How to claim a tax loss
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Individuals can generally carry forward a tax loss indefinitely, but must claim a tax loss at the first opportunity. You cannot choose to hold onto losses to offset them against future income if they can be offset against the current year’s income.
Carried-forward tax losses are offset first against any net exempt incomeExternal Link and only then against assessable income. Losses must be claimed in the order in which they were incurred.
If you're in business as an individual, either alone or in a partnership, and your business makes a loss, you must check the non-commercial loss rules to see if you can offset the loss against your income from other sources, such as wages.
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 non-commercial loss rules).
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 in future 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:
- fixed trusts
- non-fixed trusts
- excepted trusts.
The trust loss legislation is contained in Schedule 2F to the Income Tax Assessment Act 1936External Link.
Companies can carry forward a tax loss indefinitely, and use it when they choose, provided they have either:
The normal loss deduction rules are modified for widely held or eligible Division 166 companies so the rules are easier to apply.
If there is a change of ownership or control of a company during an income year and the company does not maintain the same business, it must work out its taxable income and tax loss under subdivision 165-B of the ITAA 1997External Link.
In broad terms, a company in this situation has both a taxable income and a tax loss for the same year. In some circumstances, the loss may be carried forward and used in later years, subject to the usual restrictions.
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.
A consolidated group generally has two types of losses:
- losses generated by the consolidated group (group losses)
- transferred losses that were generated by an entity before it became a member of the group.
Transferring losses to the consolidated group
When an entity becomes a member of a consolidated group (whether as head company or as a subsidiary) its unused carry-forward losses are transferred to the head company if the losses satisfy modified versions of the general company loss recoupment tests.
Broadly, the tests are applied as though the 12 months prior to the joining time were the loss claim year (known as the trial year). The loss is transferred to the head company of the group if the joining entity could have claimed the loss in the trial year assuming it had sufficient income or gains of the relevant type. The rules are outlined in Subdivision 707-A of the ITAA 1997External Link.
The amount of a transferred loss that can be claimed by the head company from a particular joining entity is calculated by reference to an available fraction. The available fraction limits the annual rate at which transferred losses may be claimed by the head company.
Using losses in the consolidated group
Before claiming a group loss or a transferred loss, the head company is required to apply the general loss recoupment provisions. This necessitates the head company passing the continuity of ownership and control tests or the same business test. For transferred losses, these recoupment tests are modified for the purposes of determining whether the company has maintained the same ownership. The modifications are outlined in Subdivision 707-B of the ITAA 1997External Link.
Designated infrastructure projects
Companies and fixed trusts carrying out part or all of a designated infrastructure project can, under certain conditions, uplift their tax losses by the long-term bond rate. These entities are also exempt from the company continuity of ownership and same business tests and the equivalent tests that apply to claiming trust losses.
Losses may be claimed by individuals, partnerships, trusts, companies, consolidated groups and designated infrastructure project entities.