ATO Reviewing/Querying Carried Forward Losses

ATO Reviewing/Querying Carried Forward Losses

The ATO’s compliance program for small and medium enterprises is now turning its attention to businesses that show carried forward tax losses in their 2009 income tax return.

Common mistakes identified include:

  • losses being used where companies don’t satisfy either the ‘continuity of ownership’ or ‘same business’ tests;
  • losses being incorrectly transferred to the head company of a consolidated group;
  • losses being incorrectly used due to incorrect calculations of the available fraction;
  • records not being kept to substantiate the loss; and
  • carried forward losses not being checked to ensure they’re correctly calculated.¬†¬†

In their “iron fist in a velvet glove” way, they advise (read: warn) that where tax agents have clients that are carrying forward tax losses they should ensure that they are still eligible to utilise¬† their loss before they lodge the client’s 2010 income tax return.

The fact that they don’t mention penalties does not mean they are not on the table.

Hint: Many taxpayers cling to their carried forward losses, like a drowning man clutching at straws, without realising that they may be only deferring tax, not ducking it all together.

After all, if a company has carried forward losses of $100,000 with expected tax savings of $30,000, the individual shareholders will very often have to pay that extra $30,000 in tax when, and if, they receive unfranked dividends of $100,000.

Further, failing the continuity of business test is very often almost a ‘given’ if there has been a change in ownership, (that is, how difficult is it for new owners to show that the business is exactly the same before and after the takeover?). if there’s any doubt, consider seeking private ruling.