Company Having a Tough Year? Your Tax Loss May Now Create a Cash Refund with Company Loss Carry-Back
Written by: Melissa Cunliffe (CA)
What if a difficult year in your business could result in some of the company tax you paid in earlier profitable years coming back into the business as cash?
For many Australian companies, that possibility is back.
Australia has reintroduced the company loss carry-back tax offset for income years commencing from 1 July 2026.
In simple terms, an eligible company that makes a revenue tax loss may be able to carry that loss back against taxable profits from the previous two income years and receive a refundable tax offset.
a cash refund from the ATO;
a reduction in another tax liability; or
a reduction in existing ATO debt.
But there is an important part of the rules that business owners need to understand:
Loss carry-back interacts directly with your company's franking account.
That means decisions about dividends, franking credits, investment and tax losses may now need to be considered together rather than in isolation.
At 3P's Future Accounting, this is exactly the type of tax change we believe should become part of broader business planning. Not simply: “How much tax can we get back?” but “What gives the business and its owners the strongest overall financial position?”
How company loss carry-back works
Normally, when a company makes a tax loss, that loss is carried forward.
For example, a company makes a $300,000 tax loss in 2026–27. Ordinarily, that loss would remain available — subject to the relevant company loss rules — to offset taxable profits made in future years.
If the company returns to profit in 2027–28, some or all of that accumulated loss might then reduce future taxable income. The problem is that the tax benefit arrives later.
Loss carry-back can bring that benefit forward. Instead of waiting for another profitable year, an eligible company may elect to carry its current revenue tax loss back against taxable income from up to two earlier income years. That produces a refundable tax offset. In practical terms, tax previously paid can potentially come back into the business.
Who can potentially use the new rules?
The new rules apply to eligible corporate tax entities with annual global income below the legislated $1 billion threshold. They apply to revenue tax losses rather than capital losses and apply to losses arising in income years starting on or after 1 July 2026.
Importantly, using loss carry-back is a choice. A company does not necessarily have to carry a loss backwards. Depending on the circumstances, it may instead be preferable to preserve some or all of that loss to offset future taxable profits. That is where tax planning becomes important.
A simple example
Imagine a family company has historically been profitable. In 2025–26 it generates taxable income of $800,000. Assume it is taxed at 25%. Its company tax liability is therefore approximately $200,000.
Now assume 2026–27 is a very different year. The company invests heavily in new equipment, incurs significant expansion costs, experiences weaker trading conditions and finishes with a $400,000 revenue tax loss.
At a 25% tax rate, the tax value of that $400,000 loss is potentially $100,000.
Potential result: a refundable tax offset of up to $100,000 — subject to the eligibility rules and statutory limits.
That could put cash back into the company at exactly the time the business is experiencing a more difficult trading period. But there is another question we need to ask: what does the company's franking account look like?
Why do franking credits matter?
When an Australian company pays income tax, it generally receives a credit in its franking account. Think of the franking account as a record of company tax that may ultimately be available to attach to dividends paid to shareholders.
If the company pays tax, its franking account generally increases. If it pays a franked dividend, franking credits are used and the franking account decreases. If the company receives certain income-tax refunds, the franking account can also be debited.
This matters because the loss carry-back rules are designed to prevent the company from receiving the benefit of the same tax twice.
The company cannot use tax previously paid to provide franking benefits to shareholders and then also receive that same tax back through loss carry-back.
Technically, the loss carry-back offset is capped by the company's franking-account surplus. The refund then has the corresponding franking-account effect.
So it is better to say the franking account limits the refund than to say the company simply “spends” franking credits to obtain it.
Scenario 1 — sufficient franking surplus
Suppose the company paid $200,000 of company tax on earlier profits and then makes a $400,000 tax loss with a potential tax value of $100,000.
If the company has sufficient franking credits available, and the other requirements are satisfied, it may potentially access the full $100,000 loss carry-back tax offset.
The company receives the cash-flow benefit now, while the franking account is correspondingly reduced to reflect that the related tax has effectively come back to the company.
Scenario 2 — franking credits already used
Now suppose the same company had previously distributed significant fully franked dividends to shareholders. Those dividends have already used much of the company's available franking-account balance.
Although the tax value of the current loss may still notionally be $100,000, the available loss carry-back tax offset can be restricted by the company's remaining franking-account surplus.
A company can have enough previous taxable income to carry a loss back against, yet still be unable to access the full refund because its franking surplus is too low.
This is why dividend decisions and loss carry-back planning now need to be modelled together.
