Among the more welcome measures in the 12 May 2026 Budget is the reintroduction of loss carry-back for companies, and unlike the two short-lived earlier versions, this one is announced as a permanent feature. For company clients that have paid tax in good years and then hit a bad one, it changes a loss from something you carry forward and hope to use later into something that can generate a cash refund now. That is a genuine cash-flow lever at exactly the moment a business is under pressure. As with every Budget measure, it still has to be legislated before anyone can rely on it, and it applies to income years commencing on or after 1 July 2026, so the first eligible loss year is 2026-27. But it is worth understanding properly now, because whether a given client actually benefits turns entirely on two constraints that most of the headline coverage skips over.
How loss carry-back works, and who can use it
The mechanism is straightforward in principle. Normally a company that makes a tax loss carries it forward and uses it to reduce tax on future profits, whenever those arrive. Loss carry-back reverses the direction: an eligible company that makes a revenue loss in an income year can elect to apply that loss against taxable income in either or both of the prior two income years, and receive a refundable tax offset for the tax effectively overpaid across that period. The refund arrives when the company lodges its return for the loss year, so the cash comes back in the year the business is actually struggling. A company with a loss in 2026-27, for example, could carry it back against tax paid in 2024-25 or 2025-26. Eligibility is limited to companies with aggregated annual global turnover under $1 billion, which covers the overwhelming majority of the client base, and the measure is announced as permanent rather than temporary.
Two boundaries define who is in and who is out. First, it is companies only. Trusts, partnerships, and sole traders cannot carry back a loss, so a client running through a trust structure does not get this, and only a corporate beneficiary could, and only against its own prior tax. Second, it is revenue losses only. Capital losses stay in their own bucket to be applied against future capital gains, so a loss driven by a capital event does not qualify. For a company client that has been profitable, paid tax, and then run into a genuine trading loss, this is precisely the situation the measure is built for.
The two caps that decide whether a client actually benefits
This is where the real advice lives, because the refund is capped two ways and both need checking before anyone promises a client anything. The first cap is the tax actually paid in the prior two years being offset. A company cannot manufacture a refund larger than the tax it genuinely paid, so if it paid little or no tax in the lookback years, there is little or nothing to claw back regardless of how large the current loss is. The second cap, and the one that catches people, is the company's franking account balance at the end of the loss year. The refund cannot exceed what is sitting in the franking account. The logic is double-dip prevention: paying tax credits the franking account, and paying franked dividends debits it. If a company has already streamed its franking credits out to shareholders as franked dividends, refunding the same tax to the company would let one dollar of tax benefit both the shareholders who used the credits and the company getting cash back, so the franking cap stops that. The practical effect is that a company that has paid substantial franked dividends may have a small franking balance and therefore a small refund, even with plenty of prior tax paid, while a company that reinvested profits and paid few dividends usually has a franking balance close to its tax paid and gets close to the full benefit.
There is a further technical point worth flagging to any client considering a claim, because it is easy to overlook. Receiving the refund itself debits the franking account, and care is needed to ensure that debit does not push the franking account into deficit, which can trigger a franking deficit tax liability at year end. So a loss carry-back claim is not a costless button to press. It interacts with the company's dividend history and its franking position, which is exactly why the first step is always to check the franking account balance, not just the prior-year tax paid.
What firms should do with company clients now
Because this is still a proposal, the honest framing is that it needs to be enacted before a client relies on it, but the first eligible year is close enough that it belongs in planning conversations now, and it will need to be enacted in time for affected companies to factor it into their 2026-27 year-end positions. The genuinely useful preparatory work is per-company: for any company client that looks likely to run a loss in 2026-27, note the tax paid in the two prior years and, just as importantly, review the current franking account balance, because those two figures together determine whether carry-back delivers a meaningful refund or almost nothing. The clients where it delivers most are established companies with a track record of paying tax and a healthy franking balance that have hit a single rough year. The clients where it disappoints are those with empty franking accounts from years of dividends, those that paid little tax in the lookback period, and anyone operating through a trust rather than a company. Flagging eligibility at the next lodgement, and checking the franking position before making the election, is a short conversation that can return real cash to a company client at the moment it needs it most, provided the measure passes in the form announced.
