What is company loss carry-back in Australia in 2026?

From 1 July 2026, eligible Australian companies can use a current-year tax loss to obtain a refundable tax offset for company tax paid in either of the previous two income years. The Australian Government says about 85,000 companies, mostly small businesses, are expected to benefit. The offset is limited by prior tax paid and the company's franking-account balance.

Can an Australian sole trader use the 2026 loss carry-back?

No. Loss carry-back applies to eligible companies, not sole traders, partnerships or trusts. Those entities generally carry tax losses forward under ATO rules, subject to the relevant loss tests. A business operating through a company should still obtain tax advice because eligibility, ownership changes and franking balances can change the outcome.

How many prior years can an Australian company carry a 2026-27 loss back?

The restored measure allows an eligible company to carry a loss back against tax paid in the previous two income years. For a loss made in 2026-27, that generally means testing it against eligible tax liabilities for 2024-25 and 2025-26, subject to the enacted rules, the company's franking-account limit and ATO return instructions.

How much can an Australian company receive under loss carry-back?

The refund is not simply the accounting loss. It is calculated by applying the relevant Australian company tax rate to the eligible loss allocated to a prior year, then limiting the offset to tax previously paid and the available franking-account surplus. For example, a base-rate entity applying a $200,000 loss at 25% could calculate a $50,000 offset before those limits.

Does Australian loss carry-back reduce carried-forward tax losses?

Yes. A loss used to generate a loss carry-back tax offset cannot also be carried forward and deducted against future assessable income. Companies should compare the immediate cash value of a refund with the potential future value of retaining the loss, particularly if their tax rate, ownership or profitability may change.

Company Loss Carry-Back Returns in 2026: An Australian Business Cash-Flow Guide

Australian companies that moved from profit into loss during the current slowdown have a newly restored cash-flow option. From 1 July 2026, eligible companies can carry a tax loss back against company tax paid in the previous two income years and receive a refundable tax offset.

That can bring cash into a business sooner than the ordinary approach of carrying a loss forward until the company becomes profitable again. The Australian Government estimates around 85,000 companies, mostly small businesses, will benefit. It is especially relevant after higher borrowing costs, a 4.75% increase in the National Minimum Wage and persistent input-price pressure tightened margins during 2026.

Loss carry-back is not free money and it is not available to every business. The legal entity must qualify, prior tax must exist, the franking account can cap the refund and the same loss cannot be used twice. This guide explains the commercial logic, the calculations and the practical decisions Australian directors should make before lodging.

What company loss carry-back means

Australia ordinarily allows a company tax loss to be carried forward. If a company loses $300,000 in one year, it can potentially deduct that amount from assessable income in a later profitable year, subject to the continuity of ownership test or business continuity test.

Loss carry-back reverses the direction. Instead of waiting for future profits, an eligible company notionally applies some or all of its current loss against taxable income from an earlier year. It then claims a refundable tax offset reflecting company tax already paid.

The economic distinction is timing:

Treatment	When the tax benefit arrives	Typical use
Carry loss forward	In a later profitable year	Growing or temporarily loss-making company expecting recovery
Carry loss back	After lodging the eligible current-year return	Company needing cash now that paid tax in either prior year
Retain loss unused	No immediate benefit	Company preserving options while eligibility or forecasts are uncertain

A refund can fund working capital, reduce an overdraft, pay suppliers or support restructuring. At a 25% company rate, accelerating the benefit on a $400,000 eligible loss may release up to $100,000 before statutory limits. At a 30% rate, the corresponding amount is $120,000.

Who may be eligible in Australia

The first threshold issue is legal structure. The measure is designed for companies. A sole trader, partnership or trust does not become eligible merely because it has an ABN or employs staff.

Company status matters

A proprietary limited company that carries on a small business may qualify, as may a larger company, if it meets the detailed rules. A corporate trustee requires particular care: the tax loss may belong to the trust rather than the trustee company in its own right. Similarly, an incorporated association, tax-exempt body or entity within a consolidated group may have special treatment.

Directors should identify:

which entity earned the earlier taxable profit;
which entity incurred the current tax loss;
whether both amounts legally belong to the same taxpayer;
whether the prior-year income tax liability was actually paid; and
whether ownership, grouping or residency changed.

Moving assets or operations between related entities does not automatically move tax losses. Australia’s integrity rules are intended to prevent trafficking in losses, so restructures and acquisitions require professional review.

The two-year look-back window

The restored 2026 measure allows an eligible loss to be applied to either of the previous two income years. For a standard 30 June balancer that incurs a loss in 2026-27, the relevant prior periods will generally be 2024-25 and 2025-26.

That window matters for businesses whose strongest pandemic-recovery profits occurred earlier. Tax paid in 2022-23 may sit outside the available period for a 2026-27 claim. A company cannot extend the window simply because it has unused losses.

