Guide to tax losses
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.
What is a tax loss?
You generally make a tax loss when the total deductions you can claim for an income year exceed the total of your assessable and net exempt income for the year.
Deductions that do not give rise to a loss
However, there are some deductions you cannot use to create or increase a tax loss, including donations, gifts and personal super contributions.
Tax loss or capital loss?
A tax loss is different from a capital loss. A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains - it cannot be offset against income.
Australian and foreign income
Australian residents now calculate an overall tax loss on the basis of their worldwide income and deductions. Foreign residents calculate a tax loss on the basis of their Australian income and deductions incurred in earning that income.
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Exempt income is certain types of income that the tax law specifically exempts from income tax - most commonly certain government payments. Net exempt income is exempt income less the losses and outgoings (not including capital losses and outgoings) incurred in earning that income and any foreign tax payable on it.
For more information, refer to Amounts that you do not pay tax on.
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Losses - home
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Deductions that do not give rise to a loss
Certain deductions that would otherwise be allowable cannot be claimed as deductions where they would give rise to a tax loss. They are:
- payments of pensions, gratuities or retirement allowances to employees, former employees, or their dependants
- gifts or contributions made to deductible gift recipients
- payments made under conservation covenants
- personal superannuation contributions.
Tax loss or capital loss?
A tax loss is different from a capital loss. While a tax loss arises out of your income and deductions for the year (that is, current account transactions), a capital loss may occur, for example, when you dispose of a capital asset for less than its tax value.
A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains - it cannot be offset against income.
Investment activities
If you own an investment property, rental income is included in your assessable income for the year; outgoings on the property, such as interest and rates, as well as the decline in value of depreciating assets, such as fittings, may be included in your deductions.
However, any capital gain or loss you make on selling the property is treated separately and included in your total capital gain or loss for the year. Costs associated with acquiring or disposing of the property (such as legal fees, stamp duty and real estate agent's commissions) are included in the cost base for determining your capital gain or loss, not in your income tax deductions.
If the sale of your investment property includes depreciating assets, the proceeds of these will give rise to income or deductions rather than being included in your capital gain or loss.
Gains and losses from selling shares are treated as capital gains and losses unless you are considered to be carrying on a business of share trading.
This means that unless you are carrying on a business of share trading, any costs associated with your share investment activity, such as interest on money borrowed to buy shares, are included in the cost base of the shares, not in your income tax deductions.
Business activities
Regular business transactions give rise to income and deductions and, therefore, to taxable income or a tax loss for the income year. This includes gains or losses on the sale of depreciating assets, such as business equipment.
Gains or losses on the sale of a business or business premises are included in your total capital gain or loss for the year.
Australian and foreign income
Australian residents are taxed in Australia on their worldwide income; foreign residents are taxed in Australia on income derived in Australia. For the purpose of tax losses, this means that:
- Australian residents now calculate an overall tax loss on the basis of their worldwide income and deductions - but there are restrictions on the utilisation of tax losses incurred in relation to foreign income before 1 July 2008 (see Foreign losses)
- foreign residents calculate a tax loss on the basis of their Australian income and deductions incurred in earning that income.
How individuals utilise losses
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.
That is, if your income in the current income year exceeds your current year's deductions, you must offset any losses you have carried forward from previous years against your current year's income. You cannot choose to hold onto losses to offset them against future income if they can be offset against the current year's income.
(If in your return for a particular year you failed to utilise a loss when you were entitled to do so, you can later request an amendment for that year.)
However, in some circumstances, individuals must treat losses from business activities separately from income and deductions from non-business activities (such as salary and wages and investments) - see Limits on offsetting losses from business activities against non-business income.
Carried-forward losses are offset first against any net exempt income and only then against assessable income. Losses must be utilised in the order in which they were incurred.
Subject to the requirement to utilise losses at the first opportunity, tax losses can be carried forward indefinitely except for:
- non-primary production losses incurred before the 1989-90 income year, which are extinguished and can no longer be utilised
- foreign losses incurred before the 1999-2001 income year, which are extinguished and can no longer be utilised. There are restrictions on the utilisation of foreign losses incurred before 1 July 2008 (see Foreign losses).
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For information on how to calculate a loss for the purpose of completing your tax return, refer to Tax losses of earlier income years.
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If you have been bankrupt, you generally cannot utilise in later years the tax losses that you incurred before you became bankrupt. This rule also applies if you were released from the debts by the operation of an Act relating to bankruptcy.
