From 1 July 2026, companies with turnover under $1 billion can carry tax losses back against profits from the prior two years and receive a cash refund. Construction revenue is notoriously uneven. This measure was built for exactly that kind of business.
The 2026-27 federal budget contains a collection of tax measures for small business that, taken together, represent the most significant package of relief for smaller operators in years. The instant asset write-off going permanent gets most of the attention. The loss carry back deserves more of it.
Loss carry back is not a new idea. It has appeared in Australian tax law before, been removed, reintroduced during COVID, and removed again. Each time it has been available, many small businesses have either missed it, misunderstood it, or decided it was not worth the complexity. This time it is permanent, the rules are cleaner, and the construction industry is entering it from exactly the kind of financial environment where it has the most practical value.
This article explains the full history of the measure, exactly how it works under the 2026-27 budget announcement, the constraints that limit the refund, and why the revenue pattern of small building companies makes this more relevant to construction than almost any other sector.
A Short History of a Measure That Has Come and Gone
Loss carry back has existed in various forms in Australian tax law for years, but its availability has been inconsistent enough that many business owners have never had a chance to use it and may not know it exists at all.
A limited version was introduced in 2012-13, but it came with a hard monetary cap of $300,000 per year on the tax offset, which significantly reduced its usefulness for any business with meaningful prior-year tax liabilities. That version was short-lived and removed without generating much industry awareness.
The measure returned in a far more significant form during the COVID-19 response. As part of the 2020-21 federal budget, the government allowed companies with turnover up to $5 billion to carry tax losses back against profits from 2018-19 onward and receive a refund. The COVID version had no monetary cap beyond the amount of prior-year tax paid, which made it genuinely useful. It applied to losses incurred in the 2019-20, 2020-21 and 2021-22 income years, later extended to include 2022-23.
Then it was repealed. A loss carry back measure briefly reappeared in the 2022-23 budget but was removed after twelve months. The result has been a measure that some businesses used during COVID, some businesses missed during COVID because they did not understand it, and almost no businesses have been able to access since.
From 1 July 2026, it returns permanently. The turnover threshold drops from $5 billion to $1 billion, which still encompasses the overwhelming majority of small and medium construction businesses. The core mechanics remain the same. And this time, the government has described it as a permanent feature of the tax system, not a temporary relief measure tied to a specific economic event.
Loss carry back has come and gone before. It was limited in 2012. It was generous during COVID. It was repealed in 2023. This time, the government has described it as a permanent feature of the tax system. That changes what builders can plan around.
How It Works: The Core Mechanics
The concept is straightforward, even if the implementation has some important technical constraints.
Under the current system, when a company makes a tax loss in a given year, that loss is carried forward. It sits on the books and reduces the company’s taxable income in future profitable years. That is useful eventually, but it does not help with cash flow right now. A company that paid $30,000 in tax two years ago, had a strong year last year, and then lost $50,000 this year has no immediate way to connect this year’s loss to the tax it already paid. It waits.
Loss carry back changes that. A company making a tax loss in the 2026-27 income year can elect to apply that loss against the tax it paid in either the 2024-25 or 2025-26 income years and receive a cash refund for the tax that was effectively overpaid across the combined period. The refund arrives when the company lodges its tax return for the loss year. It is real money, returned to the business at the moment it needs it most.
The refund is capped in two ways. First, it cannot exceed the amount of income tax actually paid in the prior year or years being offset. A company cannot manufacture a negative tax liability and receive more back than it paid in. Second, and this is the technical constraint that most commentary skips over, the refund is also limited by the company’s franking account balance at the end of the year in which the offset is claimed.
The franking account is a running record of the tax a company has paid at the corporate level, which it can then pass on to shareholders as franking credits when paying dividends. When a company claims a loss carry back refund, the ATO debits the franking account because the tax being refunded is tax that was already recorded as available to frank dividends. A company that has been paying dividends and distributing franking credits to shareholders may have a franking account balance lower than the tax it originally paid, which can limit or eliminate the carry back benefit.
This is not a reason to dismiss the measure. It is a reason to check the franking account position before making a claim, which is a standard step for any registered tax agent preparing a company return. Most small construction companies that reinvest profits rather than paying regular franked dividends will find their franking account balance is sufficient to support the carry back.
