It was a difficult time for many companies throughout Australia. Higher interest rates and reduced consumer confidence have increased sales, while many costs, including rent, have often been recorded.
The end result is that many companies have loss in the past financial year and are possibly on track to also make a loss in the current financial year. The question is then – how can such trade losses be recovered for tax?
I run my company through a company
Companies can spend a tax loss for an indefinite period of time and use it when they choose, provided that they have the same majority possession and control. Unfortunately, the previous loss-back-back scheme (as a result of which a company was able to reduce its trade losses to previous profitable years and a reimbursement of the tax already paid) ended and is not available for periods after 1 July 2023.
Also note that there are anti-avoidance rules that can prevent the current losses from being applied in the future, whereby a change of ownership in the company and the nature of the company changes considerably. So if you are considering buying a company with accumulated tax losses and then making large changes to the way in which the company works to increase profitability, make sure that you record professional advice on how your proposed changes can influence access to the losses.
In short, if there is a change of at least 50% in ownership or the control of a company, the company must meet the comparable business test. This test requires that a company continues a company during the relevant test period that is comparable to the company it carried out before the relevant test time. The comparable business test has generally not failed by the company that enters into new business activities or transactions.
When figuring out whether the current company is comparable to the former company, the following 4 factors must be taken into account, which are not exhaustive:
- The extent to which the assets (including goodwill) are used in the current company to generate an assessable income, were also used in the former company’s former company to generate an assessable income
- The extent to which the activities and activities from which the current company generates an assessable income were also the activities and activities from which the former company generated a assessable income
- the identity of the current company and the identity of the former company, and
- The extent to which all changes in the former company were the result of the development or commercialization of assets, products, processes, services or marketing or organizational methods, of the former company.
A company that has not maintained the same majority ownership will not be able to use its implemented tax losses if it has completely closed its company (for example, it has continued earlier and is not going to resume). This is because the comparable business test will fail.
If a company still continues its business, it will not fail with the similar business test only because it has:
- reduced the size of its activities, including if its activities have been reduced to a minimum or have almost been suspended almost completely
- Outdated or temporary activities are only closed due to temporary adversity or for the reasons outside the check it intends to overcome (such as COVID-19 Lockdowns or Bushfires).
I don’t run my company through a company
In general, losses that arise in this situation can only be compensated against other income that arises in the same year. So if you run a company as a one -man dealer and offer a loss this year, you can apply the loss against your other income, such as income from employment or investment income.
Insofar as you cannot use the loss this year, it must be transferred and it can be applied against income in the coming years.
Similar rules apply to losses of trust, with the extra complication that there are complex anti-avoidance rules that can seriously limit the ability of trusts to gain losses in the future (for example, by preventing the ‘injection’ of income into confidence with the specific goal of absorbing losses).
Income V capital losses
If you make a loss that results from your trading activities, this is an income loss. If you purchase a loss that results from the removal of a capital capacity (which would be subject to capital gain tax), this is a capital loss. The treatment of capital losses is much less flexible for both companies and non-companies.
They can only be compensated against other capital profits that arise in the same year and to the extent that they cannot be used in this way, they must be transferred in the coming years and compensated for the first available capital gain.
Capital losses can never be compensated against income profits (such as trade profits).
Get professional help
If your company is in a loss -making situation, talk to your accountant (such as Tax return and tax accountants in Australia | H&R Block Australia) or tax agent to fully understand the available options. Tax rules are complex and – as you can see above – are otherwise applicable to different entities.
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