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01 Jul 20267 min read
The rules are set out in the Treasury Laws Amendment (Tax Reform No. 2) Bill 2026 (introduced into Parliament on 25 June 2026) and allow corporate taxpayers to carry back losses in the current income year against taxable income of the preceding two income years. This converts a tax loss into an immediate cash refund if tax was paid in the prior two income years, rather than requiring the loss to be carried forward and realised only when future profits arise.
The eligibility rules are:
The AUD 1 billion turnover threshold is different from the COVID loss carry back rules, which had an eligibility limit of less than AUD 5 billion.
A key practical implication of the new regime is the increased importance of correctly determining whether an entity is an SGE.
Historically, SGE classification has been most visible in the context of:
However, under the proposed regime, SGE status will now also determine access to the benefit of these rules.
For private equity (PE) owned entities, SGE status can be particularly complex, due to:
Groups with PE investment may unintentionally fall within the SGE definition even where the Australian operations are relatively small. This creates a risk that loss carry back benefits are not available, and planning opportunities are missed if SGE status is not appropriately assessed.
In order to carry back the losses, the eligible corporate tax entity must:
The loss carry back tax offset is capped by the company’s franking account surplus at the end of the loss year (exempting credits do not count for loss carry back purposes). This prevents entities from both distributing franking credits and claiming a refund referable to the same underlying tax, and reducing the risk of a franking deficit arising on refund.
Where a refund is received, a franking debit arises after year end, meaning movements in the account balance may still result in a residual franking deficit exposure if the account is not adequately replenished.
Australian permanent establishments of foreign companies may also apply the loss carry back rules and their refunds are not restricted by franking credits because permanent establishments do not have franking account balances.
These rules will require careful tracking of franking account balances. Also, because there is a potential trade-off between returning franked dividends and accessing cash refunds, a company’s dividend policy may need to also be considered.
Carter Civil Pty Ltd is a regional civil contractor owned by Emma and Luke Carter. The company has annual turnover of around $5 million and generally retains some profits to fund equipment and working capital, but it also pays dividends to its shareholders when cash flow allows.
In the 2025–26 income year, Carter Civil has a strong year and generates taxable income of $520,000. At the 25% corporate tax rate, it pays income tax of $130,000. This gives rise to franking credits of $130,000 in the company’s franking account.
Following that strong year, the company declares a fully franked dividend to Emma and Luke. The dividend uses $90,000 of the company’s franking credits. As a result, although Carter Civil originally paid $130,000 of tax, its franking account balance is reduced to $40,000 after the dividend is paid.
In the 2026–27 income year, market conditions deteriorate. A major subdivision project is delayed, and Carter Civil records a tax loss of $280,000. Ordinarily, carrying back that loss to the prior year would produce a potential refundable tax offset of $70,000, being 25% of the $280,000 loss.
However, Carter Civil’s refund is limited by its franking account balance. Because the company only has $40,000 of franking credits remaining, the loss carry back refund is capped at $40,000.
This means Carter Civil receives a $40,000 cash refund from the ATO, rather than the full $70,000 that might otherwise have been possible had no franked dividend been declared. The refund debits the company’s franking account by $40,000, reducing its balance to nil.
The remaining tax value of the loss ($30,000, or gross-up value of losses being $120,000) is not refunded under the carry back rules because there are insufficient franking credits to support it. Subject to the ordinary loss recoupment rules, Carter Civil may instead need to carry forward the unused portion of the loss for use against future taxable income.
The reintroduction of the loss carry back rules represents a welcome and potentially valuable cash flow measure for eligible companies, particularly those with cyclical earnings or recent volatility. However, the practical benefits will depend on careful navigation of the eligibility criteria, particularly the exclusion of SGEs. For many groups—especially those with private equity ownership—this elevates the importance of accurate SGE and global turnover assessments.
Please contact your trusted Grant Thornton advisor to discuss how these rules apply to your business and the potential cash flow benefits available.
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