Prior tax liability is essential

Loss carry-back returns company tax already borne. If the company paid no income tax in the eligible earlier years because deductions, offsets or prior losses reduced its liability to nil, there may be nothing to carry back against.

PAYG instalments alone do not establish the final ceiling. Instalments are prepayments. The relevant comparison is the assessed income tax liability for the earlier year after amendments and offsets.

How the refund calculation works

The calculation should be modelled separately for each eligible loss year and target year. The final ATO return labels and enacted provisions govern the claim, but a simplified example shows the mechanics.

Example: base-rate company

Harbour Tools Pty Ltd was a base-rate entity taxed at 25%. It recorded:

Income year	Taxable income or loss	Company tax position
2024-25	$320,000 profit	$80,000 tax
2025-26	$160,000 profit	$40,000 tax
2026-27	$300,000 loss	Nil current tax

If Harbour Tools carries $300,000 back to 2024-25, the preliminary offset is $75,000: $300,000 multiplied by 25%. That is below the $80,000 earlier-year liability. If its franking account also supports at least $75,000, the company could receive a $75,000 refundable offset.

The unused $20,000 of 2024-25 tax is not itself a loss. Harbour Tools has used the full $300,000 current loss, so no portion remains to carry forward.

Example: the prior-tax cap

Suppose the loss were $400,000. At 25%, the preliminary value would be $100,000. But Harbour Tools only paid $80,000 for 2024-25. A claim allocated solely to that year cannot refund $100,000.

The company may be able to allocate the balance to 2025-26, subject to the precise ordering rules and all other limits. This is why accountants need the tax returns and notices of assessment for both look-back years, not only a profit-and-loss report.

Different company tax rates

Australian base-rate entities generally face a 25% company tax rate, while other companies generally face 30%. Base-rate eligibility depends on aggregated turnover and the passive-income test; it is not determined only by the company being “small”.

Eligible tax loss	Indicative value at 25%	Indicative value at 30%
$50,000	$12,500	$15,000
$100,000	$25,000	$30,000
$250,000	$62,500	$75,000
$500,000	$125,000	$150,000

These figures are illustrations before the earlier-liability and franking-account limits. A rate mismatch between the loss year and the earlier profit year also needs correct statutory treatment; directors should not multiply by whichever rate produces the largest answer.

Why the franking account can limit the payment

The franking-account limit is easy to overlook. When an Australian company pays income tax, it generally receives a franking credit. When it pays a franked dividend, franking credits leave the account.

If a company has distributed its historical after-tax profit with fully franked dividends, its remaining franking surplus may be much lower than the tax originally paid. A loss carry-back refund without a franking limit could effectively return tax that shareholders have already used as credits. The cap prevents that duplication.

Practical franking example

Consider a company that paid $100,000 tax and initially received $100,000 of franking credits. It subsequently paid dividends that used $70,000 of credits. If no other entries occurred, its available franking surplus may be only $30,000.

Even if its current loss would otherwise produce a $75,000 offset, the franking-account cap may reduce the refundable amount to $30,000. The exact balance at the required time, including PAYG instalment and refund entries, must be reconciled.

Directors should review:

the franking-account tax return and ledger;
dividend statements and declaration dates;
income-tax payments and refunds;
amended assessments;
PAYG instalment timing; and
membership of any consolidated tax group.

Carry back now or carry forward?

An immediate refund is attractive, but it is not always the best economic choice. A company should compare scenarios rather than automatically maximising the current claim.

The value of cash today

Assume a company can receive $75,000 now or preserve a loss expected to save $75,000 in tax in three years. If its overdraft costs 9% a year, using the refund to reduce debt could avoid roughly $20,600 of simple interest over three years. That makes acceleration valuable.

The benefit is also lower-risk than forecasting future taxable profit. A carried-forward loss has no cash value until sufficient assessable income arises and the company continues to satisfy the applicable loss tests.

When preserving a loss could help

Carrying forward may warrant consideration where:

the franking limit sharply reduces a current offset;
the company expects higher-rate taxable income later;
a transaction may generate a large capital or revenue gain;
the current loss includes amounts that require adjustment;
prior assessments are disputed or under amendment; or
the company needs to retain flexibility during a restructure.

Accounting loss is not the same as tax loss

A financial statement showing a $250,000 loss does not prove that $250,000 is available for carry-back. Taxable income starts with accounting results but adjusts for tax law.