Franking credits have become part of the cash-flow decision
Historically, business owners may have looked at franking credits mainly when deciding how much dividend to pay. Loss carry-back adds another dimension.
Before declaring a significant dividend, consider expected company profitability, future investment, potential tax losses, available cash, shareholder cash requirements, franking-account balance, Division 7A, future tax liabilities and whether loss carry-back could become valuable.
It does not mean “don't pay dividends” and it does not mean “always preserve franking credits”. It means the decisions need to be modelled together.
This could be particularly important for growing businesses
Imagine a successful family company that has made strong profits for several years and then decides to purchase new equipment, open another location, hire additional staff, develop a new product, invest heavily in technology or acquire another business.
That investment could create a temporary tax loss. Historically, the company might simply carry the loss forward. Now there may be another option: carry the loss backwards and potentially convert previous company tax into cash that can help fund the expansion.
The $20,000 instant asset write-off adds another planning opportunity
The same tax reform package has also made the $20,000 instant asset write-off permanent for eligible small businesses. This means capital expenditure and loss carry-back can sometimes interact.
A business may invest in qualifying equipment, the deduction may contribute to a tax loss, and that tax loss may then potentially be carried back to produce a cash refund.
Never buy something purely for the tax deduction. Spending $20,000 unnecessarily to save $5,000 of tax still leaves the business $15,000 worse off.
The commercial investment must make sense first. Tax planning comes second.
What if the company expects strong profits next year?
Loss carry-back is optional. That matters.
If the company makes a $500,000 loss this year but expects a significant taxable profit next year, there may be circumstances where carrying the loss forward is more valuable than carrying it backwards.
Differences in company tax rates, available franking credits, previous tax liabilities, future taxable income, shareholder dividend requirements and cash-flow needs can all influence the decision.
The objective should not automatically be “get the biggest refund today”. The objective should be “use the tax loss where it produces the best overall outcome”.
What happens to the loss once it is carried back?
You cannot use the same tax loss twice. If $400,000 of tax losses are carried back and used to obtain a refundable tax offset, that $400,000 is no longer available to reduce future taxable income.
If only part of the loss is carried back, the remaining eligible loss may potentially remain available for future years, subject to the ordinary company-loss rules. That makes modelling particularly important.
Think about the franking account before declaring dividends
Before declaring significant franked dividends, particularly where the company is experiencing changing trading conditions, ask:
What is our current franking-account balance?
What dividends are we proposing to pay?
What will those dividends do to the franking account?
What is the company's forecast taxable result?
Could we generate a tax loss?
Could loss carry-back provide valuable cash flow?
Are we better using franking credits for shareholders or preserving capacity to support a potential company tax refund?
There is no universal answer. The right answer depends on the circumstances of the company and its shareholders.
Preserve. Protect. Prosper.
PRESERVE
Preserve valuable tax attributes. Tax losses have value. Franking credits have value. Previous tax paid may have value under the loss carry-back regime. Those attributes should not be used accidentally. Preserve flexibility by planning ahead.
PROTECT
Protect the company's cash position. If trading conditions deteriorate, identify potential tax losses early. Do not wait until months after year-end to discover that a loss carry-back refund could have helped fund the business. Protect the franking position by understanding the consequences of dividend decisions before they are made.
PROSPER
Prosper by using the tax system to support sensible commercial investment. A temporary loss does not necessarily mean the business is failing. Sometimes a company makes a loss because it is investing, expanding, building capacity, developing new products or buying equipment. Loss carry-back can potentially convert part of that temporary tax loss into immediate cash flow to help fund the next stage.
Five questions every private company should now ask
How much company tax did we pay in the previous two years?
What is our current franking-account balance?
What will our proposed dividends do to that balance?
Are we forecasting a tax loss in 2026–27 or a future year?
Would carrying that loss backwards produce a better outcome than preserving it for future profits?
These questions should increasingly become part of year-end tax planning — before major dividend and investment decisions are made.
The 3P's view
A difficult year does not necessarily mean the business has gone backwards. Sometimes it means the business is investing. Sometimes economic conditions have temporarily changed. And sometimes an otherwise successful company simply has an unusual year.
The reintroduction of company loss carry-back means that tax paid during previous profitable years can potentially become a source of cash flow when the business needs it most.
But the rules do not operate in isolation. Tax losses matter. Previous tax paid matters. And franking credits matter.
Before declaring large dividends, undertaking significant investment or deciding what to do with a company tax loss, model the whole position. Because the best tax outcome is not necessarily the largest refund. It is the outcome that puts the company and its owners in the strongest overall position.
Contact the team today to discuss your company's tax position and plan for the strongest possible outcome.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
