INCOME TAX LOSSES – CARE REQUIRED.
If a taxpayer’s annual allowable deductions are greater than their annual gross income in any income year, then the taxpayer has incurred a “net tax loss”, even though the taxpayer may actually be ahead in cash terms for the year.
Given that a tax loss has been incurred, this loss is now valuable, as it can be used in a number of ways. However, without appropriate planning these losses can be forfeited or trapped where they cannot be accessed.
How are tax losses used?.
- Carried forward by a person, company or trust and offset against future profits
- Flow through to partners (Limited Partnership) or shareholders (LAQC)
- Transferred between group companies
There is no time limit regarding the length of time in which losses can be carried forward. Losses incurred in consecutive years are added together and the total balance is carried forward.
What are the pitfalls?
- Shareholding changes resulting from restructuring of a distressed business (introduction of new shareholders or transfer of shares to another entity) may breach shareholder continuity resulting in forfeiture of losses.
- Changes to trusts that are shareholders in a company may result in forfeiture of losses.
- Losses will be forfeited by a company when entering the QC/LAQC regime.
- Losses can be forfeited by events that cause loss of LAQC status.
- Limitations on the allocation of losses to partners of a limited partnership.
- Commonality of ownership within a company group at the time the losses are incurred.
- The use of company losses within a group that is not wholly owned can give rise to issues for minority shareholders.
- Issues may arise as regards to matching of retained earnings and imputation credits.
- Continuity and commonality issues with amalgamation and consolidation of companies.
- Restricted use of losses within a trust
- Losses are forfeited on a persons’ death or on a company liquidation.
Tax losses are a valuable asset and should be carefully managed. It is critical that you discuss any changes to the structure of your business before they occur as continuity of ownership is of vital importance, and the pitfalls need to be addressed to ensure effective use of your tax loses.
If you consider that any of the issues contained in this Fraser Flyer regarding losses may affect you please contact us.
2010 BUDGET.
We are currently reviewing in-depth the changes to the taxation legislation resulting from the 2010 budget announced on 20 May. We see the changes as largely positive.
We will report on those areas that directly affect our clients, and will be contacting clients where we see that immediate action is required. In particular, clients with companies, trusts, LAQC’s, and property.
At this point we would like to highlight that the Governments proposed changes in relation to companies in the LAQC regime have not been finalised and passed into law. They are currently going through the select committee submission process, and may not be enacted until early next year..
BUSINESS TIP
The business person who makes no mistakes usually doesn’t make anything.
Important: This is not advice. Readers should not act solely on the basis of the material contained in this report. Items herein are general comments only and do not constitute or convey advice perse. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.
