Start-Up Loss Refundability Australia: Cash for Year 1 and Year 2 Losses
From 1 July 2028, eligible Australian start-ups can convert Year 1 and Year 2 tax losses into a cash refund – capped at the PAYG and FBT they pay on Australian wages. Three worked examples for SaaS, agency and deep-tech founders, plus how this stacks with the R&D Tax Incentive.
In one paragraph
Tax years from 1 July 2028 onwards: an Australian company under $10M aggregated turnover, in its first two years of operation, can elect to convert its tax loss into a refundable cash offset. The refund is capped at the FBT plus PAYG withholding the company paid on Australian wages that year. Elect, and the loss is gone (it can’t also be carried forward). The Budget designed it this way to tie the benefit to Australian hiring.
Last reviewed: 8 May 2026 against the 2026-27 Federal Budget papers.
Author: James Carey, CA CTA JP, Director, Prime Partners.
What the new rule actually does
Most start-ups run losses for years before they turn profitable. Under existing law those losses are carry-forward tax losses, sitting on the balance sheet until future profit arrives. For many companies, that profit is years away. For some, it never arrives at all.
Start-up loss refundability gives Year 1 and Year 2 companies a different option. The ATO sends cash now instead of the company waiting on a future tax shield it may never use.
The measure starts for tax years from 1 July 2028.
Who qualifies
The rules are targeted at genuine early-stage companies:
- Companies only. Trusts, partnerships and sole traders are not eligible.
- Aggregated turnover under $10M. A much tighter cap than the $1B loss carry-back threshold.
- First two financial years of operation. Year 1 and Year 2. From Year 3, the company reverts to ordinary carry-forward.
- An actual tax loss in those years. There has to be a loss to refund.
The bit founders need to read carefully: the payroll cap
The refund is capped at the FBT paid plus PAYG withheld on wages paid to Australian employees during the loss year.
This is the design that makes the measure unusual. The benefit is anchored to Australian employment. A start-up that loses $500,000 with no Australian payroll gets nothing. A start-up that loses $500,000 while paying substantial Australian salaries gets a refund proportional to the PAYG it withheld and remitted to the ATO.
The policy intent is explicit: support Australian innovation that creates Australian jobs. Don’t subsidise burn rates with no local employment.
Worked example 1: a SaaS start-up with Australian engineers
CloudNova Pty Ltd is a B2B SaaS start-up incorporated on 1 July 2028. Two co-founders, $1.5M seed round from an Australian VC.
| FY 2028-29 (Year 1) | Amount |
|---|---|
| Revenue | $200,000 |
| Expenses | $900,000 (mostly engineer salaries and cloud hosting) |
| Tax loss | ($700,000) |
| Australian employee wages | $600,000 |
| PAYG withheld | ~$130,000 |
| FBT paid | $5,000 |
| Refund cap | $135,000 |
CloudNova elects refundability. The $700,000 loss becomes a refundable offset, but the refund is capped at $135,000. The remaining $565,000 of loss is extinguished. You don’t get to elect refundability for some of the loss and carry forward the rest.
Cash impact: $135,000 from the ATO, roughly three extra months of runway. The $565,000 of loss above the cap is gone.
Is that a good trade? It depends on the company’s view of its tax future. CloudNova has given up $141,250 of future tax shield (at 25%) for $135,000 cash today. Slight loss on paper, but cash three years before profitability has a much higher real value than future tax shield used against profits that may or may not arrive. For a venture-funded SaaS that is uncertain about scale or might be acquired before it ever pays company tax, the cash is the obvious call.
Worked example 2: mostly overseas contractors
PixelMint Pty Ltd is a digital agency incorporated 1 July 2028. Most of the development work is done by contractors in the Philippines and Vietnam. Two Australian founders draw modest salaries.
| FY 2028-29 (Year 1) | Amount |
|---|---|
| Tax loss | ($400,000) |
| Australian employee wages | $130,000 (founders’ modest salaries only) |
| PAYG withheld | ~$25,000 |
| FBT | nil |
| Refund cap | $25,000 |
PixelMint can elect refundability and receive $25,000. The full $400,000 loss is then gone. They have surrendered $100,000 of future tax shield for $25,000 cash. Probably not worth it.
For PixelMint, the carry-forward route stays the better option. By design, this measure penalises companies that don’t employ Australians directly.
Worked example 3: a deep-tech start-up with serious payroll
NeuroChip Pty Ltd is a semiconductor design start-up incorporated 1 July 2028. Six Australian engineers hired from day one to design neuromorphic processors.
| FY 2028-29 (Year 1) | Amount |
|---|---|
| Tax loss | ($1,200,000) |
| Australian employee wages | $900,000 |
| PAYG withheld | ~$215,000 |
| FBT | nil |
| Refund cap | $215,000 |
NeuroChip elects refundability and receives $215,000. The $1.2M of loss is extinguished. At 25% future corporate tax that is $300,000 of future tax shield given up for $215,000 in immediate cash.
