How the new loss carry-back tax break works: A SmartCompany Q&A

The Federal Government announced yesterday that loss carry-back will be included in this year’s Budget.

Loss carry-back was proposed by the Government’s Business Tax Working Group and Treasurer Wayne Swan said the program was aimed at “small businesses that are doing it tough” and would be “a huge benefit to many struggling businesses.”

But what does loss carry-back actually mean and who will it apply to?

Time for a SmartCompany Q&A:

1. What exactly is loss carry back?

At the moment, businesses can only carry their losses forward to be offset against future income and future profits, they can’t carry their loss back and offset it against past profits.

Under the loss carry-back reform, businesses will be able to claim losses of up to $1 million against tax they have paid in the previous two years.

A business claiming the full amount would get a refund cheque of $300,000 — representing the company tax rate of 30¢ in the dollar.

2. Sound’s good; who can actually get it?

A business has to have made a profit previously and then a loss from 1 July this year in order to be eligible for loss carry-back

This means the reforms won’t be of assistance to businesses which have been doing it tough for a few years now.

The Government’s estimate is that up to 110,000 loss-making small businesses over a four-year period will be eligible.

3. So, more importantly, who can’t get loss carry-back?

Businesses structured as partnerships, sole traders and trusts are ineligible with the reform only applying to businesses structured as companies.

Unfortunately, this means the majority of Australia’s small businesses who the reform is supposed to assist are not actually eligible for loss carry-back as, of the 2.8 million small businesses, only 20% are structured through corporate vehicles, the rest are partnerships, sole traders and trusts.

4. When will this happen?

The Government says the recommendation is going to be implemented from 1 July.

The detail is still to be worked through, but on Budget night a discussion paper will be released which will open up questions around the design of how the loss carry-back reforms will operate.