Item 25 - Tax losses deducted

Refer to Tax losses deducted on the ATO website.

Increasing access to losses

On 1 March 2019, legislation was enacted that will supplement the current ‘same business test’ for trust losses with a more flexible 'similar business test'.

The new test will expand access to past year losses when a listed widely held trust enters into new transactions or business activities.

The similar business test will allow a listed widely held trust to access losses following a change in ownership where its business, while not the same, is similar having regard to:

the extent to which the assets that are used in its current business to generate assessable income were also used in its former business to generate assessable income,
the extent to which the activities and operations from which its current business is generating assessable income were also the activities and operations from which its former business generated assessable income,
the identity of its current business and the identity of its former business, and
the extent to which any changes to the former business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business.

As a test for accessing past year losses, the 'similar business test' will only be available for losses made in income years starting on or after 1 July 2015.

The 'same business test' and the 'similar business test' will be collectively known as the 'business continuity test'.

This measure takes effect in relation to income years starting on or after 1 July 2015. See New-legislation for further information.

If the amount at item 24 for a trust is a net income amount and the trust is able to deduct the whole or part of prior year Australian sources losses in the current income year under section 36-15 of ITAA 1997, show the amount of prior year losses to be deducted at this item.

Completing label C

Show at label C tax losses from earlier income years, which are deductible in the current income year under section 36-15 of the ITAA 1997. Exclude:

foreign source losses - foreign source losses are included at item 23 Other assessable foreign income. The transitional rules in the Income Tax (Transitional Provisions) Act 1997 require the extinguishment of certain foreign losses carried forward from prior years on conversion to tax loss and impose an annual limit on the utilisation of the remaining foreign losses for the first four years of the measure's operation.
the film component of any tax loss (film loss) - a film loss is shown, to the extent permissible, at item 18 Other deductions. Film losses can only be deducted from net exempt film income or net assessable film income. Refer to Subdivision 375-G of the ITAA 1997.

A trust MUST complete a current year losses schedule if it:

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.

Record Keeping

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?

Beneficiaries with no interest in trust capital

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.

Example

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.