The refund is capped at tax previously paid and also limited by the franking account balance. A company that has been paying regular franked dividends may find its carry back is limited. A company that reinvests profits rather than paying dividends will typically have more headroom.
Why This Matters Specifically for Construction
Every sector has revenue variability. But construction has a particular pattern that makes loss carry back more relevant here than in most industries.
Building company revenue depends on projects. Projects have starts, finishes and gaps between them. A builder who completes a strong run of contracts in one year and then hits a six-month project drought in the next has not made bad decisions. They have experienced normal construction business conditions. The income drop is not a structural failure. It is a timing problem.
That timing problem becomes a tax problem under the current system. A profitable year creates a tax liability. A loss year creates a carried forward loss. The two sit in different buckets and the cash the business paid out in a good year is not returned when a bad year follows. The lag between the profitable period and any tax relief can be two, three or four years, depending on when the business returns to profitability.
The construction-specific pressures that create these patterns are well documented. Fixed-price contracts signed in periods of rising material costs can produce losses on projects that appeared profitable at signing. Defects disputes can absorb cash and management capacity for months. A single major client delaying payment can push a company into a loss position for the year. Site shutdowns triggered by weather, regulatory issues or subcontractor failure are part of the operational landscape.
These are not extraordinary events. They are recurring features of the construction business cycle. Loss carry back is a mechanism that acknowledges that cycle and returns some of the tax paid during good years when a bad year follows. The cost to government is estimated at $2.3 billion over five years across all eligible companies. The benefit to construction businesses that use it correctly is cash in the business at the moment they need it most.
Scale Suite’s budget analysis, published on the day of the announcement, specifically identifies construction businesses in a project gap as one of the primary use cases for this measure alongside hospitality businesses hit by external shocks. That is not an accident. The measure is designed for revenue patterns where a profitable period is followed by a downturn, which is precisely the construction cycle.
A Worked Example for Small Builders
Consider a small building company structured as a Pty Ltd with aggregated annual turnover well under $1 billion and a 25 per cent small business tax rate.
In 2024-25, the company completes three projects and records $120,000 in taxable profit. It pays $30,000 in company tax. In 2025-26, it completes one more project and records $80,000 in taxable profit, paying $20,000 in company tax.
In 2026-27, the company has a difficult year. A project runs over budget due to material cost increases, a client dispute delays final payment on another job, and the company books a $60,000 tax loss for the year.
Under the old system, that $60,000 loss sits as a carried forward loss. The company waits until it returns to profitability, then applies the loss against future taxable income to reduce future tax bills.
Under loss carry back, the company elects to carry that $60,000 loss back against the $30,000 tax paid in 2024-25 and the $20,000 tax paid in 2025-26. The maximum refund it can claim is $50,000, the total tax paid across both prior years, because the loss is capped at the actual tax paid. The company receives a $50,000 refund. The remaining $10,000 of the loss sits as a carried forward loss.
Critically, the company must also check its franking account balance. If the company has been paying franked dividends to its directors and the franking account balance at the end of 2026-27 is only $35,000, the refund is limited to $35,000 rather than $50,000. The remaining $15,000 of carried back losses becomes a carried forward loss. This is the franking account constraint in practice, and it is why reviewing the franking account position is the first step before making a claim.
For a company that has reinvested profits and not paid significant franked dividends, the franking account balance is typically equal to or close to the tax paid, and the constraint does not significantly limit the benefit.
What the Measure Covers and What It Does Not
Loss carry back applies to revenue losses only. It does not apply to capital losses. For a construction company, the distinction matters in specific situations but most day-to-day operating losses, including project losses, overhead-exceeding-revenue scenarios and cash flow shortfalls that produce a taxable loss, are revenue losses. Capital losses arise from the disposal of capital assets at a loss and sit in a separate bucket regardless of this measure.
The measure applies to companies. A company is a corporate tax entity, typically a Pty Ltd. Sole traders paying individual income tax are not eligible. Partnerships are not eligible. Discretionary trusts are not eligible. This is a measure specifically for businesses structured as companies, which is why the first question any construction business owner should ask is whether their structure qualifies.
For businesses structured as sole traders or through trusts who are looking at the loss carry back and wondering why it does not apply to them, this is a separate conversation about business structure that goes beyond tax and should involve a qualified accountant. The previous article in this series covers the discretionary trust reforms in detail.
