How Long Can Capital Losses Be Carried Over In Australia?

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Have you just sold an investment property in Australia from abroad as an Aussie expat? We hope you made a profit! But there might be a situation in which you made a loss and are wondering what the implications are for capital gains taxes. Because if you have made a loss, you might be wondering “how long can capital losses be carried over in Australia?”

In our database, we have an article on capital gains tax in Australia, which outlines all the facts you need about capital gains and capital losses from the Australian Taxation Office (ATO). However, this article will go deeper into this specific question of “how long can capital losses be carried over in Australia?”

So, if you have made a capital loss as an expat or resident, you’ll find out the critical facts on this topic in this article!

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What is a Capital Loss in Terms of Property?

In relation to the question of how long capital losses can be carried over in Australia, a quick definition of a capital loss is that it refers to the losses you make when you sell an asset (like a property).

Now, when you sell an asset, in this case a property, you will either make a capital gain or a capital loss, meaning that you will either have to pay tax on the capital gain you have made (i.e. the profit you make), or have the opportunity to offset the capital loss you have made against capital gains in future years.

What is the Time Frame?

According to the ATO, capital losses can be carried forward indefinitely to offset capital gains in future years. However, it’s important to note that capital losses cannot be deducted from regular income, only capital gains.

What Does the Term "Offsetting" Refer to in this Context?

Offsetting plays a fundamental role in the process of carrying over capital losses in Australia–it refers to the process of deducting capital losses made in the current year from capital gains made in future years. For this reason, carrying over capital losses for the purpose of capital gains tax can benefit you as an expat investor.

For example, if you invest in shares in the current year, purchasing them for $5,000 and make a capital loss of $1,000 when you sell them at $4,000, this capital loss can be carried forward to the following year. So, next year, if you sell a property for $300,000 that you purchased as an expat investor for $285,000, you can deduct the capital loss of $1,000 from the capital gains of $15,000. Your net capital gain would be $14,000.

Why is Knowing the Carry Over Period for Capital Losses Important?

Knowing how long capital losses can be carried over in Australia as an expat is important because, since capital losses can be deducted from capital gains in future years, you can potentially pay less capital gains tax in those future years.

In a sense, this allows losses and gains to be offset over time which provides a fairer outcome when selling assets from year to year.

How Long Can Capital Losses Be Carried Over In Australia?

How To Claim Capital Loss In Tax Return in Australia

The process involves:

  • Calculating your capital loss for the current financial year
  • Recording the capital loss on your tax return for that financial year
  • Carrying over the capital loss to future financial years by deducting it from any capital gains
  • Keeping track of your cumulative capital losses to apply in the correct order

You will need to establish your capital losses each financial year and apply them appropriately when you calculate your capital gains in future years. This can all be reported in your tax return which can be lodged electronically with the ATO.

Remember, claiming capital losses correctly can significantly impact your tax bill. If you have any doubts, don’t hesitate to contact our tax advisors at Odin Tax who can help to ensure you maximise your tax benefit.

How to Calculate Capital Losses on Property in Australia

In addition to how long capital losses can be carried over in Australia, knowing the following calculation to work out capital losses is important:

  • Take the original cost base of your property
  • Deduct any capital works deductions. Capital works deductions relate to construction costs for the property.
  • This gives you a reduced cost base.
  • Take the capital proceeds from the sale of the property.
  • Deduct the reduced cost base from the capital proceeds.
  • If the capital proceeds are lower, this gives you a capital loss. If the capital proceeds are higher, you have made a capital gain.

To make this clearer, here’s an example of how to calculate capital losses on property:

  • You purchased an investment property for $285,000 (your cost base)
  • Your capital works deductions were $15,000
  • Therefore, your reduced cost base is $270,000
  • You sold the investment property for $260,000
  • Your capital loss is $10,000

What is the Carry Over Period for Commercial Property?

For commercial property, capital losses can also be carried forward indefinitely. However, there are some additional considerations when it comes to commercial property versus residential:

  • Stricter rules around deducting capital works and depreciation
  • Different CGT discount percentages
  • Potential need to register for GST etc.

