking account balance at the end of the 2020/21 income year.

A comparison of those two figures is as follows:

• Eligible loss carry-back tax offset: $680,000

• Closing franking account balance: $550,000


Bywater Garments is only able to claim back $550,000, being its franking account balance. It will choose to claim the offset against tax paid in the 2019/20 income year.

On lodgment of its 2020/21 income tax return, Bywater Garments will be eligible for a tax refund of $550,000 being the loss carry-back tax offset.

T

ax losses to carry forward

The refundable loss carry-back tax offset of $550,000 used up $2m of tax losses incurred by Bywater Garments Pty Ltd.

$550,000 ÷ 27.5% = $2,000,000

The residual tax loss of $500,000, which relates to the 2020/21 income year, may be carried forward to later

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