The Treasury Laws Amendment (Tax Reform No. 2) Bill 2026 passed Parliament on 19 August 2026, introducing permanent two-year loss carryback for eligible companies from the 2026–27 income year. The changes also make the $20,000 instant asset write-off permanent for eligible small businesses.
For companies that have been profitable in recent years but are now facing a tougher period, loss carryback could provide some cash flow relief. Instead of waiting for future profits to use a tax loss, an eligible company may be able to apply that loss against income tax liabilities from either or both of the previous two income years.
There are some important conditions to consider. In particular, the company’s previous tax position and franking account can affect whether a claim can be made and how much may be available.
How does loss carryback work?
Normally, when a company makes a tax loss, it carries that loss forward and may use it to reduce taxable income in a future profitable year, provided the relevant requirements are met.
Loss carryback provides another option.
From the 2026–27 income year, an eligible company may be able to carry a qualifying tax loss back against income tax liabilities from the previous two income years. This may result in a refundable tax offset.
The benefit is largely one of timing. A business experiencing a difficult year may be able to access the value of its tax loss sooner, rather than waiting until it returns to profitability.
This could be particularly useful for established companies that have paid tax in recent years but are expecting a temporary downturn.
Who can access loss carryback?
The rules apply to eligible corporate tax entities that are not Significant Global Entities (SGEs).
Broadly, this means the measure is available to companies with annual global income below $1 billion, although the SGE rules are technical and should be considered carefully for entities that are part of larger corporate groups.
A fall in revenue on its own isn’t enough to qualify. The company needs to have a qualifying tax loss and an income tax liability in an eligible earlier year, as well as satisfy the other requirements under the loss carryback provisions.
The measure applies to eligible revenue losses, not capital losses.
So, while a company may have had a difficult trading year, that doesn’t necessarily mean it will have a tax loss available to carry back. The company’ taxable position needs to be considered.
Why does the franking account matter?
For companies that pay franked dividends, the franking account is an important part of the calculation.
The amount of the loss carryback tax offset may be limited by the company’s franking account position, as well as by the amount of eligible losses and prior income tax liabilities. This is designed to prevent a company from receiving a refund for tax where the benefit of that tax has already been passed to shareholders through franking credits.
As a simplified example, say a company calculates a potential loss carryback offset of $75,000. If its available franking account surplus doesn’t support the full amount, the offset may be reduced.
Companies that regularly pay franked dividends should therefore keep their franking position in mind when considering a potential loss carryback claim.
It doesn’t mean dividend decisions should be driven by loss carryback. It does mean that the timing of distributions and the company’s broader tax position may be worth reviewing together.
Loss carryback and the $20,000 instant asset write-off
The permanent $20,000 instant asset write-off may also be relevant when businesses are planning future expenditure.
From 1 July 2026, eligible small businesses with aggregated annual turnover of less than $10 million can generally claim an immediate deduction for the business-use portion of eligible depreciating assets costing less than $20,000. The threshold applies to each asset individually.
For businesses using the simplified depreciation rules, eligible assets costing $20,000 or more are generally allocated to the small business pool.
If a company is already expecting a lower-profit year, purchasing eligible equipment may further reduce its taxable income. In some cases, the available deductions could contribute to a tax loss.
Where the company also qualifies for loss carryback, that loss may potentially be carried back against income tax liabilities from either or both of the previous two income years, subject to the applicable limits.
This shouldn’t be a reason to make an investment the business doesn’t need. The commercial benefit of the purchase should come first. Eligibility for an immediate deduction does not necessarily produce an equivalent cash refund, as the actual tax outcome will depend on the company’s overall tax position and the applicable loss carryback limits. The tax treatment is simply one factor to consider when deciding when and how to invest.
What should businesses be looking at now?
With the new rules applying from the 2026–27 income year, there are a few areas companies may want to review as part of their tax planning.
Previous income tax liabilities
Look at the company’s taxable income and income tax liabilities for the previous two income years. This will help establish whether there is an earlier liability against which an eligible loss could potentially be carried back.
Expected profitability
If trading conditions have changed, consider what that means for taxable income for the year ahead. This is different from simply looking at accounting profit.
Forecasting the company’s tax position earlier may also provide more time to consider the available options.
Franking account balance
Companies that regularly pay franked dividends should review their franking account position. The available balance can affect the amount of a potential loss carryback offset.
Planned expenditure
If new equipment or other capital expenditure is already planned, consider whether the permanent instant asset write-off or other depreciation rules apply and how the timing of those deductions could affect taxable income.
Business structure
Loss carryback is a company tax measure. It doesn’t provide the same mechanism for sole traders, partnerships or trusts.
If a change in business structure is being considered, it should be assessed more broadly. Tax is one consideration, alongside issues such as asset protection, succession planning and the longer-term needs of the business.
What could this mean for your business?
For a company that has had a profitable couple of years followed by a difficult one, loss carryback could provide useful cash flow relief.
But the size of any benefit will depend on the circumstances. Previous income tax liabilities, the amount and nature of the loss, the company’s franking position and the other eligibility requirements all come into the calculation.
It is also worth looking beyond the potential refund. Decisions around capital expenditure, dividends and business structure can have wider consequences and shouldn’t be made based on one tax measure alone.
If your company has paid tax in recent years and is expecting a loss in 2026–27, or you’re planning significant business investment, now may be a good time to review your position.
Speak with Wilson Pateras to discuss how the loss carryback rules may apply to your business and what they could mean for your broader tax and cash flow planning.
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