How loss carry-back puts cash in hand
The normal rule for company losses is carry-forward. You make a loss this year, carry it forward, and it reduces taxable income when profits come back. That's useful, but slow.
Loss carry-back looks backwards. It's a refundable tax offset, not a deduction. A deduction reduces taxable income. A refundable offset can put money back in the bank. If the company paid tax in a recent profitable year and then makes a loss, it can recover some of that earlier tax through the loss-year return instead of waiting for future profits.
Think of it as a three-part chain:
- A company pays tax in a profitable year
- The same company makes a tax loss within the next two years
- The company claims an offset in its loss-year return to recover some of that earlier tax
Practical rule: If someone describes loss carry-back as “claiming this year's loss against next year's tax”, they're mixing it up with carry-forward losses.
Who can claim the new offset
Carry-back isn't a rescue measure for any business with a bad year. The Act sets these conditions:
- A corporate tax entity throughout the loss year. That's mainly companies (plus a few company-like entities such as public trading trusts). Sole traders, partnerships and ordinary trusts can't use it.
- Not a significant global entity. Broadly, the group's annual global turnover must be under $1 billion.
- A tax loss in an income year starting on or after 1 July 2026. A 2025–26 loss doesn't qualify.
- Income tax liability in one or both of the two previous years, and the entity was a corporate tax entity throughout those years.
- A clean lodgement history: the loss-year return and the returns for the previous five income years must be lodged, not required, or assessed by the ATO.
- A choice in the approved form, made in the company tax return by the day it's lodged (or a later day the ATO allows), stating how much of the loss is carried back to each year.
An integrity rule also denies the offset where control of a company changes under a scheme aimed at getting the refund. Buying a company for its tax history and cashing it out won't work.
If you trade as a sole trader or hold assets personally, carry-back isn't available to you, and your losses fall under the ordinary rules. If you're weighing up your structure, see our comparison of sole trader vs company tax.
Working out the refund: a worked example
Four figures decide the answer:
- The tax loss for the loss year
- The income tax liability for each of the two previous years (less any part already used by an earlier carry-back)
- The company tax rate for the loss year: 25% for a base rate entity, 30% otherwise
- The franking account balance at the end of the loss year
For each earlier year, the loss carried back to that year (less any net exempt income for that year) is multiplied by the loss-year tax rate, and the result can't exceed that year's tax liability. The amounts for the two years are added together, and the total is then capped at the franking account balance at the end of the loss year.
Take a fictional base rate entity, Aus Widgets Pty Ltd:
- 2024–25: taxable income $80,000, tax $20,000
- 2025–26: taxable income $200,000, tax $50,000
- 2026–27: tax loss of $300,000
- Franking account balance at 30 June 2027: $45,000 (after paying franked dividends)
Carrying back $200,000 to 2025–26 gives $200,000 × 25% = $50,000. Carrying back $80,000 to 2024–25 gives $80,000 × 25% = $20,000. That's $70,000 before the cap. Because the franking account balance is only $45,000, the offset is limited to $45,000.
The choice states how much of the loss is carried back, and the part you carry back can't also be carried forward. So in this example it makes sense to carry back only $180,000 to 2025–26 ($180,000 × 25% = $45,000, the full capped amount) and carry the other $120,000 forward against future profits. Run the numbers before lodging, not after.
Why the franking account matters: paying company tax creates franking credits, and paying franked dividends uses them up. A company that paid out its profits as fully franked dividends may have a small balance even though it paid plenty of tax. If a loss year looks likely, get advice before declaring dividends.
The offset is claimed in the company tax return for the loss year, so for most companies the first refunds will come from 2026–27 returns lodged after 30 June 2027. Our guide on how to lodge a company tax return covers the process. The same Act also made the $20,000 instant asset write-off permanent for small businesses.
The COVID-era scheme: what it was and why it ended
The new measure isn't Australia's first. The temporary loss carry-back offset applied to tax losses made in the 2019–20, 2020–21, 2021–22 and 2022–23 income years. Eligible companies (aggregated turnover under $5 billion) could carry those losses back against tax paid in 2018–19 or later years and claim the offset in their 2020–21, 2021–22 or 2022–23 company tax returns. It ran alongside temporary full expensing as COVID-era cash-flow support, and both ended with the 2022–23 income year.
The building blocks were similar: a corporate tax entity, earlier tax paid, a five-year lodgement check, and a cap at the franking account balance at the end of the claim year. For base rate entities the company tax rate changed during the period (27.5% for 2019–20, 26% for 2020–21 and 25% from 2021–22), which affected the calculation.
An earlier version applied for the 2012–13 income year and was repealed in 2014. Treasury's Business Tax Working Group report on the tax treatment of losses sets out the case for carry-back as cash-flow support during a downturn.
Can you still claim under the old scheme?
Only in narrow cases. The old offset could only be claimed in a 2020–21, 2021–22 or 2022–23 company tax return, and the choice had to be made when that return was lodged (or by a later day the ATO allowed). Changing a choice already made required an approved form lodged within the amendment period for that return, which is generally two years for small and medium businesses, so for most companies those windows have closed.
