Every business faces its fair share of ups and downs, but when the books close on a tough year, there’s a silver lining in the Australian tax code: loss carryforward. The ability to use past losses to offset future profits is a powerful tool for managing cash flow and reducing tax. With the 2025 tax policy tweaks now in effect, understanding how loss carryforward works — and how to maximise its benefits — is more important than ever.
What is Loss Carryforward and Why Does It Matter?
Loss carryforward is an accounting principle that lets businesses offset their future taxable income with losses from previous years. In practical terms, if your company records a loss this year, you can use that loss to reduce the amount of income tax you pay in profitable years ahead. This mechanism can be a lifeline for startups, cyclical industries, and businesses recovering from economic shocks.
- Startup example: A fintech launches in 2023, posts a $300,000 loss, but turns a $200,000 profit in 2025. With loss carryforward, it pays zero tax in 2025 and still has $100,000 of losses to apply in future years.
- Seasonal business: A regional tourism operator experiences a downturn during travel restrictions but rebounds as domestic tourism returns. Loss carryforward smooths the tax bill, supporting reinvestment and stability.
2025 Policy Updates: What’s Changed for Australian Businesses?
The 2025 financial year brings several notable updates to loss carryforward rules, designed to give businesses greater flexibility in a volatile environment:
- Expanded eligibility: The government has broadened access to loss carryforward provisions for small businesses, including sole traders and partnerships, not just companies.
- Continuity of ownership test (COT) relief: For 2025, the ATO has eased the strictness of the COT, making it easier for startups and scaleups to attract new investment without jeopardising their ability to use past losses.
- Temporary loss carryback extension: While primarily for companies, the temporary measure allowing losses from 2022–23 and 2023–24 to be carried back against profits as far as 2018–19 has been extended for another year, giving businesses more options to claim immediate refunds.
These changes reflect ongoing efforts to support business resilience in the face of economic uncertainty, tech disruption, and the lingering impacts of global shocks.
How to Maximise Loss Carryforward: Practical Steps and Pitfalls
To truly benefit from loss carryforward, planning is key. Here’s how business owners and finance managers can make the most of the rules:
- Track and document losses meticulously: Ensure every deductible expense is properly recorded and substantiated, as the ATO scrutinises loss claims.
- Understand the continuity and same business tests: If your company changes ownership or business activities, review whether your losses remain eligible. The 2025 relaxations help, but don’t eliminate all risks.
- Coordinate with other tax incentives: Losses can interact with R&D tax offsets, instant asset write-offs, and other government schemes. Strategic timing of asset purchases or revenue recognition can boost your tax outcome.
- Model future profits and cash flow: Use scenario analysis to decide when to apply losses for maximum benefit. Sometimes, deferring a claim to a higher-profit year yields a bigger tax saving.
Be mindful of the limits: capital losses can only offset capital gains, and personal services income rules may restrict how individuals use losses. Additionally, tax losses do not expire in Australia, but the business must continue to satisfy the relevant tests each year.
Real-World Impact: The Loss Carryforward Advantage in 2025
For Australian SMEs, tech startups, and even established companies, loss carryforward is more than a tax rule — it’s a strategic asset. In 2025, with the rules loosened to support recovery and innovation, businesses can use past setbacks as a springboard for future growth. By reducing tax in high-earning years, companies free up capital for hiring, investment, and weathering the next storm.
With careful planning and up-to-date knowledge of the latest ATO guidance, loss carryforward can transform a tough year into a future advantage. It’s a reminder that in business, every setback has the potential to fuel the next leap forward.
