Loss Carry Back: Features and Benefits

The 2020/21 included many initiatives for both businesses and individuals especially in the area of taxation. Businesses have tended to focus on the asset depreciation measures included in the budget. Particularly the temporary full expensing and the Instant Asset Write-Off as these were, in part, an extension and expansion of measures already introduced earlier in the year. As they had been around for a while, most businesses were already across the benefits to their operation that they represent and at Jade Finance, we had continued to bring these to your attention. A possible catalyst to purchase new company vehicles and trucks or invest in new equipment and be able to write off the cost in the year of purchase. (Subject to criteria of course).

But there is another key measure in the budget that our team at Jade Finance has flagged as potentially and significantly presenting a benefit to business – Loss Carry Back. While this is a measure used in business accounting, it may be worth doing at least a shallow if not a deep dive into how you can benefit from loss carry back. We’ve done that for you and provide this easy to understand overview and what it may mean to your business.

Definition

Loss Carry Back technically means claiming losses made by a business against profits made in previous years. Sounds logical, but it’s not how the system works under standard (pre-budget) ATO rulings.

There have been a few loss carry back periods but they were for a limited time.

Under the usual rulings, if a business makes a loss, then that loss can only be claimed against profit made in future years. Losses are carried forward so the business does not realise the benefit until the end of the following financial year. The benefit being reducing taxable income by the amount of the allowable loss.

New Rulings

Under the 2020/21 Federal Budget measure, a loss carry back comes into effect for a limited timeframe and subject to the eligibility criteria.

  • Eligible businesses include those with less than $5b in turnover.
  • Businesses that have paid income tax in the 2018/19, 2019/20 and 2020/21 financial years are eligible to carry back losses posted in 2019/20, 2020/21 and 2021/22.
  • Limits on losses apply, refer to specific ATO guidelines for full details.

Behind the initiative is the thinking that due to COVID-19 impacts, many businesses will make a loss in the 2020/21 and possibly 2021/22 years but had previously made profits. So rather than cause these businesses to carry the losses forward against future profits well ahead, they can realise a tax offset in the shorter term.

Benefits

The key benefit is that by carrying losses back, the business may receive a cash refund in the relevant tax years rather than have to wait for years to come. The refund can be received at a time when it is much needed and can be used to support business growth through the challenging economic times.

The cash refund may be used to further invest in the business which can contribute in general to economic growth and jobs creation.

An additional issue to consider in context is IAWO and full expensing. If a business acquires assets such as cars, trucks and equipment and writes off the asset under the rulings, this may result in the business posting a loss for that tax year. Or a greater loss if a loss is already realised.

So the accelerated depreciation measures may deliver an even larger tax benefit.

On the flip side, it may present some businesses with the prospect of receiving a tax refund rather than having to set aside funds to pay an expected tax bill.

Impact on Business Finance

Any initiative that impacts asset acquisition is of interest to us at Jade Finance as it impacts lending. We see the loss carry back as a potential reason for business to acquire assets now which may result in a loss to the business in the annual accounts which can be carried back against previous profits.

So if you purchase vehicles, trucks or equipment now or in this financial year and you made a previous profit, you may receive a cash tax refund on submitting your business tax return at 30 June 2021. Adding to the attraction of asset acquisition is the current low interest rates business finance.

It’s all subject to criteria and you will likely want a discussion with your accountant, but it is definitely worth investigating.

Selecting Suitable Finance

As a lender, our key interest in loss carry back is our customers selecting the most suitable finance facility for their asset purchases. The benefits that may be realised through IAWO and flow through to loss carry back are subject to selecting the right finance vehicle to acquire your assets. You can’t write-off or depreciate assets which are not listed in your accounts that is on the balance sheet.

Chattel Mortgage is the most suitable form of loan to acquire cars, trucks and equipment by businesses wanting to take advantage of asset depreciation measures.

If you are interested in discussing these issues further in regard to finance for your business, please give us a call.

To discuss business please contact us and speak with one of our Jade Finance consultants. Call 1300 000 008

DISCLAIMER: THIS ARTICLE INCLUDES SPECS, DETAILS, DATA, POLICIES AND MATERIAL WHICH HAS IN THE MOST PART, BEEN SOURCED FROM THIRD PARTY SOURCES. NO LIABILITY IS ACCEPTED FOR ANY MISINTERPRETATION OF THAT MATERIAL OR ERRORS IN PRESENTATION. THE ARTICLE IS PROVIDED AS GENERAL INFORMATION FOR READERS AND IS NOT PROVIDED WITH ANY INTENTION THAT IT BE USED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. IT IS NOT OFFERED AS FINANCIAL ADVICE AND IS NO WAY INTENDED AS SUCH. THOSE THAT REQUIRE ADVICE AROUND THEIR INDIVIDUAL FINANCIAL SITUATION SHOULD SEEK CONSULTATION WITH A FINANCIAL ADVISOR