Business Losses, Bad Debts and Blackhole Expenditure

To claim brought forward losses, companies must pass one of two tests:

1. Continuity of Ownership Test – more than 50% of the shareholders must be the same in the year that the loss is claimed, as they were in the year the loss was incurred and in every year in between.

2.  Same Business Test – difficult to satisfy.

 

Similar Business Test proposed  - see links below

 

NB! The Non-Commercial Loss provisions apply only to a business activity you carry on as a sole trader or in partnership.  They do not apply to a business activity carried on by a company or trust.  Refer to the link below for information on carried forward losses of companies and trusts. 

Non-Commercial Loss Provisions

When can you deduct a loss?

If you pass the $250,000 income test ( see below), you can offset a loss from a business activity against other income if the business activity passes at least one of the following four tests. It may:

Ø  have assessable income from the activity of at least $20,000

Ø  have produced a profit in three out of the past five years

Ø  use real property or an interest in real property worth at least $500,000 on a continuing basis, or

Ø  use other assets worth at least $100,000 on a continuing basis.

Exceptions:

 

1. If the activity does not pass any of these tests, you may still claim a loss if the Commissioner decides to exercise a discretion to allow the loss to be offset against other income.

2. You may also offset a loss if your business activity comes within the exception to these rules, which may apply to primary production and professional arts business activities in certain circumstances. E.g. Other income (excluding cap gains) less than $40,000.

3. From 1 July 2009, a new income test applies.  Under the income test, taxpayers with "other income" (as defined for non-commercial loss purposes) of $250,000 or more in an income year, will have excess deductions quarantined to the business activity, unless the Commissioner exercises his discretion that they will pass the profit test in future.

 

 

Repealed from 1 July 2013 - linked to MRRT repeal

Companies (and entities taxed like companies) are permitted to carry-back tax losses to offset previous profits so as to provide a refund of tax previously paid.

A one year loss carry-back applies in 2012-13, where tax losses incurred in that year can be carried back and offset against tax paid in 2011-12.

For 2013-14 and later income years, tax losses can be carried back and offset against tax paid up to two years earlier.

Losses of up to $1 million can be carried back for each year, providing a cash benefit of up to $300,000.

The measure applies to revenue losses only, is subject to integrity rules and is limited to a company’s franking account balance.

The Company Tax Return Instructions (see link below) includes information about claiming the loss carry-back tax offset.

The ATO have received a number of Company tax return 2013 where the loss carry-back tax offset has been claimed incorrectly. This has caused delays in processing Company tax return 2013.
To prevent further delays, they have made changes to the electronic lodgement service (ELS). This means you cannot lodge a company return if you claim a loss carry-back tax offset at item 13 label Z, and:

§  item 8 label M is less than the tax offset, or

§  item 8 label M is not completed.

The loss carry-back tax offset, for the financial year in which you carry-back tax losses, must be the lowest of:

§  the loss carry-back tax offset component for the 2011-12 financial year

§  the maximum $1,000,000 losses multiplied by the corporate tax rate for the year you make a claim (that is, $300,000 in the 2012-13 financial year as the corporate tax rate of 30%), or

§  the franking account balance at the end of the financial year you make a claim.

For more information on eligibility and requirements, refer to Company loss carry-back link below

Although tax losses can now be carried forward indefinitely, that is a relatively recent development.  It was extended to primary producers in 1966 and was given general application in 1990.  Before that time, most companies were only entitled to a deduction for losses from the preceding seven years.