The 2026-27 Federal Budget announced the reintroduction of tax loss carry-back, allowing eligible companies to offset losses against tax paid in either or both of the two preceding income years. The measure is before Parliament and is expected to pass into law in the second half of 2026. This article covers how the mechanism works, who is eligible, how it differs from the existing carry-forward rules, and what finance teams should be considering now.

What the proposed measure does — and who it applies to

As part of the 2026-27 Federal Budget, the Australian Government announced the reintroduction of tax loss carry-back for eligible companies. The measure is contained in the Treasury Laws Amendment (Tax Reform No. 2) Bill 2026, introduced into Parliament on 25 June 2026 and referred to the Senate Economics Legislation Committee, which is scheduled to report on 13 August 2026. The measure is not yet law. The following reflects the proposal as announced and introduced into Parliament.

How the Tax Loss Carry-Back Mechanism Works

Under the proposed measure, an eligible company that incurs a revenue tax loss in FY2026-27 or a later income year will be able to carry that loss back and offset it against tax paid in either or both of the two preceding income years. Where the offset exceeds the company's current-year tax liability, the difference is returned as a refundable tax offset — that is, a cash refund from the ATO.

From an accounting and financial reporting perspective—specifically under AASB 112 Income Taxes—eligible entities can recognise a current tax receivable rather than relying on the recognition of a Deferred Tax Asset (DTA), which is subject to stringent "probable future taxable profit" tests. It can instead be applied against tax already paid in recent profitable years, returning cash to the business at a time when it may be most needed.

Eligibility Criteria: Which Corporate Tax Entities Qualify?

The proposed measure applies to corporate tax entities — companies — that meet all of the following conditions:

• Aggregated annual global turnover of less than $1 billion

• Not a Significant Global Entity

• A revenue tax loss in the relevant income year (capital losses are not eligible)

• An income tax liability in one or both of the two preceding income years

• Income tax returns lodged — or not required — for the loss year and each of the five preceding income years

• A formal choice to claim the offset, made in the loss year return

The measure does not apply to trusts, partnerships, or sole traders. Only corporate tax entities can carry back losses under this proposal.

The Franking Account Balance Cap: A Critical Constraint

Crucially, the refundable tax offset is strictly capped by the entity’s franking account balance at the close of the income year in which the loss is incurred, mitigating integrity risks under the imputation system governed by ITAA 1997 Part 3-6. This is a significant constraint in practice. Companies that have distributed franking credits to shareholders through franked dividends in recent years may find their franking account balance is insufficient to support the full value of the potential offset. In some cases, the refund available may be substantially less than the tax paid in prior years, or nil.

Loss carry-back vs loss carry-forward — understanding the difference

Australian companies that incur a tax loss currently have one option: carry the loss forward and apply it against taxable income in a future profitable year. The proposed loss carry-back measure introduces a second option, allowing losses to be applied against tax already paid in prior years. The two mechanisms serve different purposes and suit different circumstances.

Tax Planning Decision: When to Carry-Back vs Carry-Forward

The choice is not straightforward. Carry-back delivers an immediate cash benefit, which is most valuable for companies experiencing a temporary downturn that have been consistently profitable and have maintained a meaningful franking account balance. Carry-forward preserves the loss for future use, which may be more appropriate where the franking account is low or where the company expects to return to profit in the near term.

Where a company's franking account is insufficient to support the full value of the carry-back offset, the unused portion of the loss is not lost — it can still be carried forward in the ordinary way.

The decision involves the company's franking account balance, dividend policy, and forward outlook. These are matters for a registered tax agent or accountant with knowledge of the company's specific circumstances.

Key considerations before the measure takes effect

The measure is expected to pass into law in the second half of 2026, though the precise timing depends on the parliamentary schedule. Once enacted, it will apply to income years commencing on or after 1 July 2026 — meaning FY2026-27 losses will be eligible.

There are several practical considerations for companies and their advisers in the period before and after the measure is legislated.

1. Monitor the franking account balance

The franking account balance at the end of the loss year is the single most important variable in determining the value of a carry-back claim. Companies that have distributed significant franked dividends in recent years may find that little or no refund is available, regardless of the size of the loss. Finance teams should maintain a current view of the franking account balance and model the potential impact of planned dividend distributions before year end.

2. Understand what the measure does not cover

Loss carry-back under the proposed measure applies only to revenue losses. Capital losses cannot be carried back. The measure also applies only to corporate tax entities — businesses operated through trusts, partnerships, or as sole traders are not eligible. Companies that are Significant Global Entities are also excluded.

3. Factor the election into year-end tax planning

Carry-back is not automatic. It must be actively elected in the loss year income tax return. The election is not reversible once made. For companies that anticipate a loss in FY2026-27, year-end tax planning conversations with a registered tax agent should explicitly address whether carry-back is appropriate and, if so, how the franking account balance and prior year tax payments interact to determine the available offset.

4. Confirm the legislative status before relying on the measure

As noted above, the Bill has not yet received Royal Assent. Companies should confirm the current legislative status at the ATO's guidance page before making business or financial decisions in reliance on it.

Tax loss carry-back, if enacted as proposed, gives eligible companies a meaningful cash flow tool for years when trading conditions deteriorate. The value of a claim depends heavily on the company's franking account balance — a factor that is worth tracking now, well before year end. The decision to carry back rather than carry forward is also irreversible, making it one that warrants careful consideration with a registered tax agent before the loss year return is lodged.

The measure remains subject to parliamentary passage. Companies should monitor the ATO's guidance page for updates on the legislative status, and factor the timing of enactment into any decisions made in reliance on the measure.

Official sources:

• Australian Taxation Office — Tax reform: Tax loss carry-back

• Australian Government Budget 2026-27 — Tax reform

• Parliament of Australia — Treasury Laws Amendment (Tax Reform No. 2) Bill 2026

Disclaimer : This article is for general informational purposes only and does not constitute professional tax or financial advice. The proposed tax loss carry-back measure is currently before Parliament and is not yet law. We strongly recommend consulting a registered tax agent before making any financial decisions based on this information.

Last updated: July 2026