Common Errors When Utilising Tax Losses

Some common mistakes that clients may make when using their tax losses:

• 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 concerned with the following issues, and clients should 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 transaction;
• 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 the do not reflect genuine commercial arrangements.

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


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