Use of previous years rental losses to offset this years net rental gain

Question

Sir/Madam,

I have had 2 jointly owned investment properties with my wife for over 7 years. We are non residents and have little or no other income in Australia during this period. At the end of 2008-2009 we had net total rental losses of $50,000 and $40,000 respectively. During 2009 – 2010 we had net total rental gains of $20,000 which were split equally between us. The previous years losses were used against this gain and thus we had no tax to pay and the carried forward losses were used resulting in them being reduced to $40,000 ($50,000 – $10,000) and $30,000 ($40,000 – $10,000) respectively.

During 2010 – 2011 we had total net rental gains of $32,000. I expected that as the year before, we could offset the previous years losses against these gains ie, $40,000 – $16,000 and $30,000 – $16,000 resulting again with no tax to be paid and still some previous years losses to be carried forward, ie, $24,000 and $14,000 to be carried forward.

My accountant has completed my tax return and we apparantly have approximately $6,000 of tax each to pay. I asked my accountant why we have ANY tax to pay as we still have quite a lot of rental income carried forward losses that we can use and he said "I typed the numbers in to the form and this is the tax you have to pay". I asked if the rules/tax laws have changed this year and he was unsure.

Last tax year we could use our previous accumulated rental income losses in full however it seems that we can no longer use all our losses this year.

Have the tax rules changed ? Can I no longer use my losses from previous years in their entirity to eliminate paying tax for this year ?

Regards,

Answer



I am going to assume that the losses were from the properties being negatively geared not capital losses. That certainly seems to be what you are saying, I just wanted to make that point clear.

The only changes in the law that should affect you is you will not get the 50% discount on any capital gain you make after May 2012.

It would be great if I could look at the tax return. It may be quite simply that the accountant forgot to click on the L1 box to verify the loss was to be carried over. There may have even been a problem with the rollover when the software was updated for 2012 tax returns. Please have a look in the tax return and see what it says at L1.

There are many reasons that carried forward losses can be lost but they don’t apply to non residents. All I can do is provide you with the following, extracts from the legislation, which confirms you can carry forward the losses. This is done at L1 in the tax returns.

Here is the legislation that allows you to carry forward and deduct losses in later years

Division 36 – Tax losses of earlier income years
Subdivision 36-A – Deductions for tax losses of earlier income years
SECTION 36-15 How to deduct tax losses of entities other than corporate tax entities
36-15(1)
Your *tax loss for a *loss year is deducted in a later income year as follows if you are not a *corporate tax entity at any time during the later income year.
Note:
See section 36-17 for the deduction of a tax loss of an entity that is a corporate tax entity at any time during the later income year.
View history note




If you have no net exempt income
36-15(2)
If your total assessable income for the later income year exceeds your total deductions (other than *tax losses), you deduct the tax loss from that excess.
If you have net exempt income
36-15(3)
If you have *net exempt income for the later income year and your total assessable income (if any) for the later income year exceeds your total deductions (except *tax losses), you deduct the tax loss:

(a) first, from your net exempt income; and

(b) secondly, from the part of your total assessable income that exceeds those deductions.
36-15(4)
However, if you have *net exempt income for the later income year and those deductions exceed your total assessable income, then:

(a) subtract that excess from your net exempt income; and

(b) deduct the tax loss from any net exempt income that remains.
To work out your net exempt income: see section 36-20.
General
36-15(5)
If you have 2 or more *tax losses, you deduct them in the order in which you incurred them.
36-15(6)
A *tax loss can be deducted only to the extent that it has not already been deducted.
36-15(7)
If you cannot deduct all or part of your *tax loss in an income year, you can carry forward to the next income year the undeducted amount. You then apply this Subdivision to work out if you can deduct the tax loss in that income year.
Note:
Your tax losses under this Division may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E.




As shown above you are required to reduce your carried forward losses by exempt income but as you can see from the following it only includes exempt income in Australia so none of your overseas income would count.


36-20(2) View history reference ITAA 36

If you are a foreign resident, your net exempt income is the amount (if any) by which the total of:

(a) your *exempt income *derived from sources in Australia; and View history reference


(b) your exempt income to which section 26AG (Certain film proceeds included in assessable income) of the Income Tax Assessment Act 1936 applies; View history reference

exceeds the total of:

(c) the losses and outgoings (except capital losses and outgoings) you incurred in deriving exempt income covered by paragraph (a) or (b); and

(d) any taxes payable outside Australia on income covered by paragraph (b).
View history note





Just as a mop up here is a link to the special rules about carrying forward losses. The only one that applies to individuals is the bankruptcy. If this doesn’t work it is section 36-25 of the 1997 ITAA http://law.ato.gov.au/atolaw/view.htm?dbwidetocone=08%3APLR%3ATaxation%3AINCOME%20TAX%20ASSESSMENT%20ACT%201997%3ACHAPTER%202%20-%20LIABILITY%20RULES%20OF%20GENERAL%20APPLICATION%3APART%202-5%20-%20RULES%20ABOUT%20DEDUCTIBILITY%20OF%20PARTICULAR%20KINDS%20OF%20AMOUNTS%3ADivision%2036%20-%20Tax%20losses%20of%20earlier%20income%20years%3ASubdivision%2036-A%20-%20Deductions%20for%20tax%20losses%20of%20earlier%20income%20years%3A%23000367%23SECTION%2036-25%20Special%20rules%20about%20tax%20losses%3B

Hopefully armed with this you can ask your accountant to explain why you have not benefited from your carried forward losses. If he or she is just relying on the computer program then you had better ask to speak to their supervisor.

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