A common question we get asked by new businesses is why they don’t receive a tax refund from the ATO when their company made a loss. This often occurs in the first 6 – 12 months of trading when business owners invest heavily in their business getting it off the ground and don’t make money in the first year of trading.
The reason a company won’t receive a tax refund is that they haven’t paid any tax so as the name suggests, there is no tax to refund. So, if companies don’t receive a tax refund when they make a loss, the next question is whether the losses in the company are wasted? And the answer is No!
As long as the company has substantially maintained the same ownership and control or carried on the same business since the loss was incurred, then the company can carry forward the loss to future years. This means that the loss stays in the company and can offset future profits of the company.
Let’s look at two examples
(1) Company A makes a tax loss of $10,000 in FY13. In FY14 they make a tax profit for the year of $12,000. How does this get recorded in FY14?
The taxable income recorded on the FY14 tax return is $2,000, being $12,000 of taxable profit in FY14 less the $10,000 loss applied from FY13.
(2) Company B makes a tax loss of $10,000 in FY13. In FY14, they make a tax loss of $5,000. How does this get recorded in FY14?
This is recorded as a carried forward loss to future years in the FY14 tax return of $15,000; being the $10,000 loss from FY13 added to the $5,000 loss from FY14.
This Tax Tips Tuesday is brought to you with love by Nudge Accounting. You can read other Tax Tips here.