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Offsetting trading losses

Dec 09, 2011

I have recently given up working so Trading is my only form of income. Is it possible to offset trading losses over the past 8 years to any future profits before paying tax? Also would it be advisable to set up a Hybrid Trust to distribute funds to beneficiaries? 

Assuming that they haven’t been used previously, your prior year trading losses could be offset against your current year’s trading profit. However, sometimes it is possible that you can offset your losses against other assessable income in the year that they were incurred.  For individuals and partnerships that incur a net loss from a business activity the non-commercial loss rules apply. These rules determine whether you can use your business loss to offset income from other sources such as salary and wages, interest and dividends.

Each year that a business makes a net loss, the owner must consider whether he or she can claim the loss in the current tax return or whether they must defer the loss until future profits are made.  The non-commercial losses limit the ability of taxpayers to offset business losses against other assessable income unless one or more of the following tests are met:

  • assessable income generated by the business is at least $20,000 (assessable income test);
  • the business shows a profit for at least three out of the last five years (profits test).

For those that are working, the ATO will only let you offset a current year business loss against current year assessable income from other sources if you satisfy one of the non-commercial losses tests and you earn less than $250,000 (including adding back any negative gearing losses as well as any reportable super contributions and fringe benefits).

In relation to your question about “hybrid” trusts, I must say that the use of trusts is an excellent way of minimising overall income tax liability.  They can also help with managing assets and liabilities as well as offering flexibility for estate planning purposes.  Generally trusts are not directly taxed.  Instead it is the beneficiaries of the trust that are subject to income tax on their share of the trust's net income. Beneficiaries also have the ability to obtain the full benefit of any franking credits.

However I have found too many people get caught up with wanting to have a “hybrid” trusts because they sound sexy and exotic.  Remember that if you are a Senior Australian (aged over 65), your effective tax free threshold is $30,685 if you are single or $26,680 each for couples.  So a fancy structure may not be worthwhile if you are only distributing to yourself each year or if you don’t have any other beneficiaries to distribute to because their taxable income is too high (or if you in fact make losses). 

Trusts also cost a bit to set-up (a few thousand dollars if you have a corporate trustee) and you also need to have a tax return and accounts prepared each year which will also cost.  So any tax savings made can be diminished pretty quickly thanks to legal and accounting costs.

This article first appeared in the Nov/Dec 2011 issue of YTE Magazine www.YTEmagazine.com. Copyright Your Media
Edge Pty Ltd 2011.

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