Carry-back of income tax losses

External administrators and liquidators should be aware that any previously profitable company (with less than $5bn in aggregated turnover) that has retained a positive balance in its tax franking account may be eligible to have its tax losses “converted” into a cash refund for the benefit of the insolvent administration.

According to the 2020-2021 Federal Budget papers, the proposed measure provides for a company with aggregated turnover of less than $5bn that makes a tax loss in the 2019-20, 2020-21 or 2021-22 tax years to offset that loss against taxable profits from previous years commencing 2018-19. The offset loss would potentially generate a refundable tax offset (that is, a refund of tax) in the year in which the loss arises. The budget papers have estimated that this measure will generate around $4.5bn in cash refunds for loss-making companies across 2021 and 2022.

The main limitation of the measure will be that the company must effectively have a surplus balance in its tax franking account and that the refund (although available for losses incurred in the 2019-20 tax year) will be limited to that surplus and will not be available until the company lodges its income tax return for the 2020-21 tax year.

This is far from the most significant change to impact the insolvent administration of companies in these unprecedented times – however it represents some potential good news for unsecured creditors of previously profitable companies that have fallen into external administration.