Not every year is a good year, even for a well run business. Economic conditions shift, a major project can fall through, or a contract can be delayed, and a company that has been consistently profitable can suddenly find itself with a loss on the books. If your company moves from a profit to a loss, there is now a way to turn that loss into cash back in your pocket, rather than simply carrying it forward and hoping for a better year ahead. The loss carry back tax offset, first used during COVID and then scrapped, has been reintroduced, and it is now law.
How loss carry back works
Eligible companies that make a tax loss in an income year can carry that loss back and offset it against tax they paid in either, or both, of the previous two income years.
Instead of waiting for a future profitable year to use the loss, the company can claim a refundable tax offset and get some of that earlier tax paid back as a cash refund.
The measure applies to income years starting on or after 1 July 2026, with eligible companies first able to claim the offset in their 2026 to 2027 tax return.
This is not a new idea. A very similar loss carry back measure applied temporarily during the COVID period, covering the 2019 to 2020 through to the 2022 to 2023 income years, and helped many companies manage cash flow through a genuinely difficult stretch. The measure was then allowed to lapse. Its return in the 2026 to 2027 Budget follows the same basic design, but this time it has been reintroduced as an ongoing measure rather than a temporary, time limited one.
Who is eligible
- Corporate tax entities, meaning companies and some other entities taxed as companies, with an aggregated annual global turnover under $1 billion. In practice, this covers almost every private company in Australia.
- The offset only applies to revenue losses, not capital losses.
- The refund is limited by the company’s franking account balance, so a company with little or no franking credits may not receive the full refund it would otherwise be entitled to.
Understanding the franking account limit
The franking account limit is one of the more confusing parts of loss carry back, so it is worth explaining properly. A company’s franking account tracks the tax it has paid, and franking credits are what allow that tax to be passed on to shareholders as a credit when franked dividends are paid.
When a company claims a loss carry back refund, the refund is debited against its franking account balance, the same way a franked dividend would be. If a company’s franking account balance is lower than the refund it would otherwise be entitled to, the refund is simply capped at whatever balance remains.
This means two companies with an identical trading loss and an identical amount of tax paid in prior years could end up with quite different refund amounts, purely because one has already used up more of its franking credits through dividends paid to shareholders.
A simple example
| Year | What happens |
|---|---|
| 2024 to 2025 | The company pays company tax on a profitable year. |
| 2026 to 2027 | The company makes a trading loss and elects to carry it back. |
| Outcome | The company may receive a refundable offset for some or all of the earlier tax paid, limited by its franking account balance. |
How to actually claim it
Loss carry back is not automatic. A company needs to make a specific choice, known as an election, to carry a loss back rather than simply carrying it forward in the usual way.
This election is generally made as part of preparing the company’s tax return for the loss year, which is why it is worth discussing your position with us before your return is lodged, not after.
Why it matters
It can meaningfully improve cash flow in a loss year, exactly when a business needs it most.
Using loss carry back is a choice, not an automatic outcome. A company might prefer to carry a loss forward instead, particularly if it expects strong profits soon and franking credits are already limited.
This is a decision worth making with proper advice, not a box to tick when lodging. Talk to JMB before you lodge a return in a loss year.
What if my franking account balance is low
If your company has not paid much tax in the past two years, or has already used its franking credits to pay dividends, loss carry back may only provide a partial refund, or none at all. This does not mean the loss itself is wasted. Any amount of the loss you do not carry back can still be carried forward in the usual way, to offset against future profits once your company returns to a taxable position.
This is why loss carry back works best as part of a broader conversation about your company’s tax position, rather than a decision made in isolation. Dividend timing, franking account management and loss carry back all interact with each other, and getting the sequencing right can make a genuine difference to your outcome.
Common misunderstandings about loss carry back
A few misconceptions come up regularly. Loss carry back is not a cash grant unrelated to tax already paid. It is specifically a refund of tax your company has already paid in an earlier profitable year, so a company that has never paid company tax has nothing to carry a loss back against.
It also does not apply automatically. Without a specific election in your tax return, a loss will simply be carried forward as it always has been. And it is not compulsory. Even an eligible company might choose not to use it, if carrying the loss forward against expected future profits makes more sense for its overall tax position.
Frequently asked questions
Q. Does loss carry back apply to sole traders or trusts?
No. It only applies to corporate tax entities, meaning companies and similar entities taxed as companies.
Q. Can I carry back a capital loss?
No. Only revenue losses are eligible for loss carry back.
Q. Do I have to use loss carry back if I am eligible?
No, it is optional. You can choose to carry the loss forward instead if that suits your circumstances better.
Q. How far back can I carry a loss?
You can carry a loss back against tax paid in either, or both, of the two income years immediately before the loss year.
Q. Does my company need to have been profitable every year to use loss carry back?
No, but you do need to have paid company tax in at least one of the two prior income years, and have a franking account balance to draw on, or there will be little or nothing to refund.
Sources
ATO, Tax loss carry back law now passed: https://www.ato.gov.au/businesses-and-organisations/business-bulletins-newsroom/tax-loss-carry-back-law-now-passed