Special report on the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021
April 2021
Temporary loss carry-back remedial – loss grouping
(Section IZ 8 of the Income Tax Act 2007)
Background
Section IZ 8 of the Income Tax Act 2007 contains the temporary loss carry-back rules. The rules allow a company with net losses in the 2019–20 or 2020–21 income years to carry losses back to offset taxable income in the immediately preceding income year, in order to receive a tax refund.
Key features
The purpose of this remedial amendment is to ensure companies in non-wholly owned corporate groups are able to use the loss carry-back. A non-wholly owned corporate group (“group”) is a group of companies that have at least 66%, but less than 100%, common ownership.
Under previous rules, to be eligible for the loss carry-back, a company in a group was required to:
- have a net loss in the 2019–20 or 2020–21 income years (the “loss year”), and
- have taxable income in the income year immediately preceding the loss year (the “profit year”).
If a company had losses in both the profit and loss years, then the company was not able to use the loss carry-back under the previous rules, even if another group member had taxable income in the profit year against which the losses could be offset. This outcome was contrary to the policy intent expressed in the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Bill commentary.
The policy intent is for a company to be able to carry back and offset its losses against a group member’s taxable income in the profit year, even if the company has losses in both the profit and loss years. This remedial amendment amends section IZ 8 of the Income Tax Act 2007, so that the legislation now satisfies the policy intent.
Example 56
Mippy Co and Snowy Co are 80% commonly owned. In 2018–19, Mippy Co has net income of $100,000 and Snowy Co has $50,000 of losses. Snowy Co decides to offset its $50,000 of losses against Mippy Co’s income that year, so Mippy Co has taxable income of $50,000.
In 2019–20, Mippy Co has net income of $50,000 and Snowy Co has net losses of $75,000. After offsetting Snowy Co’s losses against Mippy Co’s net income,* Snowy Co still has $25,000 of losses remaining. It decides to use the temporary loss carry-back so that it can offset its remaining $25,000 of losses against Mippy Co’s 2018–19 taxable income.
Snowy Co carries its remaining $25,000 of losses back to 2018–19, and offsets the losses against Mippy Co’s 2018–19 taxable income of $50,000. Mippy Co receives a tax refund of $7,000 ($25,000 × 28%, which is the corporate tax rate). After using the loss carry-back, Mippy Co still has $25,000 of taxable income remaining in 2018–19. Snowy has $0 losses remaining in 2019–20 after using the loss carry-back.
| 2018–19 income year | Mippy Co | Snowy Co |
| Net income/(loss) (before offsets and loss carry-back) |
$100,000 | ($50,000) |
| Taxable income/(loss) (after offsets but before loss carry-back) |
$50,000 | $0 |
| 2019–20 income year | ||
| Net income/loss (before offsets and loss carry-back) |
$50,000 | ($75,000) |
| Taxable income/loss (after offsets but before loss carry-back) |
$0 | ($25,000) |
| Temporary loss carry-back | ||
| 2018–19 taxable income/(loss) (after loss carry-back) |
$25,000 | $0 |
| 2019–20 taxable income/(loss) (after loss carry-back) |
$0 | $0 |
| Amount refunded under loss carry-back | $7,000 | $0 |
* In this example the two companies have chosen to offset losses within the group in the loss year before using the loss carry-back. This is not a requirement for groups that are not wholly owned.
Application date
This remedial amendment applies for the duration of the temporary loss carry-back scheme, so applies to two pairs of income years: the 2018–19/2019–20 and 2019–20/2020–21 profit/loss years.