Tax Tip 121: Capital Losses and Income losses

Discussion in 'Accounting & Tax' started by Terry_w, 14th May, 2016.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    9th Jun, 2006
    Australia wide
    Capital Losses and Income losses

    A capital loss is different to an income loss.

    Capital losses may result from buying capital assets and selling them without a profit being made.

    This can still occur when you sell for more than you buy. Buy a house for $500,000 and selling it later for $510,000 may result in a capital loss once stamp duty and sales fees are taken into account.

    Income losses may result from having more expense deductions than income.

    An employee with a large portfolio of negatively geared property may end up with a negative income.

    The main thing to be aware of is that capital losses can only be offset by capital gains. A capital loss cannot be used to reduce your income.

    Example 1

    Dymphna buys a property in a mining town for $1,200,000 and later sells it for $800,000. This results in a capital loss of $450,000 once costs are taken into account.

    Dymphna also earns $100,000 per year from work.

    If Dymphna has no capital gains, the loss will be carried forward to the next year and her taxable income will still be $100,000 from work. She won’t save any tax in this situation as the loss cannot reduce her taxable income.

    Example 2

    Bob is a share investor. He is new at this and has lost $100,000 in ‘trading’ shares. Bob also earns $120,000 per year as a brain surgeon.

    If Bob is an investor, that $100,000 loss will be a capital loss and cannot be used to offset his income. But if Bob is a share trader than that $100,000 will be an income loss which would be used to offset this other income like this:

    $120,000 plus -$100,000 = $20,000

    Bob would pay no tax on his income for this year if that were the case.

    (the circumstances of the trading will determine whether Bob is a trader or an investor).
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    18th Jun, 2015
    Bob needs to ensure his loss is not affceted by non commercial loss rules which would defer his loss.