Loss Carry-Back Records Your Clients Need to Keep

The loss carry back records required for a successful claim just became substantially more important. Today, 12 May 2026, the Federal Government delivered the 2026-27 Budget, restoring loss carry-back for companies with aggregated turnover under $1 billion from 1 July 2026. If you advise company clients, now is the time to audit their record-keeping — before the first eligible year opens, not after the ATO comes knocking.

This post is written for accountants and registered tax agents. It covers every document you need in a client’s file to support a loss carry-back claim, defend it under ATO review, and price the engagement correctly.

Disclaimer: This article provides general information only and does not constitute tax advice. Tax laws change frequently and individual circumstances vary. Confirm the current rules with the ATO and consult the relevant legislation before advising clients.

Why Records Matter More Now

Loss carry-back is a refundable offset — which means it puts money back into the company’s bank account. Refundable claims attract disproportionate ATO scrutiny compared with non-refundable deductions, and the 2026-27 Budget has significantly increased the ATO’s enforcement budget. According to Budget Paper No. 2, the Government has committed $231 million to shadow economy compliance — a budget that includes expanded data matching, single touch payroll cross-referencing, and targeted review programs for refundable offsets. You can read more about the enforcement implications in our post on the ATO shadow economy enforcement measures from the 2026 Budget.

The restored carry-back mechanism — outlined in detail in our loss carry-back 2026 Budget explainer — allows eligible companies to offset a current-year tax loss against corporate tax paid in up to two prior income years, generating a cash refund. The refund is capped at the lesser of the tax actually paid in those prior years and the company’s franking account balance. That two-pronged cap means documentation requirements are tightly tied to both the prior-year assessments and the franking ledger. A single gap in records can undermine the entire claim.

Clean, contemporaneous records do not just reduce audit risk. They also reduce the time you spend reconstructing evidence after the fact, which translates directly to client fees and your firm’s exposure. The time to build the file is now.

The 5 Records Every Loss Carry-Back Claim Needs

1. Prior-Year Tax Assessments (2 Years Lookback)

The ATO-issued Notice of Assessment for each prior income year in the lookback window is the anchor document for any carry-back claim. It confirms:

• The taxable income (or loss) in the prior year
• The income tax assessed — which is the upper limit of the refund available from that year
• The assessment reference number, which the ATO uses to cross-reference the current-year claim

Obtain these directly from ATO Online Services for Agents if your client cannot locate their originals. The ATO maintains these records indefinitely, so retrieval is straightforward. Keep a copy in the client file — do not rely on being able to retrieve them on demand during a review.

2. Current-Year Loss Calculation

The loss calculation is the mathematical core of the claim. It must be reconciled from the ground up:

• Start with the accounting profit or loss from the trial balance
• Adjust for non-deductible items (entertainment, certain penalties, private use)
• Adjust for timing differences (depreciation, provisions)
• Arrive at the taxable loss figure that appears in the lodged income tax return

The reconciliation should be documented as a workpaper in your file, not left implicit in the software. If the ATO queries the loss figure, a clearly labelled reconciliation — tied to both the trial balance and the lodged return — is far easier to defend than a software printout with no supporting narrative.

3. Supporting Receipts for Major Deductions in the Loss Year

The loss year expenses are where carry-back claims most often fail under audit. The ATO is particularly interested in:

• Equipment claimed under the instant asset write-off — for permanent IAWO rules and recordkeeping requirements, see our IAWO recordkeeping checklist
• Contractor and labour hire payments — invoices, ABN verification, and evidence of work performed
• Restructure and wind-down costs — any costs associated with business restructuring in the loss year are a red flag; document what was restructured and why
• One-off large expenses — anything that significantly inflated the loss in a single line item needs a receipt and a business purpose note

The ATO’s records guidance for businesses is clear that written evidence is required for expenses over $10. Digital receipts are accepted, but they need to be legible, dated, and attributable to the company.

4. Franking Account Statement

The franking account cap is the second constraint on the refund amount — and it is frequently overlooked. The carry-back refund reduces the company’s franking account balance dollar-for-dollar. If the balance is insufficient to cover the full refund, the refund is limited accordingly.

Your documentation should show:

• Opening franking account balance at the start of the current year
• Credits added during the year (tax instalments paid, other inflows)
• Debits applied (dividends franked, credits previously used)
• Closing balance available at the time of lodgement

A reconciled franking account statement is not optional — it is a mandatory component of the carry-back offset calculation in the company tax return. If your client’s accounting software does not produce this automatically, rebuild it from the instalment records and dividend statements.

5. Written Narrative of Loss Drivers

The ATO does not just want numbers. Reviewers want to understand why a previously profitable company lost money in the claim year. A concise narrative — one to two pages, signed off by a director — explaining the loss drivers materially reduces the risk of a formal review escalating into a full audit.

