Australian companies with turnover under $1 billion can now permanently claim tax refunds from previous profitable years to offset current losses. Budget 2026-27 made the two-year tax loss carry back permanent from 1 July 2026: a direct cash return from tax already paid, not just a future deduction.
Most tax planning runs in one direction: reduce future tax. Tax loss carry back runs the other way. It potentially lets eligible companies recover cash from tax they've already paid.
That distinction matters more than it sounds. For a service business that had two strong years followed by a softer year, the difference between "wait and use the loss later" and "claim back tax from earlier years now" can be the difference between continuing to invest and pulling back.
Budget 2026-27 made the two-year tax loss carry back permanent from 1 July 2026 for companies under AUD $1 billion turnover. Treasury estimates the change affects around 85,000 companies, the majority small businesses.
TL;DR: Tax loss carry back is now permanent from 1 July 2026 for companies under AUD $1 billion turnover. Eligible companies may potentially use current-year tax losses to claim refunds of tax paid in the previous two income years. The rule becomes especially powerful when combined with the permanent AUD $20,000 instant asset write-off.
What you'll find in this guide:
- What tax loss carry back actually means
- Who may qualify
- How refunds may work
- What losses generally qualify
- How the instant asset write-off can interact with carry back refunds
- Records to keep
- Common service business scenarios
Disclaimer
This article provides general information only.
Do not make tax, restructuring, or purchasing decisions based solely on this article.
Tax loss carry back eligibility depends on business structure, turnover, tax position, prior-year tax paid, company status, lodgement history, and ATO requirements. Always consult your accountant or registered tax adviser before relying on carry back tax calculations or EOFY planning strategies. This article is informational only and should not be treated as tax advice.
What tax loss carry back actually does
Tax loss carry back allows eligible companies to use current-year tax losses to claim refunds of tax paid in previous income years.
In plain English: if your company paid tax in earlier profitable years, then later makes a tax loss, the company may potentially "carry back" that loss and recover some of the tax already paid.
The psychology of this is different from a normal deduction. A normal deduction reduces what you'll owe later. A carry back refund may potentially return cash to your business now, money you already paid in a previous year. That distinction matters during the softer trading periods where cash flow pressure is real.
It also differs from the more common approach of carrying tax losses forward into future years. Forward losses help if your business returns to profit later. Backward refunds may help now.
One technical point that matters: accounting losses and tax losses are not always the same thing. A business showing an accounting loss on its books may not automatically generate an eligible carry back tax loss. Your accountant determines whether a specific loss qualifies.
ATO guidance: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/loss-carry-back-tax-offset
What changed in Budget 2026-27
Budget 2026-27 made tax loss carry back permanent from 1 July 2026.
Eligible companies under AUD $1 billion turnover can use current-year tax losses to claim refunds of tax paid in the previous two income years. Treasury estimates the change affects around 85,000 companies, the majority small businesses, meaning many Australian service businesses may potentially qualify.
Business.gov.au: https://business.gov.au/news/budget-2026-27 Treasury factsheet: https://budget.gov.au/content/factsheets/download/factsheet-backing-small-business.pdf
Who is eligible for the tax loss carry back?
The measure generally applies to companies with turnover under AUD $1 billion. That includes many trade businesses, vet clinics, dental clinics, allied health practices, professional services firms, agencies, consultants, and family-run companies.
This generally applies to companies. Not sole traders. Not standard discretionary trusts directly. Not partnerships directly.
Business structure matters heavily here. Some businesses operating through trust structures may still have company entities involved, but individual circumstances vary. Always confirm eligibility with your accountant.
How the refund works
A simplified example.
A company paid AUD $30,000 tax across FY24 and FY25, then records an AUD $50,000 tax loss in FY26. Subject to eligibility rules and franking account limits, the company may potentially claim back some previously paid tax.
At a simplified 25% company tax rate: AUD $50,000 loss × 25% = potential AUD $12,500 tax offset value.
This doesn't mean every business automatically receives a refund. Several factors matter: prior-year tax paid, the tax rate that applied, company structure, the franking account balance, loss calculations, and ATO eligibility tests.
The franking account piece is the one most owners haven't thought about. Your franking account tracks tax already paid by the company at the corporate level. A carry back refund is effectively a return of franking credits, which means the amount potentially refundable can't exceed what's available in the franking account.
The calculations become technical quickly. This is where accountant review matters more than usual.
The instant asset write-off + carry back combination
This is one of the most important planning angles from Budget 2026-27 and most service business owners haven't joined the two rules up yet.
Treasury included a worked example showing how the permanent AUD $20,000 instant asset write-off and the tax loss carry back rules can potentially work together:
- A business earns AUD $40,000 profit
- The business purchases eligible assets using the instant asset write-off
- The additional deductions may potentially move the company from a taxable profit position into an AUD $15,000 tax loss
- The company then potentially claims back AUD $3,750 of previously paid tax
The combination may significantly improve cash flow timing for some businesses. The previous year's tax can effectively help part-fund this year's investment.
Eligibility, asset rules, timing, and business circumstances still all matter. But this is the rare case in Australian tax design where two rules pull in the same direction at the same time.
Read the instant asset write-off guide
Treasury factsheet: https://budget.gov.au/content/factsheets/download/factsheet-backing-small-business.pdf
What types of losses may qualify
Operating tax losses generally may potentially qualify. That includes revenue downturns, operational losses, increased business expenses, equipment investment deductions, technology investment, eligible depreciation deductions, and staff and operating cost increases.
Losses must satisfy ATO company loss rules and integrity requirements. The ATO applies several tests and conditions. Not all accounting losses automatically qualify as carry back tax losses.