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Losses - home
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Partnerships
Partnership income is taxed in the hands of the partners. If a partnership makes a tax loss, each partner has a proportionate share of the loss, and treats it like a loss from any business activity (including applying the limits on offsetting losses from business activities against non-business income).
Limits on offsetting losses from business activities against non-business income
In some circumstances, individuals must treat losses from business activities separately from income and deductions from non-business activities (such as salary and wages and investments).
For the 2009-10 and later income years, you can only offset a loss from a business activity you carry on as an individual (either as a sole trader or in partnership) against assessable income from other sources if at least one of the following conditions apply:
- your business is a primary production or professional arts business and your income from other sources is less than $40,000 for the income year (excluding any net capital gains)
- your income for non-commercial loss purposes is less than $250,000 and your business activity passes at least one of four tests - profits test, assessable income test, other assets test, real property test
- the Commissioner of Taxation has exercised his discretion to allow you to claim the loss, or
- the loss is solely due to a deduction claimed under the small business or general business tax break.
Different rules apply for earlier income years.
If you do not meet any of these requirements in an income year, you cannot offset your business loss against any of your other assessable income for that income year, but you can defer it. Then if your business makes a profit in the future, you can offset the deferred loss against the profit.
How trusts utilise tax losses
If you operate your business as a trust and you incur a tax loss, you cannot distribute the loss to the trust's beneficiaries.
Losses must be 'quarantined' in a trust to be carried forward by the trust indefinitely until offset against future net income. It is possible to use those losses as deductions against income in the trust for succeeding income years if the trust satisfies certain tests relating to ownership or control of the trust. If the trust terminates before the losses can be offset against income, they are lost.
The trust loss rules apply in different ways to each of the following categories of trust:
- fixed trusts
- non-fixed trusts
- excepted trusts.
How companies utilise tax losses
Companies can generally carry forward a tax loss indefinitely, and utilise it when they choose, provided they have either substantially maintained the same ownership and control or carried on the same business since the loss was incurred.
When losses can be utilised
Although companies can generally utilise carried-forward losses in any future income year, losses must be utilised in the order in which they were incurred, and special rules apply in relation to net exempt income and franked dividend income.
Continuity of ownership, control, and same business tests
To utilise a tax loss a company must either:
- satisfy both the continuity of ownership test (COT) and the control test, or
- satisfy the same business test (SBT).
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Widely held and Division 166 companies
The way the normal loss deduction rules apply to a widely held or eligible Division 166 company are modified to make it easier for the company to apply the rules. For more information, refer to Guide to the loss recoupment rules.
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Current year losses
If there is a change of ownership or control of a company midway through a loss-making year and the company does not maintain the same business, the general loss utilisation rules may be overridden by the current year loss rules.
Consolidated groups and losses
When a wholly owned group consolidates for income tax purposes or a company joins an existing consolidated group by way of becoming wholly owned by the group's head company, pre-consolidation losses incurred by group companies can generally be transferred to and utilised by the head company.
When losses can be utilised
Losses must be utilised in the order in which they were incurred. That is, if you have incurred tax losses in more than one year, you must utilise the entire loss from the earliest year before you can utilise all or part of a tax loss from a later year.
Subject to this (and to satisfying the continuity of ownership and control tests or the same business test), companies can generally carry forward tax losses indefinitely, and utilise them in the year of their choosing. This means, for example, that a company can choose not to utilise prior-year losses in a particular year in order to pay sufficient tax to be able to distribute franked dividends.
A company is able to convert any unused franking tax offsets (called excess franking offsets) into an equivalent amount of tax loss. This amount is then carried forward for deduction in a later year of income. This amount then becomes a tax loss to carry forward.
Companies can also treat a current year loss that would otherwise be used up against franked dividend income as a tax loss for that income year and be able to carry forward the tax loss for consideration as a deduction in a later year of income.
If a company has net exempt income in any year, it must utilise any carried-forward losses it has to the extent of such income.
That is, if after offsetting its deductions for a particular year against its assessable income and net exempt income for that year, the company reduces its stock of losses to the extent of any remaining net exempt income.
Exempt income relevant to companies includes:
- certain annuities and lump sums which are paid to an injured person under a structured settlement
- certain distributions from an early-stage venture capital limited partnership
- certain distributions from a pooled development fund
- certain profits or gains from disposal of shares in a pooled development fund.
Continuity of ownership, control, and same business tests
To deduct a tax loss a company must either:
You must apply these tests in this order, as the outcome of the COT determines if and how the SBT is to be applied.
