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: [2015] AATA 58, RW Dunne (Senior Member), 3 February 2015, Adelaide.

[IT 2/4/15] [LTN 66, 9/4/15]