What usually does NOT qualify
Common exclusions and complications:
- Capital losses
- Certain trust losses
- Non-company entities
- Losses failing integrity tests
- Some ownership change scenarios
- Businesses without prior-year tax paid (nothing to refund)
- Franking account limitations (no franking credits available)
This is the category where most online summaries oversimplify. Carry back refunds are not automatic; the technical detail genuinely matters.
Records and documentation
Keep company tax returns, prior-year notices of assessment, financial statements, profit and loss reports, asset purchase records, depreciation schedules, tax invoices, payment confirmations, and franking account records.
Your accountant will generally need historical tax paid, current-year losses, company tax rates, ownership details, and lodgement history. Poor records create delays and risk in equal measure.
Common scenarios for service businesses
A trade business affected by the 2024-25 slowdown
A plumbing company experienced weaker construction demand, paid tax during stronger FY24 periods, and invested heavily into new equipment in FY26. The combination of lower revenue, asset deductions, and operational costs may potentially create an eligible loss position. Carry back rules may then potentially allow recovery of some prior-year tax paid.
A clinic investing heavily into equipment and systems
An allied health clinic upgrades treatment equipment, implements AI phone reception, installs AI-powered booking systems, adds missed-call text-back automation, and modernises CRM and follow-up workflows. The clinic temporarily records a tax loss while improving long-term operations and reducing admin pressure. Depending on structure and eligibility, the company may potentially claim a carry back tax offset.
Related: EOFY prepayment rule guide
A professional services business with cyclical revenue
A consulting firm has strong FY24 performance, experiences softer FY26 demand, and continues investing into staff and systems. Rather than simply carrying losses forward, the business may potentially recover some previously paid tax sooner, improving cash flow, working capital, and operational flexibility.
Why this matters more in FY26 and FY27
Many service businesses are balancing higher operating costs, wage pressure, slower consumer spending, technology investment, AI adoption, and efficiency upgrades, all at the same time. Trade businesses specifically have been feeling this through quieter pipelines, weaker construction demand, softer consumer spending, delayed approvals, and slower bookings.
The carry back rules potentially help businesses continue investing through that softer period (improving systems, upgrading technology, and smoothing cash flow) instead of pulling back operationally.
This becomes particularly important when businesses are modernising rather than simply cutting costs.
Why downturn years often build the strongest operators
Stronger businesses often use slower periods to modernise while competitors retreat.
That may include:
- Replacing outdated systems
- Improving lead handling
- Automating follow-up
- Upgrading equipment
- Reducing admin pressure
- Improving response times
The goal isn't to manufacture losses. The goal is building a stronger business before the market improves again. Tax loss carry back may potentially soften the cash flow impact of those investments for eligible companies.
The businesses that benefit most from carry back planning usually start the conversation before EOFY, not after lodgement when the planning window has already narrowed.
How to claim
The claim process generally occurs through company tax returns. This is not something businesses should attempt without accountant involvement.
Your accountant will assess eligibility, prior-year tax paid, available losses, franking account balances, ATO integrity tests, and timing.
ATO guidance: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/loss-carry-back-tax-offset
Frequently asked questions
Is tax loss carry back permanent now?
Yes. Budget 2026-27 made the measure permanent from 1 July 2026.
Who can use tax loss carry back?
Generally eligible companies under AUD $1 billion turnover.
Does this apply to sole traders?
Not directly. Sole traders do not operate through company structures.
Can service businesses qualify?
Potentially yes. Many service businesses operate through eligible company structures.
Does every tax loss qualify?
No. Several ATO eligibility rules and integrity conditions apply.
Can businesses claim refunds from multiple previous years?
Generally the previous two income years, subject to eligibility.
Does the business need to have paid tax previously?
Usually yes. Carry back offsets relate to prior-year tax already paid.
Should businesses create losses intentionally?
Businesses should make genuine commercial decisions first. Tax outcomes should not drive unnecessary spending.
Can businesses intentionally manufacture losses to claim refunds?
No. The ATO applies integrity rules and commercial substance tests. Eligible carry back losses must arise from genuine business operations and investment, not artificial arrangements designed to generate tax outcomes. Commercial substance always comes first; tax treatment is secondary.
Key takeaways
- Tax loss carry back is permanent from 1 July 2026
- Eligible companies under AUD $1 billion turnover may potentially qualify
- The measure may allow refunds of tax paid in the previous two years
- Most affected businesses are expected to be small businesses
- The rule becomes especially powerful when combined with the permanent AUD $20,000 instant asset write-off
- Company structure and prior-year tax paid matter heavily
- Franking account balances determine how much can potentially be refunded
- Accountant review is critical before relying on carry back calculations
Build a more resilient business before FY27
Tax planning is one piece of the picture. The businesses navigating FY26 and FY27 best are usually improving operational efficiency, reducing admin pressure, automating follow-up, improving cash flow visibility, and responding to leads faster.
If your business is reviewing systems, admin automation, AI implementation, or operational efficiency, Linkai can help with the operational side while your accountant handles the structure and compliance.
Budget 2026-27 overview for Australian service businesses
Sources
- Source: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/loss-carry-back-tax-offset
- Source: https://business.gov.au/news/budget-2026-27
- Source: https://budget.gov.au/content/factsheets/download/factsheet-backing-small-business.pdf
- Source: https://www.cpaaustralia.com.au/
- Source: https://www.charteredaccountantsanz.com/
Written by Katrina Curll, Co-Founder of Linkai Digital. Twenty years in strategy, automation, and performance marketing, helping Australian service businesses build systems that scale without the busywork.