Got a carry-forward tax loss burning a hole in your business’s pocket?

Business owners would be well advised to not get too creative if you’ve thought how handy it would be to absorb a business loss as a tax deduction for a future income year.

The tax law has measures in place to ensure such deductions are limited to those businesses that are legitimately eligible — such as the continuity of ownership and the same business tests. But there is another “integrity” measure that may result in a denial of a claim for losses that business owners should keep in mind.

The ATO has the discretion to disallow the deduction of a tax loss if, during the relevant income year, the business attempting to make such a claim earned assessable income (or realised a capital gain) that would not have been derived had the loss been unavailable as a deduction (our emphasis, and see more details here).

There is some balance to the rules in that the Commissioner of Taxation is “prevented” from disallowing the deduction should “continuing shareholders” stand to benefit from the relevant income. However there is still a fair amount of discretion left to the Commissioner in how the business loss rules are applied (see more here).

In other words (and of course circumstances of the business or businesses involved will have an influence), a business can mitigate the risk that the ATO will exercise this discretion to disallow a tax loss deduction by making sure that either (or preferably both) of the following contentions are supported:

  • that the business would have derived the income or realised the capital gain regardless of the tax loss being available
  • that continuing shareholders will benefit from the above in a fair and reasonable manner with regard to their rights and interests.

Tax professional advice is recommended if a business would like to pursue these type of tax deductions.

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