The narrative should address:

• The primary cause of the loss (economic downturn, loss of a major contract, capital investment cycle, restructuring, pandemic-era hangover)
• Whether the loss is expected to recur or is genuinely one-off
• Any material transactions in the loss year that a reviewer might query without context

Write this document while the facts are fresh. Asking a client director to reconstruct the rationale for a 2024-25 loss in 2028 produces vague, inconsistent answers that weaken the file.

Records You Need from Your Client (and Where to Get Them)

Gathering the above five core documents often requires pulling records from multiple sources. Here is where to look:

• Bank statements: Client’s online banking portal or direct accountant access. All accounts — operating, loan, term deposit — for the full loss year. These reconcile against the loss calculation and confirm actual expenditure.
• Receipts for major expenses: Ideally, a Taxr export covering the loss year, with receipts categorised and date-stamped. See our guide on organising receipts before your accountant appointment for the workflow to share with clients who are still managing paper.
• Payroll records: STP Phase 2 reports from the ATO, supplemented by your client’s payroll software. STP reports are ATO-lodged and timestamped, making them reliable audit evidence.
• Asset purchase invoices: Tax invoices for any equipment claimed under instant asset write-off or depreciation schedules. See the IAWO recordkeeping checklist for a full document list.
• Contractor invoices and ABN verification: Every contractor invoice, with ABN confirmed via the ABN Lookup tool. If ABN withholding applies, confirm the PAYG withholding was reported and remitted.

For clients who have not tracked expenses systematically during the loss year, a Taxr export from the accountant portal streamlines receipt collection significantly. See our guide on how to export expenses for your accountant for the format that saves the most time on both sides of the engagement.

Common Documentation Mistakes

These are the five errors most likely to create problems under ATO review:

1. Reconstructing receipts from memory. A director’s statutory declaration that an expense “must have been around $8,000” is not written evidence. If the receipt no longer exists, use bank statements and supplier records to reconstruct what you can — and be transparent about what is estimated.

2. Mixing personal and business expenses in the loss year. This is a particular risk for smaller companies where the director operates personal and business accounts interchangeably. Any personal expenses in the loss calculation expose the entire claim to challenge.

3. Forgetting the franking account reconciliation. Many firms focus heavily on the loss calculation and treat the franking account as an afterthought. The two are equally important — and a miscalculated franking balance can invalidate part of the refund.

4. Not documenting the loss narrative. Numbers without context invite questions. A one-page narrative closes off most ATO queries before they arise.

5. Letting clients lose track of bank statements over a five-year window. The ATO general record-keeping obligation runs five years from lodgement. That means a 2026-27 loss-year claim lodged in October 2027 needs records kept until at least October 2032. Confirm your client has a backup system — not just a folder on a laptop that might not survive.

Building a Defensive File

Structure the client file before you lodge the claim, not after a review notice arrives. A consistent folder structure across all carry-back engagements also makes delegation to junior staff straightforward.

Recommended structure:

[ClientName] — Loss Carry-Back FY26
├── 1. Tax Assessments
│   ├── FY2024_NoA.pdf
│   └── FY2025_NoA.pdf
├── 2. Loss Calculation
│   ├── FY26_TaxReconciliation_v1.xlsx
│   └── FY26_LodgedReturn.pdf
├── 3. Major Receipts
│   ├── 2025-08-15_EquipmentSupplier_42000_LaserCutter.pdf
│   └── 2026-02-03_ContractorABC_18500_DevServices.pdf
├── 4. Franking
│   └── FY26_FrankingAccountStatement.xlsx
└── 5. Narrative + Correspondence
    ├── FY26_LossNarrative_DirectorSigned.pdf
    └── Engagement_Letter.pdf

File naming convention: YYYY-MM-DD_supplier_amount_description.pdf. Sort chronologically within each subfolder. Back up to both cloud storage and a local copy — two independent locations minimum.

Audit Defence Workflow

If the ATO opens a review of a loss carry-back claim, the process moves faster and with less cost if you have a prepared response protocol:

1. Respond within 28 days. ATO review requests typically set a 28-day response window. Missing it escalates the review automatically.
2. Lead with the loss calculation and prior-year tax assessments. These are the two documents the ATO needs first. Providing them upfront signals competence and reduces follow-up requests.
3. Provide major deduction receipts on request. Do not proactively send every receipt from the loss year. Respond specifically to what the ATO asks for.
4. Explain the loss narrative succinctly. Attach the director-signed narrative. Keep it factual — do not over-explain or introduce new information not contained in the lodged return.
5. Do not volunteer information unrelated to the carry-back claim. Audit defence is about the specific claim, not the client’s entire tax history. Answer what is asked, support it with the file, and close each response.