If the COT, or the control test, is failed, and the SBT is also failed, losses incurred before the change of ownership are effectively extinguished. However, the company may be able to carry forward that part of the tax loss that was incurred after the change of ownership for utilisation in a later year.
The loss is available provided that the COT or SBT is satisfied for the remainder of the year and subsequent periods within the relevant ownership test period.
In the same circumstances - that is, where there is a change of ownership or control part way through a loss year and the company doesn't maintain the same business - the current year loss rules apply.
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As well as tax losses, the COT, control test and SBT affect deductions allowable for bad debts and the application of a net capital loss.
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Losses - home
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Continuity of ownership test
To pass the COT for a particular loss, more than 50% of all the following rights in the company must be held directly or indirectly by the same natural persons throughout the ownership test period:
- the right to exercise voting power
- the right to receive the company's dividends
- the right to receive capital distributions.
Note that the persons who beneficially own the shares in relation to each of the above category of rights may be different.
The ownership test period is the period from the start of the loss year - that is, the year in which the loss was incurred - and the end of the income year in which the loss is to be utilised (the prospective loss recoupment year).
Example
A Co has a 30 June year end for tax purposes. A Co incurs a tax loss in the 2005-06 income year. In the 2008-09 income year the company generated assessable income against which it wishes to claim a tax deduction for the 2005-06 tax loss.
The ownership test period commences on 1 July 2005 (start of the loss year) and ends on 30 June 2009 (end of the income year).
The COT must be satisfied throughout the ownership test period.
If a company has incurred losses in more than one year, the losses are utilised on a first in, first out basis. That is, the earliest loss is tested first and, if it is not deductible, or if there is still income remaining after it is deducted, the next loss incurred is tested to see if it can be utilised (see figure below). For this reason, it is important to keep track of the year in which a loss is incurred and the years in which it is utilised.
For each category of ownership rights, you must apply the COT under a primary test or an alternative test.
Primary test
The primary test is satisfied where the continuity of ownership is established on the basis of direct beneficial ownership of shares by natural persons.
Alternative test
The alternative test applies where there is an indirect beneficial ownership of shares through interposed entities. In this case, to establish continuity of the ownership of more than 50% for each category of rights, the ownership must be traced back through all interposed entities (companies, trusts and partnerships) to the natural persons entitled to the respective rights.
For example, in the case of a company with a single class of shares with equal rights, it would not be sufficient to establish that more than 50% of the shares continue to be held throughout the ownership period by the same entities where those entities are not natural persons. It would be necessary to establish that the indirect beneficial ownership of those shares continued to be held by the same natural persons.
There are special rules for the ownership of:
- companies that come into existence or are wound up during an income year
- companies in liquidation
- non-profit, mutual affiliate and mutual insurance companies
- widely held or eligible Division 166 companies (mainly affects large companies and consolidated groups) - for more information, refer to Guide to the loss recoupment rules.
Same share same interest rule
For the purposes of the COT, ownership rights attaching to a shareholder's share in a company are only taken into account if the shareholder owns exactly the same share throughout the ownership test period. This 'same share same interest' rule is intended to prevent a potential duplication of losses by means of the shareholder first triggering a capital loss by the disposal of a shareholding, and then reacquiring the shareholding to satisfy the COT.
If shares are split or consolidated they are considered to be the same shares.
Example
Peter Pty Ltd incurred a tax loss in the 2005 income year. Annie, Mary and Susan own ordinary A-class shares in Peter Pty Ltd as shown in the table below. There are no other share classes and no further shares were issued during 1 July 2004 to 30 June 2007.
On 18 August 2005, both Annie and Mary sold 75% of their shareholding in Peter Pty Ltd to Susan.
Peter Pty Ltd is seeking to deduct a tax loss in the 2007 income year. Will Peter Pty Ltd satisfy the continuity of ownership test?
Shareholder
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Shareholding from 1 July 2004 to 17 August 2005
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Shareholding from 18 August 2005 to 30 June 2007
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Percentage counted towards COT
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Annie
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40%
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10%
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10%
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Mary
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40%
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10%
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10%
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Susan
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20%
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80%
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20%
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Total
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100%
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100%
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40%
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No, Peter Pty Ltd will not satisfy the continuity of ownership test as only 40% of the shares have been held by the shareholders in the same way during the ownership test period. In order to satisfy the continuity of ownership test, the saving provision will need to be considered.