So while losses can still be carried over in the long term, make sure to understand the specific tax implications for commercial property investments.

What Happens If I Make a Capital Loss on a Property That Is My Home Residence?

Your main residence is fully exempt from capital gains tax in Australia. Therefore, any capital loss you make on selling your primary place of residence is disregarded for tax purposes and does not need to be carried over.

Some common mistakes to avoid when carrying over capital losses:

  • Attempting to deduct capital losses from regular income – capital losses can only offset capital gains.
  • Forgetting to deduct losses in the correct order – earlier losses must be deducted first.
  • Not keeping records of your capital losses over time.
  • Not notifying your tax agent/accountant about any capital losses.

Tax Implications of Selling Investment Property at a Loss in Australia

When you sell an investment property at a loss in Australia, there are several tax implications to consider:

Positive aspects

  • No Capital Gains Tax (CGT) payable: Since you incurred a loss, there’s no profit for the ATO to tax. You won’t owe any CGT on the sale.
  • Capital Losses carried forward: The loss you make can be “carried forward” indefinitely and used to offset future capital gains from other assets in subsequent tax years. This can help reduce your tax liability in the future.
  • Offsetting against ordinary income (limited): In some cases, you may be able to claim a portion of the loss against your ordinary income, up to a limit of $3,000 per year. However, this depends on various factors like the type of capital loss and your overall income level.

Negative aspects

  • No tax refund for the loss: While you won’t be taxed on the loss, you also won’t receive a tax refund for it. The loss merely offsets future capital gains.
  • Cost base considerations: It’s crucial to accurately calculate your cost base, which includes the original purchase price, acquisition costs, and improvement expenses. Any underestimation might lead to overreporting the loss and potential tax issues in the future.
  • Professional advice recommended: Navigating capital losses and carry-forwards can be complex. Hiring a registered tax agent or financial advisor to ensure you maximise your tax benefit and avoid any errors is highly recommended.

Carrying Over Capital Losses: The Key Facts

The key points to remember when carrying over capital losses are:

  • Capital losses can be offset against capital gains in future years indefinitely
  • Net capital losses up to $6,000 can be deducted against other income
  • Proper calculations, record keeping and tax return reporting is essential
  • There are some differences for commercial versus residential properties
  • Mistakes can be costly – understand the limitations and processes involved

The extra facts you need on property investment can be discovered on odinmortgage.com. Check out our articles and get the facts you need to invest with success.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Frequently Asked Questions

No. It is not possible to deduct capital losses from income. The Australian taxation office specifies that any capital losses can be carried over to the next financial year. So if you sell an investment property and make a capital loss, it’s not possible to deduct it from your income.

One option you have if you want to avoid capital gains tax is to plan your losses and time them well. So if you’re expecting to sell a property and make a significant capital gain, but also expecting to sell some shares for a capital loss, you might shrewdly choose to sell those shares first and then make your sale, so that you can offset the gain with the loss.

Yes. It is possible to deduct the net capital losses from a previous year and yield the ideal financial situation for you. What’s important is that any net capital losses must be deducted chronologically i.e. in the same order you incurred them. A capital loss made in 2000–2001 must first be deducted and then a capital loss made in 2003-2004 can be deducted afterwards.

Tax losses are different from capital losses. On the one hand, tax losses can arise in income. On the other hand, capital losses arise if you dispose of or sell an asset and receive less in comparison to the asset’s tax value.

In Australia, the great news is that you can carry forward your net capital losses indefinitely! There’s no time limit on how long you can use them to offset future capital gains. This means you can accumulate losses from different financial years and apply them whenever you realise capital gains, potentially reducing your tax liability.

You need to lodge an Australian tax return and include:

  • Details of the asset you sold (description, purchase date and cost, sale date and proceeds).
  • The amount of the capital loss.
  • Any capital gains you made in the same income year to offset the loss against.
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