Tax Loss and Tax Credit Carrybacks and CTax Loss and Tax Credit Carrybacks and Carryforwards

Tax Loss and Tax Credit Carrybacks and Carryforwards

B20 The benefits of a tax loss carryback are reflected in the interim period in which the related tax loss occurs. AASB 112 provides that the “benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognised as an asset”. A corresponding reduction of tax expense or increase of tax income is also recognised.

B21 AASB 112 provides that “a deferred tax asset shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised”. AASB 112 provides criteria for assessing the probability of taxable profit against which the unused tax losses and credits can be utilised. Those criteria are applied at the end of each interim period and, if they are met, the effect of the tax loss carryforward is reflected in the computation of the estimated average annual effective income tax rate.

B22 To illustrate, an entity that reports quarterly has an operating loss carryforward of 10,000 for income tax purposes at the start of the current annual reporting period for which a deferred tax asset has not been recognised. The entity earns 10,000 in the first quarter of the current annual reporting period and expects to earn 10,000 in each of the three remaining quarters. Excluding the carryforward, the estimated average annual income tax rate is expected to be 40 per cent. Tax expense is as follows: