It’s been a difficult time for retail businesses across Australia. Lockdowns and reduced consumer confidence have hit sales whilst many costs, including rent, have often remained fixed. 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.
In the Federal Budget late last year, the Government announced that companies with turnover up to $5 billion will be able to offset losses 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, the current financial year and the next financial year to reduce a prior year’s income tax liability in the 2018–19, 2019–20 and 2020–21 financial years.
Claims to carry back losses must be made through the 2020-21 and 2021-22 tax returns. This means that even if you want to carry back a loss you made in the 2019-20 year against profits you earned in 2018-19, the claim must be made through your 2020-21 tax return at the earliest. As we are still several months from the end of the 2020-21 financial year, and the company tax return probably won’t be lodged until many months after the end of the financial year, this means that eligible businesses are looking at a potentially long wait before they can get their hands on the refund of 2018-19 income tax that the loss carry-back measure entitles them to.
So, whilst the loss carry-back is a helpful measure, immediate relief is still some way away.
TIP: Combine the loss carry-back with temporary full-expensing (TFE). TFE allows 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 2022. So, the increased deduction arising from asset purchases could create or increase a tax loss in the current year that can then be carried back to the 2018-19 or 2019-20 year 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. 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 retail 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 new loss carry-back mechanism outlined above only applies to companies.
So, if your retail 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 retail 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 to fully understand the options available. Tax rules are complex and – as you can see above – apply differently to different entities. With several months to the end of financial year, you still have plenty of time to undertake planning to maximise the benefit of tax losses.