In the Australian corporate tax landscape, tax losses can be a valuable asset. When your company’s deductible expenses exceed its income, you may be able to carry forward those losses to offset future profits—reducing your tax bill for years to come.
But there’s a catch. The “Losses Forgone Rule” can make these benefits disappear overnight—especially during events like ownership changes, mergers, or liquidation. This rule was designed to prevent loss trafficking (where profitable companies acquire loss-making businesses purely for tax benefits), but it can also affect legitimate business owners.
Understanding how the rule works—and the tests your company must pass—can mean the difference between keeping or losing your tax offsets.
Understanding Tax Losses in Australia
Australian companies can incur two main types of losses:
1. Revenue Losses
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Caused by day-to-day business expenses exceeding income (e.g., wages, rent, utilities).
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Can be used to offset any future assessable income.
2. Capital Losses
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Occur when you sell a capital asset (such as property or shares) for less than its purchase price.
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Can only be used to offset capital gains (they are “ring-fenced”).
The “Losses Forgone Rule” and Its Two Tests
To use a tax loss in future years, a company must pass at least one of these tests:
1. Continuity of Ownership Test (COT)
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The same individuals must hold more than 50% of voting power, dividend rights, and capital rights from the time the loss was incurred until the time it is claimed.
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Even gradual changes in ownership can cause failure.
2. Business Continuity Test (BCT)
If COT is failed, your company may still claim the loss by proving it is carrying on the same or similar business.
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For losses before 1 July 2015: The stricter “Same Business Test” applies.
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For losses on or after 1 July 2015: The “Similar Business Test” allows for some business evolution, considering factors like asset use, products, and customer base.
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Temporary downsizing or suspension due to economic challenges may not automatically cause failure, provided there’s an intention to resume.
What Happens to Tax Losses During Liquidation?
When a company enters liquidation:
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It remains a legal entity until dissolution.
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Active trading often stops, making it difficult to pass the Business Continuity Test.
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As a result, accumulated tax losses are often lost.
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The liquidator must lodge final tax returns and manage all tax matters, including liabilities from asset sales.
Practical Tips to Avoid Losing Tax Losses
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Keep detailed records to prove ownership and business activity continuity.
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Seek tax advice early, especially before significant events like mergers, acquisitions, or liquidation.
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Review ownership structures regularly to avoid accidental breaches of COT.
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Document operational changes to support BCT compliance.
The Losses Forgone Rule exists to ensure fairness in the tax system, but it can also strip away genuine business tax benefits if you’re unprepared. With proper planning, record-keeping, and professional guidance, you can safeguard these valuable offsets and avoid unpleasant surprises.
If you’re facing a major business change—or simply want to ensure your company’s tax losses remain safe—speak to a qualified tax adviser today. Our expert team can help you navigate Australia’s complex tax rules and protect your business’s financial future.
📞 Contact us now to book a consultation and keep your tax benefits intact.
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Credits
Soundera Pandian Selvaraj
One Business Services Team