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Ruling

Subject: Carried forward losses

Question

Can tax losses be carried forward to subsequent income years if they can be offset in the current income year?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You were a non resident of Australia for the three financial years ended 30 June 2009. You resumed your Australian residency in February 2010.

During the period of non-residency, you earned salary and wage income from Country X.

You owned a rental property in Australia during the time you were a non-resident. It was negatively geared and accumulated rental property losses.

During the period you resumed your residency to 30 June 2010 you continued to earn salary and wage income from Country X. You paid tax on this income in Country X, and are entitled to foreign tax credits.

The carried forward rental property losses will be offset by the foreign income for the 2009-10 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 36-15.

Reasons for decision

Division 36 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the method for calculating and deducting tax losses of earlier income years.

Subsection 36-15(2) of the ITAA 1997 provides that where a taxpayer does not have net exempt income, and the total assessable income for the later income year exceeds the total deductions (other than tax losses), the taxpayer deducts the tax loss from that excess.

Where a taxpayer has tax losses for more than one earlier income year, they must deduct them in the order in which they were incurred. Furthermore a tax loss can be deducted only to the extent that it has not already been deducted (subsection 36-15(5) and 36-15(6) of the ITAA 1997).

Where all or part of the tax loss cannot be deducted in an income year, subsection 36-15(7) of the ITAA 1997 provides that the undeducted amount can be carried forward to the next income year. The undeducted amount is then applied to any excess in that income year or the balance carried forward to subsequent income years.

Losses carried forward are offset against the taxable income of future years in the following order:

· Firstly against Australian net exempt income, that is, net income not subject to income tax

· Then against Australian taxable income.

Individuals 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.

In your case, you have a carried forward loss that relates to a rental property you own in Australia. The losses are carried forward from the period while you were a non-resident. Although you would prefer to carry forward the rental property losses to the 2010-11 income year so that the losses are offset against Australian sourced income, the Commissioner has no discretion to allow you to choose when you can deduct your losses. Therefore, the losses must be deducted in the 2010 year against your Country X income.