Pre 2000/2001 carried forward business losses and Division 35

Can business losses incurred prior to the 2000/2001 income year be carried forward and written off against any other income in and after the 2000/2001 income year, even if none of the 4 tests from the new Division 35 legislation are satisfied?

Yes, business losses incurred prior to the 2000/2001 income year can be carried forward and written off against any other income in and after the 2000/2001 income year, even if none of the 4 tests from the new Division 35 legislation are satisfied.

An individual taxpayer had losses from the 1999/2000 and prior income years. In the 2000/2001 income year the taxpayer has net income from other sources and wants to offset the prior year losses against that income.

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) - Deferral of losses from non commercial business activities - will not affect the ability to carry forward pre 2000/2001 income year losses.

In terms of Division 35 of the ITAA 1997 the question is whether you have a deduction which, for the purposes of subsection 35-10(2) of the ITAA 1997, is "... attributable to the business activity for that income [i.e., 2001] year ... ."

If the answer is, no, then your deduction is attributable to carrying on the business prior to that year and will not be subject to Division 35 of the ITAA 1997. This is because the scheme of the Income Tax Assessment Acts is built around a system of annual tax accounting.

This was highlighted in the decision of the High Court in Ravenshoe Tin Dredging Ltd v. FCT (1966) 116 CLR 810, when Barwick C.J. stated, "... in my respectful opinion, losses resulting from operations in past years cannot be regarded as in any relevant sense "related" to the income of the current year. Once annual accounting to ascertain assessable income is undertaken, apart from special statutory provisions, the financial experience of the year is, as it were, isolated from earlier and from subsequent years: so to speak, it is self-contained."

Therefore, losses incurred prior to the 2000/2001 income year will not be related to any subsequent income years and will be able to be carried forward without having to satisfy the new tests under Division 35 of the ITAA 1997.

Division 35 of the ITAA 1997.- Deferral of losses from non-commercial business activities, applies to losses incurred in the 2000/2001 and later years.