It’s been a difficult time for businesses across Australia. Reduced consumer confidence, higher interest rates and higher inflation have hit sales while many costs, including rent, have gone up substantially.

The end result is that many businesses have made a loss in the last financial year and may be on course to also make a loss in the current financial year. The question then is – how can such trading losses be recouped for tax?

I run my business through a company

The greatest degree of flexibility in turning a trading loss to a tax advantage arises if you run your business through a company.

Companies with a turnover up to $5 billion can offset losses arising in the year ended 30 June 2023 against previous profits on which tax has been paid, to generate a refund.

Specifically, companies can elect to carry back losses made in the last financial year (to 30 June 2023) to reduce a prior year’s income tax liability in the 2018–19, 2019–20, 2020–21 and/or 2021-22 financial years.

Tip: Combine the loss carry-back with temporary full-expensing (TFE). TFE allowed most businesses to immediately write-off the full cost of purchases of capital assets (instead of depreciating the cost over several years) made from 6 October 2020 to 30 June 2023. So, the increased deduction arising from asset purchases could create or increase a tax loss in the year to 30 June 2023 that can then be carried back to earlier years to generate a refund of tax paid in those earlier years.

If your business has been in a loss-making position for a while, such that you didn’t have taxable profits in those earlier years, the loss carry-back scheme won’t be any help. In addition, the loss carry back isn’t available for losses arising in the year ended 30 June 2024 (the current financial year).

Instead, the losses must be carried forward and can then be offset against the first available profit to arise in future years. In effect, relief is deferred until profitability returns. Note also that there are anti-avoidance rules that can prevent current losses being applied in future where there is a change of ownership in the business and the nature of the business changes significantly. So, if you are thinking of buying a business with accumulated tax losses, and then making major changes to the way the business operates in order to increase profitability, make sure you take professional advice on how your proposed changes could impact access to the losses.

I don’t run my business through a company

The loss carry-back mechanism outlined above only applies to companies.

So, if your business is operated through any other structure, you won’t be able to carry back your losses. That is bad news for sole traders and businesses that are run through partnerships and trusts.

Generally speaking, losses arising in this situation can be offset against other income arising in the same year. So, if you run a business as a sole trader and make a loss this year, you can apply the loss against your other income, such as income from employment or investment income. To the extent you can’t use the loss this year, it must be carried forward and can be applied against income in future years.

Similar rules apply to trust losses, with the added complication that there are complex anti-avoidance rules in place that can severely restrict the ability of trusts to access losses in future (for instance, by preventing the ‘injection’ of income into the trust with the specific aim of absorbing losses).

Get professional help

If your business is in a loss-making situation, talk to your accountant or tax agent – like those at H&R Block – to fully understand the options available. Tax rules are complex and – as you can see above – apply differently to different entities.

Mark Chapman is director of tax communications at H&R Block.