Savings rule
Failure to pass the continuity of ownership test may be disregarded where this is the result of applying the same share same interest rule, and during the test period, less than 50% of the loss is reflected elsewhere in deductions, reduced assessable income, capital losses or reduced gains - that is, duplicated in the shares of the company arising from a CGT event that:
- affects direct or indirect equity interests in the company, and
- is related to deductions or losses that have already been incurred or could be incurred in the future.
Example
At the start of the ownership test period, John holds 90% of the shares in A Co Pty Ltd, and Ben owns the remaining 10%. The company had originally issued 100 ordinary shares (that is, John owned 90 shares and Ben owned 10 shares). During the test period, A Co issues one hundred new shares, 90 to John and 10 to Ben.
As a consequence of this new issue, the original shares held by John only carry 45% of the power and rights in the company (90/200 = 45%) and shares held by Ben only 5% (10/200 = 5%). Due to the operation of the same share same interest rule, only the original shares (45% + 5%) can be counted for the purposes of determining whether there has been continuity of ownership throughout the period.
In the absence of the saving provision, A Co would fail COT because only 50% of the power and rights in the company have been maintained throughout the test period. To satisfy the test, more than 50% continuity must be maintained. However, under the saving provision, A Co will be treated as though it satisfies the continuity of ownership test if it can show that:
- there was no substantial change in the proportion of shares held between John and Ben. (In this case, John has maintained a 90% interest and Ben has maintained a 10% interest), and
- less than 50% of the loss has been duplicated during the period. (In this case, neither John nor Ben has sold any of their original shares).
Control test
As well as the COT, the control test must also be satisfied for a particular loss to be deductible.
The control test is failed where at some point during the ownership period there has been a change in control to the extent that a person began to control, or was in a position to control, the voting power in the company for the purpose of getting a tax advantage.
Example
Sleep Pty Ltd incurred a tax loss in income year 2003-04 and is seeking a deduction for that loss in the 2004-05 income year. The shares carry equal voting, dividend and capital distribution rights.
The register of shareholders:
Shareholder
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2003-04
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2004-05
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Cath Pillow
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40%
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60%
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John Bolster
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40%
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30%
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Chris Sheet
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20%
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10%
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The company will be subject to the control test even though it satisfies the COT. Accordingly, it will not be able to deduct the tax loss if Cath Pillow began to control or became able to control the voting power in Sleep Pty Ltd for the purpose of getting some taxation benefit or advantage for herself or for others. However, Sleep Pty Ltd would be able to deduct the tax loss in these circumstances if it satisfied the same business test.
Same business test
Where in relation to a particular tax loss the COT or control test is failed, or it is not practicable to show that the COT is satisfied, the loss can still be utilised if the same business test (SBT) is satisfied.
The SBT is satisfied if all of the following conditions are met throughout the prospective loss recoupment year:
- The company carries on the same overall business as it carried on immediately before the test time. ('Same' does not necessarily mean identical in all respects. The business can expand or contract provided it retains its essential character.)
- The company does not derive assessable income from a type of business it did not carry on before the test time (the new business test). (A new business involves activities that are distinguishable from the company's other activities. Note that a company would fail this condition if it started to carry on a business before the test time for the purpose of satisfying the SBT.)
- The company does not derive assessable income from a kind of transaction it had not previously entered into in the course of its business before the test time (the new transaction test).
A new type of transaction would be one:
- outside the course of the business operations
- extraordinary or unnatural when judged by the course of the business operations, or
- usually considered one of a different kind from the transactions actually entered into by the company before the test time.
Test time
The test time is:
- where the company fails the COT for a particular loss - the latest time during the ownership test period that the company was able to satisfy the COT
- where it is not practicable to show when the company failed the COT - the start of the loss year, or
- if the company was formed during the loss year, and it is not practicable to show when the company failed the COT - the end of the loss year.
Example
Beetle Pty Ltd is an Australian company incorporated on 20 September 2001. The ultimate individual ownership of Beetle Pty Ltd is traceable. It made a tax loss in the 2002-03 income year. There was a change of 55% of the original ownership on 7 July 2003. It wishes to claim the loss in the 2005-06 year.
Beetle Pty Ltd will not satisfy the continuity of ownership test as it had a change in majority ownership or control during the ownership test period. It will only be able to claim the losses where it satisfied the same business test since the test time. The test time for the SBT is the date ownership or control changed. In this case, it is 7 July 2003.
