An Australian company that makes a tax loss in one income year may be able to use it to reduce taxable income in a later year. The loss does not usually produce an immediate refund, and carrying it forward is subject to rules that depend on the company’s circumstances. Understanding those rules early can help a business preserve the value of a loss and prepare clear evidence for its tax return. Here are the basics to discuss with your tax adviser.
What counts as a tax loss
A tax loss arises when a company’s allowable deductions for an income year exceed its assessable income and other relevant amounts under tax rules. It is not necessarily the same as an accounting loss shown in financial statements. Tax adjustments, such as differences in deduction timing or the treatment of particular expenses, can make the two figures different.
Companies generally carry a tax loss forward and may deduct it against assessable income in a later income year, subject to eligibility rules. A loss is not itself a deduction that can be freely transferred to another company in a group. The company that incurred it generally needs to meet the relevant tests before claiming it.
Rules for carrying losses forward
A company generally needs to satisfy either the continuity of ownership test or, if it does not satisfy that test, the business continuity test. The continuity of ownership test looks at whether the same persons held more than 50% of the relevant voting, dividend and capital rights throughout the required period. Ownership changes, complex share structures and changes in control can make this assessment less straightforward.
If ownership continuity is not met, the business continuity test may allow the company to use a carried-forward loss if it continues the same business, or satisfies the applicable similar business test, from the relevant time. The tests have detailed conditions and restrictions, including rules about new business activities and transactions. A company should get advice before relying on a loss after a significant ownership or business change.
The amount and timing of a claim also matter. Companies generally apply available losses in the order required by tax law and cannot use a loss beyond the taxable income available for that year. Specific rules can apply to certain losses and company arrangements, so confirm the treatment for the company’s facts rather than relying on a prior-year return or accounting balance.
Records that support a claim
Keep the tax calculations that show how each loss arose, including reconciliations from accounting profit to taxable income, supporting schedules and copies of relevant company tax returns. Retain source documents for income and deductions, such as invoices, bank records, contracts and expense records. Clear working papers make it easier to verify the loss amount and explain differences between accounting and tax results.
Ownership records can be important when applying the continuity of ownership test. Keep share registers, share issue and transfer documents, shareholder agreements, company constitutions and records of changes to voting, dividend or capital rights. If ownership changed, a timeline of the relevant events and an analysis of the applicable test can help support the company’s position.
For the business continuity test, retain evidence of the company’s activities before and after a change. Useful records may include business plans, product or service information, customer and supplier records, asset registers, contracts, staff information and documents explaining any restructuring. Keep records for the period required by tax law and preserve older records where a carried-forward loss remains relevant to a later return.
Review losses before lodging
Before claiming a carried-forward loss, reconcile the balance from the prior return to the current year’s tax workpapers. Check that the company has not already used the loss, confirm the amount available, and identify any changes in ownership or business operations that could affect eligibility. Keep a schedule that tracks each loss by income year and records how much remains.
Seek advice when the company has issued or transferred shares, undergone a restructure, acquired a business, or changed its main activities. These events can affect whether a loss remains available, and the answer depends on the legal and commercial details. Reviewing the position before lodging can help identify missing evidence and avoid treating an accounting loss as an available tax loss.
Carried-forward tax losses can help an eligible company reduce taxable income in a later year, but the company must establish both the loss amount and its entitlement to use it. Maintain tax calculations, ownership documents and evidence of business activities, then review them when circumstances change. For advice on your company’s position, contact Harbour Tax Advisory.