Guide to tax losses

Overview

If you make a tax loss in an income year you can generally carry it forward and deduct it in future years against income for tax purposes.

What is a tax loss?

You generally make a tax loss when the total deductions you can claim for an income year exceed your assessable and net exempt income for the year.

Individuals

Individuals, both those in business (sole traders and partners) and those not in business, can generally carry forward a tax loss indefinitely, but must utilise a tax loss at the first opportunity. Individuals may have to treat losses from non-business activities (such as investments) and business activities separately.

Trusts

If you operate your business as a trust and you incur a tax loss, you can generally carry forward a tax loss indefinitely, but must utilise a tax loss at the first opportunity. You cannot distribute the loss to the trust's beneficiaries.

Companies

Companies can generally carry forward a tax loss indefinitely, and deduct it in the year of their choosing, provided they have, since the loss was incurred, either substantially maintained the same ownership and control or carried on the same business.

Foreign losses

Before 1 July 2008, deductions relating to foreign income were 'quarantined' and could not be deducted against Australian income, with foreign tax losses only able to be carried forward and deducted against foreign income of the same class.

For the 2008-09 and later income years, foreign deductions and losses are no longer quarantined, and are treated in the same way as other deductions and losses. Transitional rules apply to foreign losses carried forward as at 30 June 2008.

Record keeping and reporting

Generally, you must keep proper records relating to your tax affairs for at least five years after preparing or obtaining them, or after you completed the relevant transactions or acts, whichever is later. If you carry forward a tax loss, you may have to keep records for longer.

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