How to claim a tax loss

Individuals

Individuals can generally carry forward a tax loss indefinitely, but must claim a tax loss at the first opportunity. You cannot choose to hold onto losses to offset them against future income if they can be offset against the current year’s income.

Carried-forward tax losses are offset first against any net exempt income and only then against assessable income. Losses must be claimed in the order in which they were incurred.

How to claim prior year tax losses on your tax return is explained at label L1 of the Individual tax return instructions.

If you're using myTax, tick the box 'You had tax losses from earlier income years'.

Non-commercial losses

If you're carrying on a non-commercial business activity as an individual, either alone or in a partnership, and your business makes a loss, you must check the non-commercial loss rules. The rules provide if you can offset the loss against your income from other sources, such as wages.

Partnerships

If a partnership makes a tax loss, each partner has a proportionate share of the loss and treats it like a loss from any business activity (including applying the non-commercial loss rules).

Trusts

If you operate your business as a trust and you incur a tax loss, you cannot distribute the loss to the trust’s beneficiaries.

Losses must be quarantined in a trust to be carried forward by the trust indefinitely until offset against future net income. It is possible to use those losses as deductions against income in the trust in future income years if the trust satisfies certain tests relating to ownership or control of the trust. If the trust terminates before the losses can be offset against income, they are lost.

The trust loss rules apply in different ways to:

• fixed trusts
• non-fixed trusts
• excepted trusts.

The trust loss legislation is contained in Schedule 2F to the Income Tax Assessment Act 1936.

How to claim a tax loss on your trust tax return is explained in Question 27 of the Trust tax return instructions.

Companies

Companies can carry forward a tax loss indefinitely, and use it when they choose, provided they have maintained the same majority ownership and control. If there is a change of at least 50% in the ownership or control of a company, the company needs to satisfy the:

• same business test, or
• similar business test, which applies to losses incurred in an income year beginning on or after 1 July 2015.

For guidance on the same business test and similar business test, see Taxation Ruling TR 1999/9 and Law Companion Ruling LCR 2019/1.

A company that has not maintained the same majority ownership will not be able to use its carried-forward tax losses if it has closed its business completely (e.g. discontinued the business previously carried on and has no intention to resume). This is because it will fail the same business test and similar business test.

If a company is still carrying on its business, it will not fail the same business test or similar business test merely because it has:

• reduced the scale of its business, including if its activities have reduced to a minimum or are almost entirely suspended
• suspended or temporarily closed its business only because of temporary adversity or due to reasons beyond its control which it intends to overcome.

In determining whether a company's business is still being carried on the following must be considered:

• reasons for the inactivity– for example, whether the company is actively holding itself out for business though obtaining none, and
• whether there is the expectation of resuming active operations within a reasonable time.

These principles should be taken into account if a company's business has been affected by circumstances relating to COVID-19 after its majority ownership has changed. For instance, if a gym closes temporarily for three-months because of restrictions on its operations, this will not cause it to fail the same business test or similar business test.

A company will not fail the same business test or similar business test merely because it has received JobKeeper payments.

The normal loss deduction rules are modified for widely held or eligible Division 166 companies so the rules are easier to apply.

How to claim a tax loss on your company tax return is explained in Question 13 of the Company tax return instructions.

See also:

• The general company loss recoupment rules in Division 165.
• The modified loss recoupment rules for widely held and eligible Division 166 companies.
• The modified rules in Division 167 for companies whose shares carry unequal rights to dividends, capital distributions or voting power.
• Taxation Ruling TR 1999/9 – concerning the application of the same business test.
• Law Companion Ruling LCR 2019/1 The business continuity test - carrying on a similar business
• Loss carry back tax offset

Current-year losses

If there is a change of ownership or control of a company during an income year and the company does not maintain the same business or similar business, it must work out its taxable income and tax loss under subdivision 165-B of the ITAA 1997.

In broad terms, a company in this situation has both a taxable income and a tax loss for the same year. In some circumstances, the loss may be carried forward and used in later years, subject to the usual restrictions.

Consolidated groups

Consolidation allows a wholly owned group of entities to be treated as a single entity for income tax purposes, with the head company of the consolidated group the only entity recognised for determining the income tax liability of the group.

A consolidated group generally has two types of losses:

• losses generated by the consolidated group (group losses)
• transferred losses that were generated by an entity before it became a member of the group.

Transferring losses to the consolidated group

When an entity becomes a member of a consolidated group (whether as head company or as a subsidiary) its unused carry-forward losses are transferred to the head company if the losses satisfy modified versions of the general company loss recoupment tests.

Broadly, the tests are applied as though the 12 months prior to the joining time were the loss claim year (known as the trial year). The loss is transferred to the head company of the group if the joining entity could have claimed the loss in the trial year assuming it had sufficient income or gains of the relevant type. The rules are outlined in Subdivision 707-A of the ITAA 1997.

Available fraction

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

See also:

• Subdivision 707-C of the ITAA 1997.

Using losses in the consolidated group

Before claiming a group loss or a transferred loss, the head company is required to apply the general loss recoupment provisions. This necessitates the head company passing the continuity of ownership and control tests or the business continuity test. For transferred losses, these recoupment tests are modified for the purposes of determining whether the company has maintained the same ownership. The modifications are outlined in Subdivision 707-B of the ITAA 1997.

How to claim losses if you are an individual, partnership, trust, company or consolidated group.