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Ruling

Subject: Deductibility of carried forward losses

Question

Can you offset your carried forward tax losses from previous years against your salary and wages in the 2009-10 to 2011-12 financial years, even though your business has ceased?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You ceased a sole trader business in the 2009-10 financial year.

You have incurred tax losses from earlier income years which have been carried forward.

The losses are not deferred under the non-commercial loss provisions.

Reasons for decision

Division 36 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for the deduction of tax losses incurred in earlier income years.

Section 36-10 of the ITAA 1997 provides that the tax loss for an income year is the excess of deductions over the sum of assessable income and net exempt income.

Section 36-15 of the ITAA 1997 allows a tax loss for a loss year to be deducted in a later income year. That is, if all of the tax loss cannot be deducted, then the undeducted amount is carried forward to the next income year (subsection 36-15(7) of the ITAA 1997).

The taxpayer seeking a deduction for a tax loss of an earlier income year must be the same taxpayer that originally incurred that tax loss.

Tax losses of earlier income years which are carried forward, commonly referred to as 'carried forward losses' are distinguished from 'deferred' losses (a term used in Division 35 of the ITAA 1997 about non-commercial losses).

For example, if your business activity ceases to be carried on, and is never carried on again, and no business activity of a similar kind is ever carried on in a future year, any entitlement to claim a deduction for a 'deferred' loss is lost forever.

However, 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.

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.

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.

Subject to the exception relating to bankruptcy, you will be entitled to claim any undeducted carried forward losses in the 2009-10 to 2011-12 financial years.