Losses and horizontal equityLosses are allowed as a deduction against income - division 36
Calculating your tax loss
Did You Notice the Bit about Offsetting Losses against Exempt Income?
You can not make a gift to increase a loss
Other deductions which section 26-55 precludes from increasing a loss
How to deduct tax losses under section 36-15
Section
8-1 allows losses and outgoings incurred in gaining assessable income as a deduction in the year of income, but division 36 goes one better by allowing a deduction for losses of previous years which have not been allowed as a deduction, because they exceeded the income of those years.In this way, taxpayers involved in industries with wildly fluctuating fortunes, or taxpayers facing a lengthy period of low returns before their business establishes itself are provided with an element of equity. If losses in bad years could not be carried forward to and offset against income in good years, a taxpayer whose income stream was marked with wild fluctuations would end up paying more tax over a period of years than a taxpayer whose income was fairly stable.
The ability of a tax system to treat taxpayers that receive the same amount of income over a period of years in the same way is referred to as its horizontal equity. The provision for the carry forward of losses and their offsetting against later years income is one aspect of this horizontal equity. (Another is the averaging provisions allowed to primary producers and inventors, etc)
If you have more deductions for an income year than you have income, the difference is a tax loss, which you may be able to deduct in a later income year.
Section
36-10 tells you how you calculate a tax loss for a particular year
(1) Add up the amounts you can deduct for an income year (except tax losses for earlier income years).
(2) Subtract your total assessable income.
(3) If you derived exempt income, also subtract your net exempt income (worked out under section 36-20).
(4) Any amount remaining is your tax loss for the income year, which is called a loss year.
Did You Notice the Bit about Offsetting Losses against Exempt Income?
If your allowable deductions exceed your assessable income, you must then deduct them from any exempt income you may have derived.
If your deductions still exceed the total of your assessable and exempt income, you have a loss you can carry them forward under section
36-10 and offset against income in future years under section 36-15You can not make a gift to increase a loss
Answer this question….
Assessable income = $10,000
A gift of $11,000 was made to a fund in respect of which a deduction is allowed under the gift provisions.
Can the taxpayer carry forward a loss of $1000? (Hint - refer section
26-55)Yes No
Section
26-55 precludes deductions under specified sections from being added to a carry forward loss.Other deductions which section 26-55 precludes from increasing a loss
section 78 - gifts
section 78B - promoters recoupment tax
section 82 AAT - contributions to superannuation funds
Section 79D precludes the deduction of a foreign loss against domestic assessable income. A foreign loss can only be carried forward for offset against assessable foreign income.
Section
36-15 tells you how!It depends on whether you have net exempt income or not
The bad news is, you have to deduct the loss from the exempt income BEFORE you can deduct it from the assessable income. So, if you have exempt income, it will chew up your losses without any net benefit to you.
Let's look on the bright side first, and take the case of a taxpayer with NO exempt income.
If no exempt income then taxable income
= assessable income - allowable deductions - tax losses
(1) A tax loss for a loss year is deducted in a later income year as follows.
If you have no net exempt income
(2) If your total assessable income for the later income year exceeds your total deductions (other than tax losses), you deduct the tax loss from that excess.
If you have exempt income and
Your taxable income was positive before losses
then taxable income
= assessable income plus exempt income
less allowable deductions less tax losses
(3) If you have net exempt income for the later income year and your total assessable income (if any) for the later income year exceeds your total deductions (except tax losses), you deduct the tax loss:
If you have exempt income and
your taxable income was negative before losses
you still have to offset your losses against the exempt income
(4) However, if you have net exempt income for the later income year and those deductions exceed your total assessable income, then:
So what is net exempt income?
Section
36-20 defines it. We will take the case of a resident.(Look up the section if you want to know about non residents.)
exempt income
less expenses incurred in gaining it
less foreign taxes
(1) If you are an Australian resident, your net exempt income is the amount by which your total exempt income from all sources (except excluded exempt income) exceeds the total of:
Section
36-20 (3) lists certain items of exempt income which a excluded from net exempt income - they mainly foreign income amounts.Under section
36-15 (5) the losses are offset against income in the order in which they were incurred.Losses incurred by bankrupt taxpayers
Answer this question….
Is a taxpayer entitled to claim a deduction under section 36-35 in respect of losses incurred prior to bankruptcy?
Yes No
Refer section
36-35
Answer this question….
Is a taxpayer who was bankrupted in the previous year is entitled to a deduction for amounts he voluntarily pays back to his former debtors?
Yes No
Refer section
36-40Can a taxpayer transfer a loss to another taxpayer?
Remember that losses are personal to the taxpayer. If a taxpayer sells a business, which incurred losses, he does not sell the value of those tax losses, but is allowed to offset them against the future assessable income he will derive.
A company can only carry forward losses if it satisfies either the
Continuity of business test
Continuity of ownership test
Refer to the provisions on transferring of company losses if you want more information
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