Common differences include:

Item	Possible tax treatment issue
Depreciation	Tax decline-in-value may differ from book depreciation
Provisions	Leave, warranties and doubtful debts may not be deductible when accrued
Entertainment	Some expenditure is non-deductible
Fines and penalties	Generally non-deductible
Capital expenditure	May be depreciated or added to cost base rather than immediately deducted
Prepayments	Timing rules may defer a deduction
Bad debts	Deductibility requires statutory conditions and documentation
Asset write-offs	The permanent $20,000 instant asset write-off has specific eligibility and cost thresholds

A business should finalise tax reconciliations before using a projected refund in its cash-flow plan. Forecasting the offset is useful, but committing the full amount before lodgment creates risk.

Records an Australian company should assemble

Good records reduce both calculation errors and ATO review risk. Before lodging, prepare a file containing:

Earlier income years

lodged company tax returns;
notices of assessment and amended assessments;
working papers supporting taxable income;
proof of income-tax payments;
PAYG instalment statements; and
franking-account reconciliations.

Loss year

final trial balance and financial statements;
tax reconciliation;
fixed-asset register;
bad-debt evidence;
related-party loan schedules;
loss continuity analysis; and
board papers explaining material write-downs or restructuring costs.

The ATO generally expects records to be retained for at least five years, though longer periods can apply where losses, asset cost bases or disputes remain relevant. If a carried-forward loss will be used years later, retain the ownership and business-continuity evidence needed to substantiate it.

Ownership changes and the company loss tests

Australian company losses are not transferable coupons. Broadly, a company must satisfy the continuity of ownership test or, where available, the business continuity test to deduct prior-year losses. Loss carry-back also operates within an integrity framework.

Continuity of ownership

The continuity test generally examines whether the same persons maintained more than 50% of voting power and rights to dividends and capital distributions through the relevant period. Tracing rules, interposed entities and family ownership can complicate the analysis.

A routine share issue to an investor may affect percentages. A sale between family members may still be relevant. Companies should create a dated cap table showing every allotment, transfer, option exercise and buy-back.

Business continuity

Where ownership continuity fails, the business continuity rules may preserve a loss if statutory tests are met. This is fact-sensitive. New products, new markets, acquisitions and changes in income streams can all matter.

Cash-flow planning after receiving a refund

A tax offset is a one-off balance-sheet opportunity, not recurring revenue. Directors should decide its purpose before it lands.

One practical hierarchy is:

reserve amounts needed for wages, superannuation and GST;
clear overdue statutory liabilities under any agreed ATO plan;
reduce high-cost short-term debt;
protect critical suppliers and inventory;
fund projects with measured payback; and
retain a contingency buffer.

For example, applying a $75,000 refund against a 10.5% unsecured facility avoids up to $7,875 of annual interest before allowing for repayments. Using it for a speculative expansion may produce a higher return, but also exposes the company to fresh execution risk.

The board must still consider solvency. A future refund does not justify incurring debts the company cannot pay when due. Directors dealing with severe distress should obtain restructuring and legal advice promptly.

A practical action plan for 2026-27

Step 1: Update monthly forecasts

Build a rolling 13-week cash-flow forecast and a full-year profit forecast. Separate accounting adjustments from genuine cash movements.

Step 2: Estimate the tax loss

Ask the accountant to prepare an interim tax reconciliation, including depreciation, provisions, asset disposals and non-deductible expenses.

Step 3: verify earlier liabilities

Retrieve the last two returns, assessments and payment records. Confirm that the entity name, ABN and income years align.

Step 4: Reconcile the franking account

Bring the franking ledger up to date before declaring new dividends. A dividend decision made without considering the loss carry-back cap can reduce available cash.

Step 5: Model both treatments

Compare carry-back, carry-forward and mixed scenarios. Include finance costs, expected profitability, tax rates and the probability that future losses remain usable.

Step 6: Document the election

Record the board’s commercial reasoning, calculations and reliance on tax advice. Maintain the schedules that map every claimed dollar to the eligible loss and earlier liability.

Step 7: Lodge accurately

Use the ATO company return instructions for the relevant year. Do not treat an estimate in management accounts as the final claim.

Common mistakes to avoid

The most expensive errors are often structural rather than mathematical:

claiming through a trust, partnership or sole trader;
using an accounting loss without a tax reconciliation;
overlooking the franking-account cap;
counting PAYG instalments as final tax paid;
using a loss both for carry-back and carry-forward;
ignoring a shareholding change;
targeting a year outside the two-year window;
assuming every expense in a difficult year is deductible; and
spending an expected refund before eligibility is confirmed.

Loss carry-back can turn a difficult trading year into an immediate source of liquidity, but only when tax records, ownership history and franking balances support the claim.

Get help with an Australian loss carry-back claim

The restored rules create a useful planning opportunity for companies, particularly those that paid tax in 2024-25 or 2025-26 and are now facing weaker margins. The best result comes from modelling the claim early, not discovering it after the year-end accounts are complete.

Find an Australian accountant on WealthWorks to assess eligibility, reconcile your franking account and compare carrying the loss back with preserving it for future profits.