Tax losses

A tax loss is when the total deductions you can claim, excluding gifts, donations and personal super contributions, are greater than your total income for an income year.

If your business makes a tax loss, you may be able to:

  • Offset the loss in the same income year against other assessable income; or
  • Carry forward the loss and claim it as a business deduction in a later year; or
  • Carry the loss back to an earlier income year (but not before 2018–19) in which the business has an income tax liability and receive a tax offset – loss carry back was available only to companies until 2022–23 and ceased to be available from 2023–24.

If your business has made more than one tax loss in a year, you will need to consider each tax loss separately.

If you’re a sole trader or in a partnership and want to offset a tax loss, first check if the business activity meets at least one of the four tests under the non-commercial loss rules. (Those rules do not apply to business losses made by primary producers and professional artists whose income from other sources is less than $40,000.)

  • If you do meet at least one of the four tests, then you can offset the loss against other assessable income (such as salary or investment income) in the same income year.
  • If you don’t meet at least one of the four tests, you can defer the loss or carry it forward to a future income year. For example, you can offset it when you next make a profit.

Non-commercial losses made by an individual with an adjusted taxable income exceeding $250,000 are quarantined.

The rules for record-keeping still apply in relation to business losses. You need to keep records for 5 years for most transactions. However, if you fully deduct a tax loss in a single income year, you need to keep records for only 4 years from that income year.

Claiming a tax loss

Before you claim a tax loss, make sure you have correctly claimed expenses to which you are entitled. Overclaiming expenses can put your business in an incorrect tax loss situation.

Keeping accurate and complete records will help you keep track of your tax losses. It can help you avoid incorrectly carrying back a tax loss or carrying forward tax losses to deduct in future years.

If your business makes a tax loss in the current income year, you can generally carry forward that loss and claim a deduction for your business in a future year (subject to satisfying either the continuity of ownership test or the same or similar business test in the case of a company).

Companies and entities taxed as companies (e.g. corporate limited partnerships) may be able to claim the loss carry back tax offset. You can carry back losses made in 2019–20, 2020–21, 2021–22 and 2022–23 to an earlier income year (but no further back than 2018–19) and claim a refundable tax offset.

If you’re carrying on a non-commercial business activity as an individual, either alone or in a partnership, and your business makes a loss, you must consider the non-commercial loss rules.

Changing loss carry back choice

If your company has chosen to carry back a loss from one income year to an earlier income year (but not before 2018–19), it may want to change how much of the tax loss it carries back. This needs to be done on the approved ATO form and within the time limit for amending the relevant tax assessment.

The change will take effect from the day your company made the original loss carry back choice.

The ATO provides this example.

XYZ Co made a loss carry back choice in its Company tax return 2021 to carry back $5,000 of the $10,000 tax loss it made in that income year to the 2019–20 income year. Later it decides that it wants to carry back all the $10,000 tax loss to the 2019–20 income year.

XYZ Co notifies the ATO of its change in loss carry back choice using the approved form within the time limit for amending its tax assessment for the 2020–21 income year.

The period for amending an assessment is generally 2 years if your company is a small business entity (aggregated turnover of less than $10 million) or, if the income year starts on or after 1 July 2021, a medium sized business (aggregated turnover of less than $50 million). Otherwise, the amendment period is generally 4 years.

For a company balancing on 30 June, the first income year starting on 1 July 2021 is the 2021–22 income year.

Contact our KMT tax advisers today about how to best utilise a tax loss!

About our adviserChrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. Chrisanthe’s passion lies in process improvement, as she combines her analytical prowess with adaptability to explore avenues for business sustainability. By deeply understanding her clients’ businesses and goals, Chrisanthe empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Please do not hesitate to reach out if you need assistance.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or get professional advice from a qualified accountant at KMT Partners.