Item 25 - Tax losses deducted

• has total tax losses and net capital losses carried forward to the current income year greater than $100,000,

• is a life insurance entity and has either complying superannuation class tax losses or a virtual pooled superannuation trust (PST) net capital loss carried forward to the current income year,

• is a listed widely held trust (as defined in Schedule 2F to the ITAA 1936) and the trust is required to pass the same business test in order to claim a deduction for losses in the current income year or will be required to pass that test in respect of losses being carried forward to later income years. Refer to subdivision 269-F of Schedule 2F to the ITAA 1936,

• claims a deduction for foreign source losses,

• has current year foreign source losses,

• has foreign source losses carried forward to later income years,

• claims a deduction for prior year controlled foreign company (CFC) losses,

• has 'current year' CFC losses, or

• has CFC losses carried forward to later income years.

• The total of any tax losses shown at label C cannot exceed the amount of net income shown at item 24 Total of items 20 to 23.

• Under the provisions of Schedule 2F to the ITAA 1936, conditions effective from 9 May 1995 must be satisfied by a trust before it can claim a deduction under section 36-15 of the ITAA 1997 for the whole or part of an earlier income year loss. Some trusts may be required to work out their net income and tax loss for a year in a special way under Division 268 of Schedule 2F. For more information refer to trust loss provisions on the ATO website.

• Complete item 27 Losses information if the income injection test under the trust loss provisions prevents the trust - including a family trust - from fully claiming a deduction for tax losses of an earlier income year in the 2007-08 income year. Refer to Division 270 of Schedule 2F to the ITAA 1936.

• If the trust has net exempt income and an excess of assessable income over total deductions - other than tax losses of earlier income years - deduct the tax loss from the net exempt income and then deduct any remaining amount of tax loss from the excess assessable income. Refer to subsection 36-15(3) of the ITAA 1997.

• If the trust has net exempt income and an excess of total deductions - other than tax losses of earlier income years - over assessable income, subtract the excess deductions from the net exempt income and then deduct the tax loss from any net exempt income that remains. Refer to subsection 36-15(4) of the ITAA 1997. A trust's net exempt income is calculated in accordance with section 36-20 of the ITAA 1997.

• Losses from primary production may generally be carried forward indefinitely until deducted, irrespective of the year in which the loss was incurred. Non-primary production losses incurred prior to 1989-90 may not be carried forward.

Keep a record of any claims for undeducted tax losses of earlier income years. The trust must keep a record of its tax losses and account for any adjustments including those made by the ATO. If a trust incurs tax losses, you may need to keep records longer than five years from the date when the losses were incurred. Generally, tax losses incurred this year can be carried forward indefinitely, until they are applied by recoupment. When applied, the loss amount is a figure that leads to the calculation of the trust's net income (and beneficiary's taxable income) in that year. It is in the trust's interest to keep records substantiating this year's losses until the amendment period for the beneficiary's assessment for the recoupment year in which the losses are fully applied has lapsed (up to six years from the date of that assessment).

Refer to TD 2007/2 - Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?

 A life tenant is a beneficiary with an interest in the income of the trust for the duration of their life, but with no interest in the capital of the trust.

If the trust includes a beneficiary who is a life tenant or a beneficiary with no interest in the capital of the trust, you cannot claim a deduction for tax losses of earlier income years in calculating the share of those particular beneficiaries in the net income of the trust if the tax losses of previous years are required to be met out of corpus.

The XYZ trust has tax losses of earlier income years of $2,000. Its net income is $20,000, excluding losses of earlier income years. There are two presently entitled beneficiaries of the trust, each with a 50% interest in the income of the trust. The trust deed requires tax losses to be met out of corpus.

One beneficiary is a life tenant. The other has an interest in the income and the capital of the trust.

In calculating the net income of the trust for the life tenant's share, no account is taken of earlier year losses. The life tenant's share of the net income of the trust for tax purposes is 50% of $20,000, that is, $10,000.

Conversely, in calculating the other beneficiary's share of the net income of the trust, earlier year losses are taken into account. That beneficiary's share of the net income of the trust for tax purposes is 50% of ($20,000 - $2,000), that is, $9,000.