Companies with turnover up to $5 billion will be allowed to offset losses against previous profits on which tax has been paid, to generate a refund, Treasurer Josh Frydenberg announced on Tuesday.
The tax refund would be limited by requiring that the amount carried back is not more than the earlier taxed profits and that the carry-back does not generate a franking account deficit.
The tax refund will be available on election by eligible businesses when they lodge their 2020–21 and 2021–22 tax returns.
Currently, companies are required to carry losses forward to offset profits in future years.
“Normally, businesses would have to return to profit before they can use these losses. But these are not normal times,” Treasurer Frydenberg said.
“In order to keep their workers, these businesses need our help now. They cannot wait years for the tax system to catch up.”
According to the rules, companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
The loss carry-back measure is expected to promote economic recovery by providing cash flow support to previously profitable companies that have fallen into a tax loss position as a result of the currently weaker economic conditions, associated with the economic impact of COVID-19.
Loss carry-back will also support the incentive for companies to invest under the measure JobMaker plan — temporary full expensing to support investment and jobs.
This measure is estimated to decrease the underlying cash balance by $4.9 billion over the forward estimates period and $3.9 billion over the medium term.
The loss carry-back was first introduced in 2012, but it was scrapped a year later with the repeal of the mineral resource rent tax.
Speaking exclusively to MyBusiness following the budget reveal, Tony Greco, general manager of technical policy at the IPA, welcomed the reintroduction of this measure, noting that it should be a permanent part of the tax system.
“It provides that automatic stabiliser in the sense that if you have a bad year, you crawl back tax that was paid in an earlier year so you get the benefit of the loss a lot sooner,” Mr Greco explained.
“It’s a very important feature when an economy goes into recession and COVID is the perfect scenario.”