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Hard Times - Tax consequences |
There is little in life - including marriage and death - without tax consequences. |
There are even tax consequences to recessionary times. |
When rising asset prices were the norm, a standard path to wealth was negative gearing, the incurring of tax-deductible expenses in the expectation that they would be more than recouped by concessionally taxed capital gains on property. |
Selling at loss |
If a taxpayer sells an asset at a loss, unless the asset was held on revenue account, that loss can only be offset against same year capital gains (and there might not be any) or carried forward. However, if the asset was held on revenue account, any such loss can be offset against ordinary income. |
As a consequence, there may well be some taxpayers who want to forsake negative gearing and claim that they bought assets - which they have sold at a loss - for trading rather than passive investment purposes. |
This allows them to offset the loss against their ordinary business or employment income. |
Whether they will be successful in doing this is a question of fact - objective proof of intent is needed. |
In fact, some taxpayers will not even have to sell assets to be able to claim a tax deduction where an asset goes down in value. They can do this by the trading stock provisions, valuing assets which have increased in value at cost, while valuing assets which have gone down in value at market. They can use these provisions if they carry on a business of dealing in those assets as trading stock. Again, this will be a question of fact but, for example, if a taxpayer has borrowed to purchase shares and holds more than a few parcels of them, they might be able to show that this is the case. |
Bad debts |
In a recession, bad debts will rise. If a debt has been returned as income but not collected, it can be written off as a bad debt, and a deduction can then be claimed for it, or if it is the uncollected proceeds of the sale of a capital asset, an adjustment can be made for any capital gain previously subjected to tax. |
Loss carry forward |
Taxpayers who incur tax losses will want to be able to offset those against future income. They might even want to allow some more profitable taxpayer to take advantage of those losses. |
However, unless the taxpayer is just an individual, the tax law allowing tax losses to be carried forward can be complicated. |
This is because the law is concerned to prevent loss trafficking arrangements, that is, arrangements whereby the benefit of a loss is transferred from the person who effectively incurred or who will benefit from that loss to one who did not or will not. |
So far as companies are concerned, the general rule is that they must satisfy either a continuity of ownership test or else a same-business test, and the rules become even more complex where a loss company joins a consolidated group. A discretionary trust will not be able to carry forward losses unless a family trust election has been made in respect of that trust, which means that if a distribution of either income or capital is made outside the nominated family the trustee will be subject to a penalty tax. |
Trusts |
A tax problem looms if mortgage trusts and the like freeze or even just restrict redemptions of capital and interest. A beneficiary must include in their assessable income that share of the net income to which they are 'presently entitled' at year-end. If, however, a beneficiary's right to be paid income from a trust is frozen or restricted, the trustee rather than the beneficiary will be assessed on that income, and savvy investors might insist that this is the case. |
