The Government announced temporary ‘loss carry-back’ rules in 2020 that can deliver cash flow benefits for mining and resources businesses.The proposed scheme, and the resultant cash flow boost, compares favourably to the current laws which enable tax losses to be carried forward to be offset against profits derived in future years of income.
A similar loss carry-back scheme was briefly introduced in 2012-13 under the Gillard government, in response to the global financial crisis, but it was scrapped within two years.
Now in context of COVID-19 circumstances, the current version of the scheme is designed to generate a cash flow boost for companies by providing a cash refund of tax previously paid in respect of the 2018-19 year of income (or later years). This is conditional upon the company subsequently incurring a tax loss in the financial years 2020, 2021 or 2022.
Using a simple example, if the company made a taxable profit of $1,000 in 2018-19 and as a result, paid tax of $300, following which that same company made a loss in 2019-20 of $1200, then the company could claim a refundable tax offset on its 2020 income tax return to effectively ‘carry-back’ its 2019-20 tax loss to reduce the 2018-19 profit from $1,000 to $nil.
This would mean the company would receive a full refund of the $300 of tax previously paid in respect of the 2018-19 tax return. The company would also have $200 of residual tax losses to be carried forward.
The scheme is open to all Australian resident companies, which carry on business, and have an aggregate annual turnover of less than $5 billion. Included in this turnover threshold is both Australian and international turnovers, which may be relevant if operating as part of a multinational group. Unfortunately, non-corporate taxpayers (such as trusts and individuals) are unable to access the loss carry-back rules.
The scheme is optional, so companies can elect to carry forward financial years 2020-22 tax losses under the current rules. Further, 2020-22 tax losses can only be carried back to offset profits of the 2018-19 (or later) year of income. However, it will not be possible to obtain a refund of tax paid in 2017-18 or earlier years of income.
Although the scheme applies to 2019-20 financial year income, the first tax refund will only be available when eligible businesses lodge their 2020-21 and 2021-22 income tax returns.
That would mean a company with a 30 June year end will not be able to claim a tax refund until July 2021 at the earliest.
The tax refund will be limited such that the amount of tax losses carried back is not more than previously tax profits and it will be capped, such that the refund does not generate a franking account deficit for the company.
The limitation in relation to the company’s franking account balance was a restrictive requirement for companies seeking to access in the 2012-13 version of the scheme. This feature will necessitate a crucial need for planning in terms of the interaction of the loss carry-back scheme and a company’s dividend policy, including any dividend policy to ‘fund’ Division 7A loans.
Taxpayers should be aware that as the corporate rate of tax progressively decreases (from 30% to 25%), so too will the level of tax offset available to them as a result of the loss carry-back provisions. In addition, other types of losses, such as capital losses, are not eligible for the loss carry-back provision.
The loss carry-back rules are welcomed as a practical attempt by the Government to provide income tax relief to corporate taxpayers in the mining and resources sector, particularly where previously profitable companies have been adversely and significantly affected by COVID-19.
To find out more about how you can make the most of loss carry-back provisions for your mining and resources business please contact Craig Barry, Accountant & Tax Specialist on +61 (0) 7 3007 2000 or email email@example.com
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