1. Prepare Tax Documentation for Individuals
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2. © National Core Accounting Publications
Chapter 13
Tax Losses
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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).
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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.
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5. 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:
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6. 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
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Limit on Deductions for Gifts and Superannuation Contributions
s 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.
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8. 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 ,200
Taxable income Nil
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9. 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
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10. 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)
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11. 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.
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12. Restriction on Tax Losses
Individuals
Assessable income test
Profits test
Real property test
Other assets test
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13. 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.
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14. 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.
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15. 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
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16. 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
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17. 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.
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18. 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
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19. 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.
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20. 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.
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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.
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