Private ruling: Loss carry back tax offset
Published: June 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Was the balance of the franking account $X at the end of the 2012-13 financial year? | A1: No. | Q2: Is the company entitled to any loss carry back tax offset in the 2012-13 financial year? | A2: No.

Relevant facts and circumstances: The company first traded in the relevant financial year. The relevant financial year income tax return was lodged on prior to 30 June 20XX. The tax assessment of $X was paid after 30 June 20XX. The company had paid no income tax, income tax instalments or dividends until the payment made after 30 June 20XX. The company has made a loss in the subsequent financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 160-10 | Income Tax Assessment Act 1997 section 200-15 | Income Tax Assessment Act 1997 section 205-15

Reasons for decision: Summary: Section 200-15 of the ITAA 1997 explains that the franking account is used to keep track of income tax paid by an entity, so that the entity can pass to its members the benefit of having paid that tax when a distribution is made. According to subsection 200-15(3) of the ITAA 1997, a corporate tax entity receives a credit in the franking account if the entity pays income tax or receives a franked distribution. Subsection 205-15(1) of the ITAA 1997 sets out when a credit arises in the franking account of an entity and the amount of the credit. Item 2 of the table states that: | Detailed Reasoning - Arises:: 2 the entity pays income tax; and the entity satisfies the residency requirement for the income year for which the tax is paid; and the entity is a franking entity for the whole or part of that income year that part of the payment that is attributable to the period during which the entity was a franking entity, less any reduction under subsection (4) on the day on which the payment is made In this case, the company lodged their income tax return for the relevant financial year on before the end of the relevant financial year. Although lodgement occurred before the end of the subsequent financial year the tax liability was not paid until after 30 June 20XX. As discussed above, a corporate tax entity does not receive a credit in the franking account until the day on which the payment of income tax is made. Therefore, as no tax had been paid by the company as at 30 June 20XX there was no credit in the franking account at that time. | Detailed Reasoning - Question 2: Section 160-10 of the ITAA 1997 details the requirements that must be met for an entity to be entitled to the loss carry back tax offset. An entity is entitled to a tax offset for the current year if the following conditions are satisfied: a) the entity is a corporate tax entity throughout the current year b) either or both of the following income years were loss years: i. the current year; ii. the income year just before the current year (the middle year); c) the entity had an income tax liability for either or both of the following income years: i. the middle year; ii. the income year just before the middle year (the earliest year) d) any of the following requirements are satisfied for the current year and each of the 5 income years before the current year: i. the entity has lodged its income tax return for the year; ii. the entity was not required to lodge an income tax return for the year; iii. the Commissioner has made an assessment of the entity's income tax for the year; e) the entity makes a loss carry back choice for the current year in accordance with Subdivision 160-C. Under subsection 160-15(1) of the ITAA 1997, the amount of the loss carry back tax offset for the current year is the least of the following amounts: • the sum of the loss carry back tax offset components for the earliest year and the middle year; • the entity's franking account balance at the end of the current year; • $1,000,000 multiplied by the corporate tax rate for the current year. In this case, as discussed in question 1, the company's franking account balance at the end of the subsequent financial year was 0. This is because the company had not paid any income tax at this point in time. Therefore, although the company may meet the eligibility requirements, the amount of the tax offset available is 0.