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Edited version of your written advice
Authorisation Number: 1013087873679
Date of advice: 12 September 2016
Ruling
Subject: Losses
Question
Can Taxpayer X transfer their carry forward losses from the year ended 30 June 20YY to Taxpayer Y?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 20YY
Year ending 30 June 20ZZ
The scheme commences on
1 July 20XX
Relevant facts and circumstances
Taxpayer Y and Taxpayer X each operate a separate sole trader activity.
Taxpayer X made a loss from their sole trader activity in the year ended 30 June 20XX. This loss and their other deductions exceeded their assessable income for that year. Thus, they had a non-primary production (NPP) loss to carry forward and offset against future income.
Taxpayer X also made a loss from their sole trader activity in the year ended 30 June 20YY. This loss and their other deductions exceeded their assessable income for that year. When combined with the NPP carry forward loss from the previous year, they had a NPP loss to carry forward and offset against future income.
Taxpayer Y made a loss from their sole trader activity in the year ended 30 June 20YY. After applying their loss against their other income, Taxpayer Y has a positive taxable income.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 36-15
Reasons for decision
A taxpayer has a tax loss for an income year where the amounts they can deduct exceeds their assessable income and net exempt income (section 36-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Section 36-15 of the Income Tax Assessment Act 1997 (ITAA 1997) states
(1) Your tax loss for a loss year is deducted in a later income year as follows if you are not a corporate tax entity at any time during the later income year.
(2) If your total assessable income for the later income year exceeds your total deductions (other than tax losses) you deduct the tax loss from the excess.
(3) If you have net exempt income for the later income year and your total assessable income (if any) for the later income year exceeds your total deductions (except tax losses), you deduct the tax loss:
(a) first from your net exempt income; and
(b) secondly, from the part of your total assessable income that exceeds those deductions.
(4) However, if you have net exempt income for the later income year and those deductions exceed your total assessable income, then
(a) subtract the excess from your net exempt income; and
(b) deduct the tax loss from any net exempt income that remains.
(5) If you have 2 or more tax losses, you deduct them in the order in which you incurred them.
(6) A tax loss can be deducted only to the extent that it has not already been deducted.
(7) If you cannot deduct all or part of your tax loss in an income year, you can carry forward to the next income year the undeducted amount. You then apply this Subdivision to work out if you can deduct the tax loss in that income year.
Section 36-15 of the ITAA 1997 refers to the terms 'you' and 'your'. This means that the provisions apply to the entity that incurs the tax loss. That is, the entity that incurred the loss is the same entity that uses the loss to reduce assessable income in a future year.
Under the Australian taxation system, individual taxpayers are assessed on their individual income and deductions. Income derived by other taxpayers is not included in calculating an individual taxpayer's taxable income.
There is no provision in the taxation legislation which allows an individual taxpayer to transfer a tax loss to another taxpayer.
Thus, in this situation, the tax loss Taxpayer Y has incurred can only be used by Taxpayer Y to reduce their future taxable income. Taxpayer Y's tax loss cannot be transferred to Taxpayer X to use to reduce their taxable income in either the current or future year.
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