Revenue losses incurred
We focus on entities that inappropriately generate tax losses by over-claiming expenses and reconciliation items in a given year.
Potential compliance risks include:
- inflating expenses and creating artificial losses
- understating, mischaracterising or omitting income
- misclassifying capital losses as revenue losses.
Entities with one or more of the following factors in their tax returns attract our attention:
- high operating loss in a single year
- significant revenue loss in a single year
- high negative reconciliation items resulting in low or no taxable income
- poor profitability over a sustained period.
For information on keeping records relevant to a tax loss, see TD 2007/2 Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?
Revenue losses used
We focus on entities that are using or carrying forward tax losses incorrectly.
Tax losses that attract our attention include those:
- being used where companies do not satisfy either the continuity of ownership or business continuity tests
- deducted in the current year and exceeding the previous year’s carried forward tax losses
- that cannot be reconciled with relevant labels on the tax return
- being used by trusts that do not satisfy the relevant trust loss rules.
Rulings and determinations:
- LCR 2019/1 The business continuity test - carrying on a similar business
- TR 1999/9 Income tax: the operation of section 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 (same business test)
- TR 2007/2 Income tax: application of the same business test to consolidated and MEC groups – principally, the interaction between section 165-210 and section 701-1 of the Income Tax Assessment Act 1997
- TD 2007/2 Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?