Psst!! Tax Losses and Claims Unveiled

The tax losses are made when the total deductions for an income year exceed the total assessable and net exempted amount in any financial year. When the tax losses are taken into consideration, several other factors are looked after. For example, if the tax losses are due to the following contributions, then the same will not be considered under Tax Loss and its claims:

  • Pension payments or payments for gratuities, retirement allowances provided to employees, former employees, or their dependents.
  • Gifts or contributions to the deductible gift recipients.
  • Payments counted under the label of conservation covenants.
  • Personal Superannuation Contributions.

Is it Capital Loss or Tax Loss?

Capital Loss and Tax Loss are completely different and hold a different meaning in different circumstances. Capital Loss happens when a capital asset is disposed of than its original tax price. Capital Loss is only the offset between the capital gains in the current income year against future capital gains. The Capital Loss calculated cannot be offset against any other income.

What if I am a Foreign Resident?

For foreign residents, they can calculate the tax loss based on their income in Australian denomination and deductions in the income. And for Australian residents, they can evaluate their tax loss based as per the worldwide income and deductions.

How do I Claim My Tax Loss?

  • For Individuals

For individuals, they generally have the opportunity to carry forward a tax loss procedure indefinitely. But in the first place, they should claim a tax loss initially. The individuals are not allowed to put a hold onto the losses to offset them against the future income if they will offset against the income in the current year.

The carried-forward tax losses are considered under net exempt income and then against assessable income. After this, losses must be claimed in the order of incurrence.

  • Non-Commercial Losses

For the single business owners, or in partnership system, and case the business incurs a loss, they must check the non-commercial loss rules to check their eligibility for offsetting the loss against their income from other sources, for example, wages.

  • For Partnerships

If the partnership firms incur a tax loss, then every partner has a proportionate share of loss. Also, they have to treat it like a loss form any business activity which means that the non-commercial loss rules can also be applicable.

  • For Trusts

In case the individuals operate their business or commercial activity as trust, then they cannot distribute the same to the trust’s beneficiaries.

The losses so incurred is liable to be quarantined within a trust that is carried forward by the trust indefinitely till the offset against the future net income. These losses may be used against deductions against trust income in future income years in case the trust can satisfy certain tests related to trust ownership and its control. However, in case the trust is terminated before the losses can be offset against the income, they are lapsed.

The three ways in which the trust loss rules are applicable are:

  • Fixed trusts
  • Non-fixed trusts
  • Excepted trusts

For Companies:

The operating companies can carry forward a tax loss indefinitely and use the same as per their choice. However, the companies have either:

  • Maintained the same ownership and control
  • Carried the same business or similar business (applies on or after July 1, 2015) since the tax loss incurred.

For Current Year Losses:

In case there is an ownership change during the income year and the company is not able to maintain the same business, then the taxable income and tax loss should be evaluated as per Subdivision 165-B of ITAA 1997.

In broader terms, the company has both taxable income and tax loss for the same year in these circumstances. In some situations, the loss may be carried forward and used shortly, with usual restrictions.

For Consolidated Groups:

With consolidation, the wholly-owned group of entities can be treated as a single entity for income tax. With the head of the consolidated group, he/she becomes the only entity recognized for income tax liability determination of the group.

The consolidated group generally incurs two types of losses:

  • Losses generated by the consolidated group (group losses)
  • Transferred losses that were generated by an entity before the consolidation or conglomeration.

Can I Transfer Tax Losses to Consolidated Groups?

When any external entity becomes a consolidated group member (irrespective of head company or a subsidiary), then its unused carry-forward losses would be transferred to the head company. However, this would happen only when the losses satisfy modified versions of the general company loss recoupment tests.

The transferred loss amount that can be claimed by the head company from the 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.

Parting Words

The taxation services and laws are getting updated now and then. However, these are only done to benefits the residents of Australia and to evade the financial frauds happening around.

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