Prepare Tax Documentation for Individuals © National Core Accounting Publications

© National Core Accounting Publications Chapter 13 Tax Losses © National Core Accounting Publications

© National Core Accounting Publications Tax Loss Defined A tax loss occurs when a taxpayer's deductions, other than unrecouped losses brought forward from earlier years, exceed the sum of assessable income and net exempt income in the year of income. In every year that a business activity makes a net loss, the taxpayer must consider whether they: can deduct the loss in the current year, or, must defer the loss and carry it forward to a future income year(s). © National Core Accounting Publications

© National Core Accounting Publications Past year losses A tax loss can be carried forward indefinitely for deduction against taxable income until it is absorbed. However, the taxpayer cannot elect the year in which to apply a past year tax loss. © National Core Accounting Publications

Firstly, against any net exempt income then from that part of assessable income that exceeds deductions for the current income year. Deducting Tax Losses A tax loss must be offset in the order incurred from: © National Core Accounting Publications

Illustration: Carry-forward loss Ahmed has the following information: 2014/15 A carry-forward tax loss of $10,000. 2015/16 Assessable income $29,000, deductions $7,000, and net exempt income $3,000. Required: Calculate taxable income for the year ended 30 June 2016. Solution: $ $ Assessable income 29,000 less Deductions 7,000 22,000 less carry-forward loss 2014/15 loss 10,000 less net exempt income 3,000 7,000 Taxable income 15,000 © National Core Accounting Publications

© National Core Accounting Publications Limit on Deductions for Gifts and Superannuation Contributions s.26-55 limits the extent of deductible gifts and personal superannuation contributions to the amount of income remaining after deducting from assessable income all other deductions. i.e. an otherwise deductible gift or personal superannuation contribution cannot either create or increase a carry forward tax loss. © National Core Accounting Publications

Illustration: Limit on Gifts Max has assessable income of $10,000, work-related deductions of $6,800 and has made a $5,000 donation to the Australian Red Cross. Required: Calculate taxable income. Solution: Assessable income $ 10,000 less Deductions Work-related 6,800 3,200 less Donation $5,000 but limited by s.26-55 3,200 Taxable income Nil © National Core Accounting Publications

Illustration: Personal Superannuation Contribution Limit Zac, a self-employed taxpayer, has a net business loss of $20,000 as well as a $1,000 contribution to his superannuation fund. Required: Calculate taxable income. Solution: Assessable income Net business loss $ (20,000) Taxable income Nil © National Core Accounting Publications

Restriction on Tax Losses Companies A company that fails to satisfy both the continuity of ownership and same business tests is prohibited from carrying forward a loss (refer to Advanced Income Tax Law Chapter 4: Companies) © National Core Accounting Publications

Restriction on Tax Losses Individuals and Partnerships Losses from a non-commercial business activity carried out by an individual taxpayer cannot be automatically offset against other assessable income in the year in which the loss was incurred. A loss from a non-commercial business activity can be deducted from other income only if at least one of four tests is satisfied.   © National Core Accounting Publications

Restriction on Tax Losses Individuals Assessable income test Profits test Real property test Other assets test © National Core Accounting Publications

Restriction on Tax Losses Assessable income test the assessable income from the activity is at least $20,000 p.a. Profits test the particular activity resulted in taxable income in at least three out of the last five income years, including the current year. © National Core Accounting Publications

Restriction on Tax Losses Real property test the total reduced cost bases of real property used in carrying on the activity are at least $500,000. Other assets test the total value of other assets (excluding motor vehicles) used in the activity is at least $100,000. © National Core Accounting Publications

Restriction on Tax Losses Exception The tax loss restrictions do not apply to individuals: provided assessable income (excluding net capital gains) from other sources is <$40,000. Carrying on a primary production business Or a professional arts business © National Core Accounting Publications

Illustration: Tax losses - Comprehensive William Turncoat, a resident taxpayer, conducts a part-time business as an educational consultant. He is also employed as a teacher by Dodgy Hospitality College. A summary of his business activities and other income is as follows: 2014/15 2015/16 2016/17 Business income $ 15,000 $ 15,500 $ 22,000 Gross wages – Dodgy Hospitality College 65,000 70,000 75,000 Business deductions 23,000 12,000 26,000 Donations to Registered charities 500 1,000 Exempt income 3,000 © National Core Accounting Publications

Illustration: Tax losses - Comprehensive The Commissioner has not exercised any discretion in applying Division 35 for any of these years. William’s business uses assets valued at $15,000. Required: For each year, determine William’s taxable income and any losses that may be carried forward. © National Core Accounting Publications

Illustration: Tax losses - Comprehensive Solution: 2014/15 $ Assessable income Gross Salary 65,000 Business Deductions 23,000 less: Deductions less: Business Income 15,000 Donations 500 DIV. 35 LOSS C/FWD 8,000 TAXABLE INCOME 64,500 2015/16 Div 35 Losses b/fwd add: Business Deductions 12,000 70,000 15,500 Exempt Income 3,000 18,500 1,000 1,500 69,000 © National Core Accounting Publications

Illustration: Tax losses - Comprehensive Solution: $ Div 35 Losses b/fwd 1,500 Gross Salary 75,000 less: Losses Recouped Net Business Income -4,000 71,000 DIV. 35 LOSS C/FWD Nil less: Deductions Donations 1,000 Loss Recouped 2,500 TAXABLE INCOME 68,500 2016/17 Note 1 - In 2015/16 the business is still considered non-commercial as the business income is less than $20,000. Therefore, the c/fwd loss can only be applied against the net income from the non-commercial activity. Note 2 - In 2016/17, the business passes the assessable income test even though it makes a loss. The c/fwd loss may now be applied against taxable income. © National Core Accounting Publications

Restriction on Tax Losses Income test Taxpayers with an adjusted taxable income of over $250,000 are only able to deduct expenses from non-commercial business activities against income from those activities. Any excess deductions will be quarantined to the business activity. © National Core Accounting Publications

© National Core Accounting Publications Investment Losses Losses arising from rental property or shares are not normally considered to arise from the carrying on of a business. The non-commercial loss rules do not apply to investment losses. © National Core Accounting Publications