For a deep-tech company that is years away from revenue and likely to need multiple funding rounds, $215,000 now reduces the funding gap directly. The lost tax shield only bites if the company eventually becomes very profitable, which is the upside case for any deep-tech venture. The cash today is worth the trade.
How to decide
The election decision usually comes down to two questions: how big is the cap relative to the loss, and how confident are you in future tax shield? Some heuristics:
| Your situation | Elect refundability? |
|---|---|
| Substantial Australian payroll, no clear path to profit | Yes |
| Australian payroll, possible acquisition before profitability | Yes (the buyer often cannot use the carry-forward anyway) |
| Mostly overseas contractors, low PAYG | No (cap too small) |
| Confident near-term profitability, predictable tax shield use | No (carry-forward worth more) |
| The cash buys you another quarter of runway | Almost certainly yes |
The election is irreversible
You have to opt in. Elect, and the loss for that year is extinguished. There’s no clawback, no re-characterisation, no “I changed my mind” once it is done.
For most start-up directors this is one of the first non-trivial tax decisions the company makes. Get advice in Year 1 and Year 2 specifically. The wrong default in either direction can leave real money on the table.
Where this fits in the broader Budget for start-ups
Loss refundability arrived alongside several other measures pointed at young companies:
- Expanded VC incentives (1 July 2027): VCLP investee cap up from $250M to $480M, ESVCLP investee cap up from $50M to $80M. More Australian start-ups become eligible for concessional VC funding.
- R&D Tax Incentive overhaul (1 July 2028): Higher offset rate for core R&D and the refundable cap raised from $20M to $50M turnover. More growing companies stay in the refundable bracket for longer.
- Start-up CGT consultation: Treasury has flagged bespoke CGT settings for the early-stage investment ecosystem, beyond the broader new indexation regime.
For founders, this is the strongest pro-innovation Budget in years. The other side of it: legacy tax structures (discretionary trusts, bucket companies, geared investment property) are being tightened in the same package.
Stacking with the R&D Tax Incentive
Tech and deep-tech founders already use the R&D Tax Incentive to turn eligible R&D spend into a cash refund. Loss refundability stacks on top of that: the non-R&D losses (sales, marketing, general operations) that were previously stuck as carry-forward can now be partially refunded against the PAYG cap.
For a SaaS company spending $400k on eligible R&D and running a $300k operating loss, Year 1 could deliver:
- R&D refundable offset on the R&D spend (currently 43.5% on $400k = $174,000)
- PAYG-capped refundable offset on the remaining $300k of loss, up to the FBT+PAYG cap
The mechanics need care. The same dollar of loss can’t be claimed in both buckets. But for a young software company with serious Australian engineering payroll, a well-built Year 1 claim can materially improve runway. Our R&D Tax Incentive Advisory team models both levers together for software, manufacturing and agritech founders.
What to do in the next twelve months
- Incorporating after 1 July 2028? Plan Year 1 headcount with the cap in mind. Australian hires generate PAYG and FBT that become refundable. Overseas contractors don’t.
- Incorporating in FY 2026-27 or FY 2027-28? The measure only starts 1 July 2028, so an early-2028 incorporation date might land Year 1 inside the eligible window. Talk to your accountant before you choose an incorporation date.
- Running a VC or angel fund? The cap structure makes start-ups with Australian engineering teams meaningfully more capital efficient. Reflect this in valuation models and term sheets.
- Already a founder in a loss year? The election is made in the loss year, not retroactively. Decisions made in the closing weeks of FY are usually worse than decisions made earlier with full information. Get advice early.
Founder? Let’s talk through your Year 1 numbers
Your structure, hiring plan and election timing in the first twenty-four months determine how much of this Budget measure is actually available to you. Prime Partners’ R&D Tax Incentive Advisory and Business Accounting & Tax Advisory teams handle start-up tax planning and election modelling as part of normal advisory work.
Related guidance
- Loss Carry-Back Australia 2026 – the parallel measure for established profitable companies
- R&D Tax Incentive Advisory – fixed-fee R&D claim support
- R&D Tax for Software Development – SaaS and software-specific R&D claims
- R&D Tax Incentive Calculator – estimate your refund
- Business Structure Review – is your start-up using the right entity?
- Business Accounting & Tax Advisory – ongoing compliance and planning
Official sources
- 2026-27 Federal Budget – Treasury fact sheets on start-up loss refundability
- Income Tax Assessment Act 1997 – refundable tax offset provisions
- ATO PAYG and FBT 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.