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Businesses can rejoice in the fact that the much talked about loss carry-back measures were finally passed by Parliament just days before 2012-13 ended, in a move to benefit more than 110,000 Australian companies.
The loss carry-back law provides a company with the choice to carry back up to $1 million of losses against profits from a previous income year. This means losses from the current financial year can be offset against tax already paid to the ATO during more profitable years, up to a limit of $1 million of losses for each year – providing companies with a cash injection of up to $300,000 at the current company tax rate of 30% per year. This is known as a loss carry-back tax offset.
A transitional period applies for the 2012-13 income year, so you can only claim a loss carry-back refund against your tax liability for the 2011-12 income year. From the 2013-14 income year however, you can claim a loss carry-back refund against your tax liability for either of the two previous income years. Capital losses don’t qualify for this treatment.
While the law is good news for small businesses, business owners should be aware that the initiative is only open to corporate tax entities – which include companies, corporate limited partnerships, corporate unit trusts and public trading trusts – meaning sole traders, trusts and partnerships lose out. It is estimated that around three quarters of all small businesses are not corporate tax entities.
Eligibility for the initiative is also limited to a company’s franking account balance and subject to integrity rules – that is, the need to have continuous majority ownership and carry on the same business.
Prior to the loss carry-back legislation becoming law, businesses were able to carry losses forward to offset profits in future years, but this law signals the first time businesses will be able to carry back the losses to gain refunds on previous profits.
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