Loss Carry-Back Australia 2026: How a Bad Year Becomes a Cash Refund
From 1 July 2026, an Australian company under $1B turnover that loses money in a year can ask the ATO for a refund of tax it paid in the previous two profitable years. We walk through who qualifies, why the franking account balance sets the ceiling, and what it changes about dividend policy.
In one paragraph
Tax years from 1 July 2026 onwards: an Australian company under $1B aggregated turnover that makes a tax loss can elect to carry it back against profit taxed in the prior two years. The ATO refunds the tax, but only up to what is sitting in the company’s franking account. Trusts, partnerships and sole traders miss out. Capital losses miss out too. The 2026-27 Budget makes the measure permanent after two earlier short-lived versions.
Last reviewed: 8 May 2026 against the 2026-27 Federal Budget papers.
Author: James Carey, CA CTA JP, Director, Prime Partners.
What loss carry-back actually does
A company has a profitable year and pays its tax. Two years later it loses money. Under standard rules that loss sits as a carry-forward, useful only when (or if) the company is profitable again. Loss carry-back lets the company go the other way: apply this year’s loss against the prior year’s taxable income, and the ATO refunds the tax already paid.
Carry-forward is patience. Carry-back is cash.
Australia has tried this twice before. It ran briefly in 2012-13, was abolished in 2014, then came back as a COVID lifeline covering 2019-20 through 2022-23. The 2026-27 Budget makes it permanent for tax years from 1 July 2026.
Who can use it
The rules screen out anything that isn’t a company.
- Companies only. Trusts, partnerships and sole traders are excluded. If your operating entity is a discretionary trust with a corporate beneficiary, the bucket company can technically carry back its own prior tax, but the trust minimum tax landing in 2028 will narrow that pathway.
- Aggregated global turnover under $1B. Almost every Australian SME, and most mid-market businesses, sit under this.
- Tax years from 1 July 2026. A loss in FY 2026-27 can offset profit taxed in FY 2024-25 or FY 2025-26.
- Revenue losses only. Capital losses can’t be carried back. They stay in their own carry-forward bucket against future capital gains.
- Up to two years back. The loss can be applied against one of the prior two years, or split across both.
Why the franking account sets the ceiling
Most directors don’t see this coming. The refund can’t exceed the franking account balance.
The logic is double-dip prevention. Paying tax credits the franking account. Paying franked dividends debits it, sending the credits out with the dividends. If a company has already dividended out the franking credits attached to a year’s tax, refunding that same tax to the company means the same dollar is benefiting both the shareholders (who already used the credits) and the company (now getting cash back). The cap stops that.
In practice:
- A company that retained earnings and never paid franked dividends has a full franking balance. Full refund.
- A company that aggressively distributed franking credits has an empty franking account. Almost nothing to refund, even on a substantial loss.
- Most family operating companies sit somewhere between.
A worked example: Anderson Earthmoving Pty Ltd
Anderson Earthmoving is a civil works contractor turning over about $4M a year. John and Mary Anderson own the shares personally. Here is what loss carry-back does for them over three years.
FY 2025-26: a good year
- Taxable income: $400,000
- Tax paid at 25%: $100,000
- Franking credits banked: $100,000
- John and Mary each draw $50,000 salary; the remaining profit stays in the company
- Closing franking balance: $100,000 (no dividends paid)
FY 2026-27: a bad year
A major client enters administration and a big civil job is paused.
- Taxable income: ($300,000) loss
- Tax payable: nil
- Anderson Earthmoving elects to carry $300,000 of loss back against FY 2025-26 profit
The refund
| Step | Amount |
|---|---|
| Loss carried back | $300,000 |
| Applied at 25% corporate rate | $75,000 refund |
| Franking balance before | $100,000 |
| Franking balance after refund | $25,000 |
Anderson Earthmoving receives a $75,000 cash refund from the ATO. The franking account debits by $75,000 because that tax is now being refunded, leaving $25,000 of credits in the company. The $300,000 of loss has done its job against FY 2025-26 and can’t also be carried forward.
The timing matters. $75,000 lands at the moment the business needs it: in a year when cash flow is already tight. Without carry-back, that benefit sits on the balance sheet, dependent on future profitability that may or may not arrive.
When carry-back is the right lever
| Situation | Why it works |
|---|---|
| Cyclical industry (construction, agriculture, project-based services) | Good and bad years rotate. The cap normally has room. |
| A one-off shock (client failure, regulatory hit, industry disruption) | One bad year against a stack of prior good years |
| Earnings retained in the company | Strong franking balance, so the cap doesn’t bite |
| Healthy franking account | Refund matches the full economic loss benefit |
When it isn’t worth much
Three patterns where carry-back delivers less than it sounds:
- Companies that have steadily dividended out franking credits. Empty franking account, small refund cap.
- Loss-makers that didn’t pay tax in either of the prior two years. There is nothing to claw back.
- Trust structures. The trust itself can’t carry back. Only a corporate beneficiary can, and only against its own prior tax payments.
What this changes about dividend policy
The standard advice to family-company directors for a long time has been: distribute franking credits as fast as they are earned. Don’t let them sit unused.
That advice now deserves a second look. Retained earnings buy optionality. Hold the credits in the company and you’ve banked an insurance policy: a bad year arrives, the carry-back refund kicks in. The bad year doesn’t arrive, you can dividend out later anyway.
For most family businesses this isn’t a wholesale change to dividend policy. It is a conversation with your accountant about the right balance for your industry, your concentration risk, and your shareholders’ personal tax rates.
What to do in the next twelve months
- Pressure-test your dividend policy. If you’ve been distributing franking credits aggressively, model what happens if a bad year hits with the franking account near empty. That is the worst-case scenario, and it is now avoidable.
- Run a franking balance forecast. Cyclical industries and client-concentrated businesses especially: an hour with your accountant mapping the franking balance across realistic scenarios is cheap insurance.
- Treat the election as a planned decision. Carry-back has to be elected in the loss year. You don’t want this conversation to happen at the year-end scramble.
- Revisit your structure. Carry-back is a company tool. Trusts don’t get it. If your operating vehicle is a trust and your industry swings, this is another piece of evidence for the structure conversation. Our Business Structure Review service handles exactly this kind of analysis.
Talk to us about your franking position
If your company has been profitable and you’re facing a cyclical or one-off downturn, the franking-balance numbers are worth running now, not at year-end. Prime Partners’ Business Accounting & Tax Advisory and External Finance Team / Virtual CFO services handle franking-balance modelling and dividend policy reviews as part of normal advisory work.
Related guidance
- Start-Up Loss Refundability Australia 2028 – the parallel Budget measure for Year 1 and Year 2 companies
- R&D Tax Incentive Advisory – fixed-fee R&D claim support
- Business Structure Review – is your structure still right for the post-Budget rules?
- Business Accounting & Tax Advisory – ongoing tax and compliance support
- External Finance Team & Virtual CFO – franking and dividend modelling
Official sources
- 2026-27 Federal Budget – Treasury fact sheets on loss carry-back
- Income Tax Assessment Act 1997 – loss carry-back provisions (Subdivision 160-A as amended)
- ATO franking account guidance
This is general commentary on announced Budget measures, not personal tax advice. The measure is at announcement stage and final legislation is expected later in 2026. Detail above reflects Treasury’s published fact sheets and may change in legislation. Talk to your accountant before making decisions that depend on this measure.