How a current-year loss can turn into a refund of tax your company already paid.
When a company has a bad year and makes a loss, the usual rule is that it carries that loss forward to reduce tax on future profits. That helps eventually, but it does nothing for cash flow today. Loss carry back flips the timing: it lets a company use a current-year loss to claw back tax it already paid in earlier years, turning a paper loss into a cash refund when the business needs it most. The Government confirmed in the 2026-27 Federal Budget that it is reintroducing the measure.
From 2026-27, eligible companies that make a loss in the current income year will be able to use that loss to get a refund against tax paid in the prior two income years. The Government says the change will benefit up to 85,000 companies, mostly small businesses, and frames it as a way to support business risk-taking and resilience. A related loss refundability measure for new start-ups, in their first two years of operation, begins from 2028-29 and is expected to help up to 25,000 young companies each year.
The Budget illustrates it with a small restaurant. Dining Co has $1 million in turnover and paid $12,500 in tax on a $50,000 profit in 2025-26 at the 25% small company rate. In 2026-27 it spends $65,000 on new equipment, each item under $20,000, and immediately deducts it under the instant asset write-off. That turns its result into a $15,000 tax loss. Rather than carrying that loss forward, Dining Co carries it back against the prior year's tax and receives a $3,750 refund, calculated as $15,000 multiplied by the 25% tax rate. That cash lands just as the business is trying to expand.
| Item | Amount |
|---|---|
| 2025-26 taxable profit | $50,000 |
| Tax paid in 2025-26 (25%) | $12,500 |
| 2026-27 tax loss | $15,000 |
| Carry-back refund ($15,000 × 25%) | $3,750 |
Loss carry back is generous but not unlimited. The refund can never be more than the tax the company actually paid in the years it carries the loss back to, so a company that paid little or no tax in those years has little to reclaim. Under the earlier version of the scheme, which the ATO ran for the 2019-20 to 2022-23 income years, the offset was also capped by the company's franking account balance, preventing a refund of more tax than the company had effectively banked. You can read how the previous version operated on the ATO's loss carry back tax offset page. The fine print of the reintroduced measure will be confirmed when it is legislated.
Disclaimer: This article offers general information about the loss carry back measure announced in the 2026-27 Federal Budget and is not financial or tax advice. The final rules will be set when the measure is legislated. Refer to the official Budget 2026-27 tax reform page and the ATO website, and consult a qualified tax professional for advice on your business.