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Loss Companies or Trusts

This strategy involves directing business or investment income across to a taxpayer’s loss-company or trust.

Loss companies and trusts are entities that have either unapplied revenue tax losses or capital losses. These losses may have been incurred as the result of previously operating a business at a loss or having investment losses on shares or property.

The losses in the company or trust are valuable if income can be diverted to the loss-company or trust. This will involve either:

  • Establishing a new business to operate through the company or trust, or selling a current business across to the company or trust.
  • Selling investments (shares or property) across to the loss-company or trust, or buying new investments in the loss company or trust name.

Where business or investment assets are sold across to the loss company or trust the stamp duty costs involved will need to be considered as stamp duty can be as high as 5% of the assets values. In addition, potential tax liabilities may be incurred in selling assets across to the loss entities as the assets must be sold across at their market values, not original cost.

In addition, loss companies must pass the same business test or the continuity of ownership provisions to ensure the losses aren’t lost and can be utilised. The same business test requires that the company is operating the same type of business in the year the losses were incurred and the year the losses are to be utilised. The ownership provision requirements are complex but basically require that the shareholders in the company when the losses were incurred are the same shareholders when these losses are utilised.