The measure is available for companies with aggregated annual global turnover under $1 billion. This threshold encompasses the vast majority of small and medium construction businesses in Australia. Aggregated turnover includes the turnover of any connected or affiliated entities, so a builder who operates multiple companies in a group needs to be aware that the combined turnover of the group is what matters, not just the individual entity making the claim.
Baker McKenzie notes that the measure also includes integrity rules. Companies must have satisfied their lodgement requirements for the current year and the five preceding income years. A company that has outstanding lodgements or is not up to date with its tax return obligations may be ineligible. This is another reason why tax compliance is not just an administrative task but a prerequisite to accessing measures like this one.
Loss Carry Back vs Loss Carry Forward: How to Choose
When a company makes a tax loss, it does not have to elect loss carry back. It can choose to carry the loss forward instead, applying it against future taxable income to reduce future tax bills. The choice should be made deliberately, not by default.
Loss carry back produces an immediate cash refund. Loss carry forward reduces future tax liability. Which is better depends on the company’s specific circumstances at the time of lodgement.
If the company has immediate cash flow pressure, wages to pay, suppliers to settle, or bridge financing needed before the next project starts, the immediate cash refund from loss carry back has obvious value. A dollar today is worth more than a dollar in two years.
If the company anticipates returning to profit quickly and has a high franking account balance that would be eroded by the carry back claim, carrying forward might preserve more flexibility. Carrying forward losses also retains them for future use without touching the franking account.
Scale Suite’s analysis makes the point clearly: whether to apply loss carry back or carry the loss forward is a decision that depends on the company’s forecast future profit, franking account position and timing. It is a tax agent decision, not a bookkeeping decision. Any construction company with a registered tax agent who prepares their company return should be asking this question explicitly at lodgement time from 1 July 2026 onward.
Whether to apply loss carry back or carry the loss forward is a decision that depends on forecast future profit, the franking account position and timing. It is a tax agent decision, not a bookkeeping decision. Ask the question explicitly at lodgement time.
The Start-Up Add-On: Loss Refundability From 2028
Alongside the reintroduction of loss carry back for all eligible companies, the government has introduced a separate but related measure for start-up businesses that becomes available from 1 July 2028.
Small start-up companies with aggregated annual turnover under $10 million that generate a tax loss in their first two years of operation will be able to receive a refundable tax offset. The offset is capped at the value of fringe benefits tax and PAYG withholding paid on employee wages during the loss year.
This is a narrower measure than the main loss carry back, and it works differently. Rather than carrying a loss back against prior-year tax paid, it converts losses into a refund capped at the employment tax already remitted. A new construction company in its first two years that is running at a loss but paying staff and remitting PAYG withholding can recover some of that cash even before it has a history of prior-year tax payments to carry back against.
For anyone starting a new building company from 2028 onward, this is worth flagging with an accountant at incorporation. The benefit is not large but it is real, and it is available specifically because new businesses often burn cash in the early years before reaching profitability.
Loss carry back is not a headline measure. It does not generate the same response as a tax rate cut or a stamp duty concession. It is a structural mechanism that acknowledges the economic reality of businesses with uneven revenue, converts a tax loss year into a cash refund, and returns money to a business at the moment it is most under pressure.
Construction is an industry built on uneven revenue. Projects come and go. Margins on individual jobs vary. The gap between a strong year and a difficult one can be a single project, a single client or a single material cost spike. The tax system has historically responded to that gap by asking businesses to wait.
From 1 July 2026, the wait is optional.
If your construction business is structured as a company, check your prior-year tax paid, check your franking account balance, and make sure your tax agent knows to assess loss carry back eligibility at your next lodgement. That is a fifteen-minute conversation that could return meaningful cash to your business.
For ongoing analysis of the 2026-27 federal budget and what it means for Australian builders, follow The Good Builder.
General Information Disclaimer:
This article draws on the federal Budget 2026-27 small business statement and budget papers, and publicly available analysis from Baker McKenzie, BDO, PwC, Scale Suite and HLB Mann Judd. It is provided as editorial commentary for industry professionals and does not constitute financial, tax or legal advice. The legislation implementing this measure has not yet been passed by Parliament. Business owners should seek advice from a registered tax agent specific to their individual circumstances before making claims or lodgement decisions.
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