Pricing Loss Carry-Back Work

Loss carry-back is a specialised engagement. Pricing it correctly protects your firm and sets clear expectations with the client. As a general guide — indicative only, not definitive:

• Standalone carry-back claim, simple SMB: Allow 4 to 10 hours depending on the quality of the client’s records. Cleaner records compress this range significantly.
• Combined with the annual return: Factor the carry-back work into the year-end fee at engagement letter stage. Surprises at invoice time damage client relationships.
• Audit response work: Scope this separately. Review responses are unbounded in time and should be billed on an hourly or capped-hourly basis with a separate engagement letter.

BAS reconciliation for the loss year, if needed to confirm GST-exclusive figures, adds time — use the BAS quarterly calculator to sense-check input tax credit figures against the loss calculation.

Software and Tooling for Loss Carry-Back Documentation

No single software product covers the full documentation requirement, but the combination below handles most engagements:

• Cloud accounting (Xero, MYOB, QuickBooks): Trial balance, general ledger, franking account reports, and the journal trail for year-end adjustments. This is the source of truth for the loss calculation workpaper.
• Receipt apps (Taxr): Individual expense substantiation for loss-year deductions. The accountant portal lets you see client receipts without back-and-forth email chains. Particularly useful for reconstructing major expense receipts if the client has not kept paper copies.
• Document management (your firm’s existing DMS): Store and version-control the full client file. Label versions clearly — the filed return and the final workpapers should be clearly distinguished from draft workings.
• ATO Online Services for Agents: Retrieve prior-year tax assessments, confirm instalment history, and check STP lodgement data without involving the client. This is the fastest route to the anchor documents.

When to Decline a Loss Carry-Back Claim

Not every loss year produces a carry-back opportunity. Advise clients clearly when the claim is not viable:

• Client paid no tax in the lookback period. The refund is capped at tax actually paid. If the company paid no tax in FY2024 and FY2025, there is no refund available for a FY2026 loss — but the loss carries forward to future profitable years.
• Records too sparse to defend. If you cannot reconstruct the loss calculation to a standard that would survive ATO review, lodging the claim creates audit risk without a reliable outcome. Better to carry the loss forward until records can support it.
• Loss arose substantially from non-deductible expenses. Entertainment, private use, and certain penalties do not contribute to a tax loss. Recategorise first and recalculate the true tax loss before assessing carry-back viability.
• Carry-forward against future profits is a better strategy. If the company expects to return to profit within one to two years, the timing of the refund benefit may not justify the compliance cost and audit exposure of a carry-back claim. Model both scenarios before recommending.

Frequently Asked Questions

How long do loss carry-back records need to be retained?

Five years from the date of lodgement of the carry-back claim, per ATO general rules. Best practice for the underlying loss-year supporting records is seven years given the heightened ATO compliance funding. A claim lodged in October 2027 for FY2026-27 losses needs records kept until at least 2034 on a conservative approach.

What if a client’s prior-year records are incomplete?

Reconstruct from ATO assessments, bank statements, and accounting software backups. The ATO has the prior-year tax assessment in its records — that is the anchor point for the lookback. Missing supporting records weaken the claim but do not void it if the assessment exists. Document what was reconstructed and how, so the methodology is transparent.

Does the franking account statement need to be reconciled?

Yes. The carry-back refund reduces the franking account balance dollar-for-dollar with the refund. Reconcile prior dividends paid, prior franking credits attached, and current balance before lodging. An unreconciled franking account is one of the most common errors in loss carry-back claims and can result in the ATO amending the refund amount downward.

What if my client’s loss year coincides with an asset disposal?

Document the disposal carefully. Loss carry-back applies to the company’s tax loss net of all transactions in the year. CGT events in the loss year affect the loss calculation — a capital loss reduces the taxable loss, while a capital gain reduces it further. Ensure the loss workpaper captures the full CGT schedule for the year.

Can I claim loss carry-back if the client paid no tax in the prior 2 years?

No. Loss carry-back generates a refund of tax actually paid. If the company paid no tax in the lookback period, there is no refund available — but the unused tax loss carries forward to future profitable years. Model the carry-forward scenario so the client understands the value does not disappear.

What records does the ATO most often request in a loss carry-back review?

Workings reconciling the current-year loss to bank deposits, expense receipts for major deductions, prior-year tax assessments, the franking account statement, and a written explanation of the loss drivers. The loss narrative — a document few accountants think to prepare — consistently reduces the scope and duration of ATO reviews when it is provided proactively.

Loss carry-back claims live or die on receipts. If your client’s loss-year expense records are a mix of faded paper, email attachments, and memory, the claim is difficult to defend before it is even lodged. Taxr’s free accountant portal lets your clients capture every expense the moment it happens — receipt scanned, date and amount extracted, category assigned — then export a clean, dated trail to your firm at year-end. No reconstruction, no gaps, no explaining to the ATO why a $40,000 equipment claim has no supporting invoice. Set up your free accountant portal and stop rebuilding loss-year records from bank statements.