Beetle Pty Ltd will only satisfy the same business test where it carries on the same business during the 2005-06 year that it carried on immediately before 7 July 2003.
Current year losses
If there is a change of ownership or control of a company midway through a loss-making year and the company does not maintain the same business, the general loss utilisation rules may be overridden by the current year loss rules.
Without these rules, a company that had incurred losses at the beginning of an income year could be acquired and then have income injected into it, in order to absorb those losses for tax minimisation purposes.
The current year loss rules apply if, during an income year, a company:
- undergoes a change in majority underlying ownership or control of voting power, and
- fails the SBT for the remainder of the year, and
- has incurred a 'notional loss' in a period of the income year, whether before or after the change in ownership.
In broad terms, a company in this situation has both a taxable income and a tax loss for the same year. The loss may be carried forward and utilised in later years, subject to the usual restrictions.
The test for a change in majority ownership is the same as the COT, except that the ownership test period is replaced by the income year in question and the same share same interest rule is taken to be satisfied if you have information from which it would be reasonable to conclude that there has been no substantial duplication of losses. The control test also applies in the same way as it applies to the COT.
To calculate the loss under the current year loss rules, carry out the following steps:
- Divide the income year into periods bounded by the time of each change in ownership or control
If there is only one disqualifying change in ownership or control during the income year, there will only be two periods for that income year. For example, if the company experiences two disqualifying changes in ownership or control during the income year, there will be three periods. The last period in the income year ends at the end of the income year (normally 30 June).
- Calculate notional loss or notional taxable income for each period
Treat each of these periods as an income year, attributing assessable income and deductions to each to arrive at a notional taxable income or notional loss for each period. Income and deductions cannot be attributed on a simple pro rata basis. Sections 165-55 and 165-60 set out the rules for attributing deductions and assessable income respectively.
- Calculate taxable income and the tax loss for the income year
As a notional loss of one period cannot be offset against the notional taxable income of another period, you can potentially have both a taxable income and a tax loss for the same income year.
The taxable income for the year of change is worked out by adding up: (a) each notional taxable income; and (b) any full-year amounts (that is, amounts of assessable income not taken into account at Step 2), then subtracting any full-year deductions (that is, deductions not taken into account at Step 2). A notional loss is not taken into account when calculating taxable income, but counts towards the company's tax loss.
A company's tax loss is the total of each notional loss and excess full-year deductions of particular kinds.
- Carry forward any tax loss for the income year
You can carry forward any notional loss and offset it against net assessable income in a future income year, provided it then satisfies the COT and control test or, failing that, the SBT.
Treatment of taxable income
You cannot offset any taxable income derived in the period before or after the change in ownership against any current year tax loss, or prior-year tax loss. You cannot offset any prior-year losses against current year taxable income because the usual test requirements have not been met.
Treatment of a tax loss
A tax loss incurred in the period before the change in ownership cannot be utilised in a later income year.
A tax loss incurred in the period after the change in ownership may be carried forward and utilised in a later income tax year, provided the usual test requirements are then met.
Consolidated groups and losses
Consolidation allows a wholly owned group of entities to be treated as a single entity for income tax purposes, with the head company of the consolidated group the only entity recognised for determining the income tax liability of the group.
Under consolidation, pre-consolidation losses incurred by group companies can generally be transferred to and utilised by the head company of the consolidated group.
Foreign losses
Before 1 July 2008, deductions relating to foreign income were 'quarantined' and could not be deducted against Australian income. Foreign income was sorted into four classes, and a foreign tax loss of a particular class would arise separately from another tax loss in an income year, with the foreign loss only able to be carried forward and offset 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:
- Foreign losses more than 10 years old at that date (that is, incurred in the 1997-98 or earlier income years) are extinguished.
- Foreign losses incurred in the previous 10 years are converted into a tax loss, with restrictions applied to the utilisation of the converted tax loss in the four income years to 2011-12, after which any remaining tax loss is subject to the ordinary loss utilisation rules (see Converting pre-1 July 2008 foreign losses).
Converting pre-1 July 2008 foreign losses
You have a convertible foreign loss where you have an unutilised foreign loss incurred in any of the previous ten income years (from 1 July 1998 to 30 June 2008).
You must first calculate the convertible foreign loss for each class of income for each of the 10 years, taking into account the following adjustments:
- Companies must disregard deductions relating to foreign source non-assessable and non-exempt income. This will principally affect taxpayers who incurred losses through branches in unlisted countries before the 2004 amendments that broadened the branch profits exemption to all countries. Individual taxpayers do not have to make this adjustment.
