In a case involving the calculation of losses carried forward under Subdiv 36-A of ITAA 1997, the AAT has confirmed that a net exempt loss of a year of income cannot be carried forward to a future year but rather is lost.
Under s 36-10 of ITAA 1997, a tax loss arises in any income year in which a taxpayer’s allowable deductions exceed the taxpayer’s assessable income (ignoring tax losses of earlier income years), provided that excess also exceeds any net exempt income for the income year. This can be expressed as the following formula:
Tax loss = [Allowable deductions − Assessable income] − Net exempt income
The taxpayer argued that a net exempt loss of the SMSF (ie where losses and outgoings incurred in deriving exempt income exceed total exempt income) should be allowed to be carried forward to offset the net exempt income of a future year. This was contrary to the Commissioner’s long-standing position.
The AAT held that a taxpayer cannot carry forward the excess of losses and outgoings relating to the taxpayer’s exempt income as a carried forward loss to be offset against the taxpayer’s exempt income in a future year. It said that there are no provisions of the tax law that provide that where losses and outgoings in relation to exempt income exceed exempt income the excess can be applied to reduce net exempt income in a future year. While there are specific provisions relating to earlier year tax losses related to assessable income (eg s 36-10 and 36-15 of ITAA 1997) there is no corresponding provision in relation to exempt income.
AAT ref:  AATA 58, RW Dunne (Senior Member), 3 February 2015, Adelaide.
[IT 2/4/15] [LTN 66, 9/4/15]
Tax losses are an excess of current year deductions over assessable income and can be carried forward to reduce what would otherwise be the taxpayer’s taxable income, after first being reduced by ‘net exempt income’ (see relevant sections below). There is some conceptual merit in the taxpayer’s position, in that ‘deductions’ are not allowable to the extent that the loss or outgoing was incurred to derive exempt income (of which there can be a lot in a superannuation fund). If this is not to act in a penal way, ‘net exempt income losses’ should be able to be carried forward to reduce future ‘net exempt income’ amounts. But, as the AAT noted, there are no express provisions to facilitate this.
Extract from ITAA 1997
36-10 – How to deduct tax losses of entities other than corporate tax entities
(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 1: 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.
Note 2: A tax loss can be deducted only to the extent that it has not already been utilised: see subsection 960-20(1).
If you have no net exempt income
(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
(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.
(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.
(5) If you have 2 or more * tax losses, you deduct them in the order in which you incurred them.
36-20 – Net exempt income
(1) If you are an Australian resident, your net exempt income is the amount by which your total * exempt income from all sources exceeds the total of:
(a) the losses and outgoings (except capital losses and outgoings) you incurred in deriving that exempt income; and
(b) any taxes payable outside Australia on that exempt income.