That leaves companies with a 2020–21, 2021–22 or 2022–23 return that still hasn't been lodged. They may be able to make the choice when that return is lodged, but only if the old conditions are met, including the five-year lodgement history. That usually means rebuilding the file first: confirm the profit-year tax, verify the loss, reconcile the franking account, and lodge the overdue returns in the right order. Late-lodgement penalties can still apply, and old refund claims tend to draw ATO review. If the ATO disputes the position, the ATO objection process and its time limits apply.
Common myths that cost businesses money
Myth one. “Loss carry-back is finished.” It was unavailable for losses from 2023–24 to 2025–26, but it's back for losses in income years starting on or after 1 July 2026.
Myth two. Any taxpayer with a loss can use it. No. Only corporate tax entities that aren't significant global entities qualify. Sole traders, partnerships and ordinary trusts are out.
Myth three. If there's a loss, there's a refund. No. The company needs tax paid in one of the two previous years, a positive franking account balance at the end of the loss year, and an up-to-date lodgement history.
Myth four. A 2025–26 loss can be carried back under the new rules. No. The new rules start with income years beginning on or after 1 July 2026. A loss in the 2025–26 return you're lodging now is carried forward under the ordinary rules.
Common pitfall: If an article talks about IRS forms, federal NOL rules or US case law, it's describing the US system, not Australia's.
What to do with company losses now
If the company made its loss in 2025–26 or earlier, or carry-back isn't available, the ordinary loss rules apply:
- Carry the loss forward. Company tax losses can be carried forward indefinitely and deducted against future income. A company can choose how much of a prior-year loss to use in a later year, which helps with franking credit planning.
- Pass the continuity of ownership test. Broadly, the same people must hold more than 50% of the voting power, dividend rights and capital rights from the start of the loss year to the end of the year the loss is used.
- Or pass the business continuity test. If ownership has changed, the company can still use the loss if it carries on the same business or, for losses from income years starting on or after 1 July 2015, a similar business.
- Lodge a losses schedule where required. Companies generally need one if their tax losses and net capital losses carried forward total more than $100,000.
From 2026–27, run both options side by side: a carry-back refund now or a deduction later. A loss year can also justify varying PAYG instalments; see how PAYG instalments work. And if cash is tight, our guide to managing small business cash flow is a good companion.
A practical checklist
- Check your entity: carry-back is for companies and other corporate tax entities only.
- Check the year: losses from income years starting on or after 1 July 2026 only.
- Check the previous two years: was tax payable in 2024–25 or 2025–26?
- Check the franking account before paying dividends in a year that may end in a loss.
- Check your lodgement history: the previous five years' returns must be in.
- Decide how much to carry back: match it to the cap and carry the rest forward.
- Overdue COVID-era returns? Get them reviewed before assuming anything is left to claim.
For a wider view, see our guides to tax minimisation strategies for Australian businesses and small business tax in Australia.
Sources: ATO, Tax reform: tax loss carry back; Treasury Laws Amendment (Tax Reform No. 2) Act 2026; ATO, Loss carry back tax offset: eligibility (2019–20 to 2022–23 scheme); ATO, How to claim a tax loss.
How do I get help with this from the ATO?
The ATO provides guidance through ato.gov.au, the Small Business Support Line (13 28 66), and Online Services for individuals and businesses. For complex situations, a registered tax agent provides advice tailored to your specific circumstances and professional indemnity protection. You can verify agent registration at the TPB register at tpb.gov.au.
What records do I need to keep for tax purposes in Australia?
Most tax records must be kept for five years from the date of lodgement or the date the transaction occurred, whichever is later. Records must be in English or convertible to English and must be sufficient to explain the income and deductions in your return. The ATO can request records at any time during the retention period.
When do I need a registered tax agent in Australia?
Consider a registered tax agent when your affairs involve multiple income sources, business activity, investment properties, capital gains, or overseas income. Agents extend your lodgement deadline, provide safe harbour protection, and take professional responsibility for the advice given. Verify registration at tpb.gov.au.
How does the ATO calculate penalties for compliance failures?
The failure to lodge penalty is based on penalty units ($364 per unit from 1 July 2026), accruing per 28-day period for late returns and BAS lodgements. Incorrect information penalties range from 25% to 75% of the tax shortfall depending on whether the behaviour was careless, reckless, or intentional. Proactive disclosure before an audit begins typically results in significantly reduced penalties.
What is the difference between tax avoidance and tax minimisation?
Tax minimisation is the legal arrangement of your affairs to reduce tax — claiming all eligible deductions, using appropriate structures, and timing income and expenses. Tax avoidance involves arrangements that technically comply with the law but achieve outcomes parliament did not intend. The ATO can apply Part IVA anti-avoidance rules to cancel benefits from avoidance arrangements.
If your company expects a loss in 2026–27, or has overdue returns from the COVID-era years, Australia Wide Tax Solutions can model the carry-back position and get the compliance side sorted first. Call 0488 854 200 or book an appointment.
