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The Administrative Appeals Tribunal, sitting as the Small Taxation Claims Tribunal, has held that a taxpayer cannot carry forward the excess of losses and outgoings relating to the taxpayer’s exempt income as a carried forward loss to be offset against the taxpayer’s exempt income in a future year.

The taxpayer in this case, the trustee of a self-managed superannuation fund, claimed deductions for exempt current pension income. The Commissioner audited the fund’s returns in respect of claims for tax losses, and as a result some items in the fund’s returns were identified as incorrect and amended assessments were issued. The amended assessments apportioned the expenses claimed by the fund between the assessable and exempt income in each of the relevant years. Net exempt income of the fund and the tax losses originally calculated and carried forward to the 2010 and 2011 income years were adjusted.

The Tribunal noted that, under s 36-10 of the Income Tax Assessment Act 1997, a tax loss arises in any income year in which the taxpayer’s allowable deductions exceed the taxpayer’s assessable income (ignoring tax losses of earlier income years), provided that excess also exceeds any net exempt income for the income year. This can be expressed as the following formula:

Tax loss = [Allowable deductions – Assessable income] – Net exempt income

A carried forward tax loss is deducted in later income years in accordance with the rules in s 36-15.

For an Australian resident, the term “net exempt income” is defined in s 36-20. It is used in determining whether a tax loss exists and the manner in which that tax loss is required to be deducted. For a resident taxpayer (such as a self-managed superannuation fund) net exempt income for a year of income is the amount by which the total exempt income from all sources for that year of income exceeds the total of the losses and outgoings (except capital losses and outgoings) incurred in deriving that exempt income, and any taxes payable outside Australia on that exempt income.

When s 36-20(1) refers to an Australian resident, it applies in calculating net exempt income in all areas of taxation, not only or simply self-managed superannuation funds. Specifically, s 36-20(1) is applied to self-managed superannuation funds in the same way as it is applied to other taxpaying entities, but having regard to provisions of the ITAA 1997 that apply to superannuation funds.

When s 36-20(1) speaks of losses and outgoings incurred in deriving that exempt income, the section allows a deduction for a loss or outgoing to the extent that it is incurred in deriving that exempt income in that year of income.

There are no provisions of the tax law that provide that where losses and outgoings in relation to exempt income exceed exempt income the excess can be applied to reduce net exempt income in a future year. Whilst there are specific provisions relating to earlier year tax losses related to assessable income (for example s 36-10 and 36-15 of the ITAA 1997) there is no corresponding provision in relation to exempt income.

Re Trustee for the Payne Superannuation Fund and FCT [2015] AATA 58 (Senior Member R W Dunne, 3 February 2015).


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