Common Errors When Utilising Tax Losses

The ATO has identified some common mistakes that taxpayers make when using their tax losses, including:

  • incorrect classification of the loss on either revenue or capital account;
  • losses being used where a company doesn’t satisfy either the continuity of ownership (COT) and the  
  • control test, or the same business test (SBT);
  • records not being kept to substantiate the loss;
  • incorrect claiming of tax deductions, in particular finance-related claims; and
  • carried-forward losses not being checked to ensure they’re correctly calculated including:
  • failure to reduce amounts carried forward by amounts previously recouped (claimed); and
  • tax losses carried forward despite having utilised all losses in the previous year.

The ATO is also concerned with the following issues, and wants taxpayers to look out for them when dealing with their tax losses:

  • claims for losses that do not meet COT or SBT;
  • unexplained losses;
  • inappropriate creation of losses through debt forgiveness and other inter-group / entity transactions;
  • inappropriate creation of losses through income omission or incorrect classification (revenue or capital);
  • manipulation of loss entities in various ways, including using profitable trusts to distribute income into loss entities;
  • inappropriate claims for losses derived from permanent establishments;
  • claims for losses that do not reflect genuine commercial arrangements.

To support claims for losses, records should be retained at least until the end of the period of review for the income year in which the relevant losses are fully applied.