Carrying Over Capital Losses in Australia

Are you aware that you can carry over your capital losses in Australia? If you’ve incurred capital losses in a financial year, it’s essential to understand how you can carry forward the losses and claim deductions.

Here’s what you need to know:

Understanding Capital Losses

Capital losses occur when you dispose of an asset, such as shares, property, or collectibles, for less than its purchase price. You can use capital losses to offset capital gains and reduce your tax liability. If your capital losses exceed your gains, you can carry over the remaining losses to the following financial year.

It’s important to keep accurate records of your capital losses, as they can be used to offset future capital gains. You should also keep track of the date of acquisition and disposal of each asset and any associated costs, such as brokerage fees and legal costs. This will help you calculate your net capital gain or loss accurately.

Limitations on Capital Losses

Capital losses can only be used to offset capital gains and not other types of income, such as salary or wages. Additionally, you cannot claim deductions for capital losses in the same financial year you incurred them. However, you can carry over the losses indefinitely and use them to offset future capital gains. It’s essential to be aware of capital loss limitations to avoid compliance issues with the Australian Taxation Office (ATO).

Claiming Capital Losses

To claim capital losses, you must complete the Capital gains tax (CGT) schedule when lodging your tax return. The CGT schedule requires you to disclose any capital gains or losses you’ve made in the financial year. You can use the losses to reduce your capital gains and the resulting tax payable.

You must ensure that you’re eligible to claim capital losses by meeting the ATO’s requirements. For example, you must be an Australian resident for tax purposes. You must have incurred the loss from a CGT event. Seeking advice from a tax professional can help you ensure that you’re meeting the eligibility criteria.

Applying Capital Losses

Suppose you’ve incurred $5,000 in capital losses in the 2021-22 financial year and have no capital gains to offset them. In this case, you can carry over the losses to future years and apply them against any capital gains made in those years. This can result in significant tax savings over time.

Applying your capital losses in the most effective way to maximise your tax savings is important. For example, you may want to apply your losses to assets with the highest capital gains to reduce your overall tax liability. Seeking advice from a tax professional can help you develop a tax strategy that meets your financial goals.

How long can a capital loss be carried over for?

Capital losses can be carried over indefinitely in Australia, which means you can use them to offset future capital gains. For example, if you incurred $10,000 in capital losses in the 2020-21 financial year and had no capital gains to offset them, you can carry over the losses to the 2021-22 financial year and apply them against any capital gains made in that year. If you still have remaining capital losses, you can carry them forward to subsequent years until you exhaust them or no longer have capital gains to offset.

It’s important to note that in the event of your death, any unused capital losses cannot be transferred to your beneficiaries. Instead, the losses are extinguished, and your beneficiaries start with a new cost base for the asset. Therefore, it’s essential to ensure you maximise your capital loss deductions while you’re alive and can benefit from them.

What Happens if I Make a Capital Loss on a Property that is my Home Residence?

If you make a capital loss on your home residence, you can’t claim a tax deduction. This is because your home is considered a personal use asset, and any loss made on it is not a tax-deductible capital loss. However, if you sell your home at a profit, you may be liable for capital gains tax (CGT) on the gain, depending on certain circumstances.

In Australia, if you sell your home, it’s generally exempt from CGT if you meet the eligibility criteria, such as:

The property was your principal residence for the entire period you owned it.
You didn’t use the property to produce income.
The property is situated on land less than two hectares in size.

If you meet these criteria, you won’t be liable for CGT on any capital gains made from the sale of your home. However, suppose you’ve used your home for income-producing purposes, such as running a business or renting out a portion of the property. In that case, you may need to apportion the capital gain and pay CGT on the income-producing portion.

It’s essential to keep accurate records of your home’s purchase price and any improvements made to the property, as this will help you calculate your CGT liability if you sell your home for a profit.

Seeking Professional Assistance

Understanding and applying capital losses can be complex, and seeking professional assistance can ensure you meet your tax obligations. The Odin Tax Team can help you navigate the complex tax rules surrounding capital losses and provide tailored advice to suit your specific needs. They can help you develop a tax strategy that aligns with your financial goals and maximises your tax savings.

Contact them today to schedule a consultation and start optimising your tax outcomes.

Frequently Asked Questions

Is it possible to deduct capital losses from my income?

No, you can’t deduct capital losses from your income in Australia. Capital losses can only be offset against capital gains to reduce your tax liability.

How can I use capital losses to avoid paying capital gains tax in Australia?

One effective strategy is to plan and time your losses strategically. For example, if you’re anticipating a significant capital gain from selling a property and also expecting to sell some shares at a capital loss, you can sell the shares first to offset the gain with the loss. This way, you can reduce your capital gains tax liability and maximise your tax savings.

Are my capital losses accumulated year after year?

Yes, you can accumulate your capital losses year after year and use them to offset future capital gains. There is no time limit for carrying forward capital losses, and you can apply them until they are fully utilised.

How is tax loss different from a capital loss in Australia?

In Australia, a tax loss occurs when your deductions exceed your income, while a capital loss occurs when you dispose of an asset for less than its purchase price. Tax losses can be carried forward to future years and offset against future income.