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Ruling

Subject: Capital gains tax - capital losses

Question and answer:

Are you entitled to a refund of capital losses?

No.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

In the year ended 30 June 2009 you incurred a combined capital loss.

The loss was agreed by the ATO in your assessments for that year.

You have both been forced to retire because of your age and medical conditions.

As you are trying to survive on pension income there is no possible way that you would ever have the ability to make any capital purchases and therefore you will never make any capital gains against which your losses can be offset.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 102
Income Tax Assessment Act 1997 Section 121-25

Reasons for decision

Please note, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Capital gains and losses

Division 102 contains the general rules for working out your net capital gain or net capital loss for a financial year. Section 102-5 includes a net capital gain in your assessable income which in turn is taxed at your marginal tax rate. In contrast, a net capital loss is not deductible in its own right, but can be taken into account in the calculation of future net capital gains.

Section 102-5(1) contains a 5-step method statement for determining the net capital gain for an income year.

Step 1: Reduce the capital gains you made during the financial year by the capital losses (if any) you made during the same financial year.

Step 2: Apply any previously unapplied net capital losses from earlier financial years to reduce the amounts (if any) remaining after the reduction of capital gains under step 1 (including any capital gains not reduced under that step because the capital losses were less than the total of your capital gains).

Step 3: Reduce by the discount percentage each amount of a discount capital gain remaining after step 2 (if any).

Step 4: If any of your capital gains (whether or not they are discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions

Step 5: Add up the amounts of capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year.

Broadly, your net capital gain is the sum of the capital gains in one income year, reduced by any current and prior year capital losses and any applicable CGT concessions.

Capital losses

Alternatively, you will have a net capital loss for a financial year if the sum of the capital losses made during that year exceeds the sum of the capital gains made during that year.

Section 102-10(1) contains a 3-step method statement for working out a net capital loss for a financial year:

Step 1: Add up the capital losses you made during the financial year. Also add up the capital gains you made.

Step 2: Subtract your capital gains from your capital losses.

Step 3: If the Step 2 amount is more than zero, it is your net capital loss for the financial year.

Section 102-10(2) states that "you cannot deduct from your assessable income a net capital loss for any financial year." However, to the extent that net capital losses cannot be used to offset capital gains in one financial year, they can be carried forward indefinitely to later financial years.

Other than the guidelines contained in Division 102, there are no provisions within the legislation that will allow a refund of your capital losses.

Record keeping

Taxation Determination 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?

This TD explains that a taxpayer who has made a net capital loss should retain records relevant to the establishment of that loss until at least the later of the following times:

· the end of the statutory retention period (for CGT purposes, CGT records must be retained for five years after it becomes certain that no CGT event can happen for which those records could reasonably be expected to be relevant in working out a capital gain or loss); or

· the end of the period of review for the year of income when the net capital loss is fully applied (generally the period for review is 2 years from the date the notice of assessment issues).

Further, where a formal dispute arises in relation to a loss, you should retain relevant records until any objection or appeal in relation to a loss has been finally determined.

Conclusion

In accordance with the provisions of Division 102, you are not entitled to a refund of your capital losses; they must be offset against your capital gains.