If you are running a profitable company and have paid tax for several years, it can pretty rough to go through a bad patch. You lose money, make tax losses and don’t get anything back from the taxman. Tax losses are only be used to save tax on future profits leaving your current cash flow situation a bit grim.
Well that’s all about to change.
From the 2013 financial year onwards, it is proposed that a company that makes a tax loss can try to cash back this loss. So if you make a tax loss of $100,000 after a history of making profits, you could potentially receive a refund of 30% of the loss, being $30,000. That would help immensely to rebuild your business and get back on track.
There are many conditions limiting how much you can claim back and I won’t go through all of them. But the general theory behind the rules is that:
- You can only claim back at most 3 years of tax
- You should not get double the benefit from your tax payments.
- You can’t claim back as many losses as you like.
Starting from 2013 there is a phase-in period where the tax loss claim time is shorter. But over the long term the ATO will only ever allow to claim back up to the last three years of losses. That is the plan. Assuming you are reading this a few years in, you will probably be aiming aim to claim back 3 years worth of tax payments.
Here’s the catch though. You can only claim back up the balance of your franking account. Tax experts would say “of course” and just move on. But to everyone else in the room this probably warrants some explanation.
Every time a company pays tax this is recorded on the company franking account. This is like a “tax bank account” which records tax payments and tax refunds. So if a company has a history of paying tax and accumulating the after-tax profits, their franking account would be pretty large.
Take a simple example. Imagine you are a small investor in Woolworths. The company makes money, say $100, then pays tax, leaving it with $70 cash. It then pays that $70 cash to you, and gives you a tax credit for the $30 of tax it has already paid. In this case, the franking account records the tax payment of +$30 and the dividend credit of -$30 as well. The final balance would be NIL. When you do your tax return you get a benefit and pay less tax on the dividend because you have received this franking credit.
If your company has a NIL balance in your franking account it means someone, somewhere may have already received a benefit from the company’s tax payments. That is why the ATO will only let you claim back losses up to the balance left in your franking account. It doesn’t want to give out a double benefit.
Finally, the government doesn’t have endless piles of money to throw around, so the maximum tax losses you can claim per year are $1,000,000. That makes for a maximum refund of $300,000 per year regardless of how bad the business is going.
Now this is just a simple outline of the rules, but I hope you get a general understanding of how they work for you. If you require assistance with how this will work with your taxation situation please contact us.