- Existing overall foreign losses incurred in the first three years of the 10-year period (1998-99, 1999-2000, 2000-01 income years) are halved.
For each year, you then add together the overall foreign losses for each class of income, to arrive at a convertible foreign loss for each year. Then you add together the convertible foreign losses (of no particular class) for each year, and the total is the starting value of the loss parcel.
Example 1
For the 2003-04 income year, a taxpayer has an overall foreign loss of $25,000 in relation to interest income and an overall foreign loss of $13,000 in relation to the modified passive class of income. Its convertible foreign loss for 2003-04 is a single undifferentiated amount of $38,000.
Example 2
Over the period 1998-99 to 2007-08, a company with a 30 June balance date has the following overall foreign losses. The 2002-03 loss was incurred through a branch in a then-unlisted country.
Income year
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Foreign loss
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Convertible foreign loss for income year
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1999-2000
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$80,000
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50% × $80,000 = $40,000 (see rule (2) above)
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2002-03
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$30,000
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Nil (see rule (1) above)
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2005-06
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$60,000
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$60,000
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Total
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$170,000
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$100,000
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This calculation produces a convertible foreign loss for each relevant year. For the purposes of the transitional rules, this is treated as if it were a tax loss for that year and is therefore added to the domestic tax loss, if any, that the taxpayer incurred for that year. The resultant loss amount may then be carried forward in 2008-09 or subsequent income years, subject to the normal recoupment rules.
The loss parcel can be utilised as follows:
- Where the starting value of the loss parcel is $10,000 or less, you can utilise the loss parcel in the 2008-09 or later income years without restriction (that is, in the same way as any other carried-forward losses).
- Where the starting value of the loss parcel is more than $10,000, you can choose either to:
- reduce the loss parcel to $10,000 (with the excess extinguished), and then use it without restriction (but you must make this choice in the 2008-09 income year), or
- apply special utilisation rules (intended to mimic current taxpayer utilisation rates), which limit utilisation to 20% of the loss parcel in each of the four income years to 2011-12, with the remaining 20% and any remaining amount that you were unable to use in a prior year (for example, due to insufficient assessable income) available for utilisation in the 2012-13 or later income years without restriction (that is, in the same way as any other carried-forward losses).
Example 1
As at the start of 2008-09, the taxpayer has a starting total for its loss parcel (that is, total convertible foreign losses of the preceding 10 years) of $100,000. It can offset 1/5 × $100,000 = $20,000 in each of the 2008-09 to 2012-13 income years. (This assumes that the taxpayer has assessable income in each of those years sufficient to absorb the $20,000.)
Example 2
Assume instead that the taxpayer in the previous example has assessable incomes in some years that are not sufficient to absorb the relevant loss, as follows:
Income year
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Assessable income*
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Max deduction for foreign loss component
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Actual deduction
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2008-09
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15,000
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20,000 (ie 1/5 of $100,000)
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15,000**
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2009-10
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50,000
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(40,000 - 15,000) = 25,000
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25,000
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2010-11
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18,000
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(60,000 - 15,000 - 25,000) = 20,000
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18,000**
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2011-12
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6,000
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(80,000 - 15,000 - 25,000 - 18,000) = 32,000
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6,000**
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2012-13
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40,000
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(100,000 - 15,000 - 25,000 - 18,000 - 6,000) = 36,000
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36,000***
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100,000
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* excluding prior-year losses.
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** limited to amount of assessable income for year.
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*** the 20% phase-in rules do not apply after 2011-12.
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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 use information from those records in a later tax return, you may have to keep records for longer. For example, if you carry forward a tax loss, you must keep the records until the end of any period of review for the income tax return in which the loss is fully deducted.
Under the rules for reviewing taxpayers' returns:
- for individuals and very small businesses, the Australian Taxation Office (ATO) may generally amend an income tax assessment within two years of issuing the notice of assessment for the relevant year
- for other taxpayers, the ATO may generally amend an income tax assessment within four years of issuing the notice of assessment for the relevant year.
Records relating to tax losses need to contain adequate information to distinguish transactions relevant to tax losses (current account transactions) from those relevant to capital gains and losses.
While your records must be in English or in a form that we can access and understand in order to work out the amount of tax you are liable to pay, you can issue and store records in either paper or electronic form.
Reporting
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For information on preparing and lodging your tax return, including how to report and claim losses, refer to:
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Last Modified: Wednesday, 3 August 2011
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