A staggering $1.1billion in claimed losses have been disallowed as a direct result of ATO audit activity during the last financial year. With detailed disclosure schedules of company losses on both revenue and capital account , incurred both within Australia or as Foreign Losses, the 2010 Company Tax Return shall also be under close audit review for small to medium enterprises (SME).
To claim company losses carried forward against current income, there must be a clear record of these losses and correct application of these losses to exempt income. There also need to be an absence of Excess Franking credits form private dividends (as these are not refundable ). There must not be a change in character of Capital losses as Revenue losses. For example, with the GFC and realised stock market losses many taxpayers may be tempted to change their classifications from Share Investors to Share Traders. Therefore, instead of having capital losses, revenue losses result and are claimed against revenue for 2010. The ATO is aware of this practice and will focus audit resources to this area.
Passing the Continuity of Ownership Test (COT)
Broadly speaking, the COT requires that the shares carrying more than 50% of the voting power, dividends and capital rights be beneficially owned by the same person at all times during the ownership test period.s165-12 & s165-96. This is usually easily quantified unless the company shares are owned by a discretionary trust.
Where 50% or more of a company’s shares are held by a discretionary trust it is not possible to trace the ownership of the shares as individual beneficiaries do not have an interest in the shares.
The problem may be resolved via a FTE and should this apply then by contacting the office we shall review your position. A similar issue arises with different classes of company shares with different rights and entitlements.
Passing the Same Business Test (SBT)
Failing the COT test directs one to the SBT in the alternative to claim prior year tax losses.
Basically, to pass the same business test the business at the time of the losses incurred to the time of claiming, the activities must be identical. No single factor per se will determine whether a taxpayer passes the SBT. Mere intention, dormancy and winding down of the business however usually, according to documented cases, results in failing the SBT. (Ref TR1999/9 & Lilyvale Hotel Pty Ltd v FTC 2009 on appeal to FFC.)
Small to medium business claiming prior year losses are well served by have detailed documentation and records , including access to old computerised general ledger records which can be read and printed if directed to do so. With changing technology and IT platforms ie Windows, don’t be caught out in claiming losses which you are entitled to.