By Athan Stamatelatos & Kate Nguyen
Earlier this month as a part of our monthly tax training, our team had the opportunity to take part in an in-depth training session on the topic of Recouping Company Losses.
The presenter shared her expertise on how businesses can effectively navigate the complex rules around carrying forward and utilising tax losses, ensuring compliance while maximising potential benefits.
Here are the key takeaways you should know about:
Understanding the Types of Losses
Revenue Losses occur when allowable deductions exceed assessable and exempt income, and can be carried forward indefinitely.
Capital Losses arise when the capital proceeds from a CGT asset are less than its cost base, and can only be offset against capital gains.
Please note that there are general and special rules for Loss Recoupment for companies, and it is not mandatory for a company to deduct a tax loss in an income year.
Companies receiving excess franking credits can have the excess credits converted into tax losses.
Claiming Prior Year Losses
To deduct a prior year loss, a company must pass either:
Continuity of Ownership Test (COT)
- Requires >50% continuity in voting power, dividend rights, and capital distribution rights.
- Ownership must be traced to natural persons.
- Includes special rules for family trusts and non-fixed trusts.
Business Continuity Test (BCT) Available if COT fails.
- Compares business activities before and after a change in ownership.
- Allows new activities if they are a natural development of the former business.
Applying the BCT: Key Factors
- Use of Same Assets – Are the same assets (including IP and goodwill) used to generate income?
- Same Activities – Are the income-generating operations consistent?
- Business Identity – Has the core identity of the business remained intact?
- Development of Former Business – Are changes a natural evolution of the original business?
Control Test: Looking Behind the Share Register
Even if COT and BCT are satisfied, a company may be denied losses if:
- A person gains control of voting power to obtain a tax benefit.
- Control test applies a modified BCT period to assess eligibility.
Consequences of Failing COT and BCT
- Losses incurred before ownership change are extinguished.
- Only part-year losses post-change may be deductible.
- Current year losses are restricted if ownership or control changes mid-year.
Record-Keeping Obligations
To support compliance companies must maintain detailed records to support COT and BCT analysis. Please note that a loss schedule is required to be disclosed if your losses exceed $100,000.
Navigating the rules around recouping company losses requires a deep understanding of tax legislation and strategic foresight. Whether through maintaining ownership continuity or demonstrating business similarity, companies must be diligent in record keeping and compliance to preserve valuable tax deductions.
Contact Us
If you would like to discuss your own circumstances, then please feel free to contact your DFKBKM representative, or you can get into contact with us here.
