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Carry-forward of Losses

8.164. Currently the Act restricts the allowance of losses to those incurred by a taxpayer in the seven years following the year of income (section 80(2)). There is one exception to this general rule in that primary producers may carry losses forward indefinitely (sections 80AA to 80 AC).

8.165. As a result of representations made to it, the Spooner Committee considered the question of the removal of the seven-year limit and made a qualified recommendation in favour of the indefinite carry-forward of losses. The qualifications were, firstly, that a deduction would not be allowed for a loss incurred in a year of income prior to the year of income ended 30 June 1944; and secondly, that a taxpayer claiming a loss incurred more than seven years before the year of income should be required to establish the amount of any loss and also establish that it had not been allowed as a deduction from assessable income in any intervening year or been offset by exempt income. The point was also considered by the Ligertwood Committee, which dismissed the issue with the brief comment: ‘No evidence was presented to us that the seven year period is generally inequitable or inadequate, and in the absence of cogent reasons to the contrary, we consider the period of seven years now provided should be retained.’

8.166. Overseas practice varies considerably. In the United Kingdom, South Africa and New Zealand losses may be carried forward without restriction; Norway permits ten-year carry-forward, the Netherlands and Sweden six-year; Canada, France, West Germany and the United States allow a five-year period. According to the Carter Commission, the existing five-year period applying in Canada was insufficient for new businesses that required long periods to develop and a liberal carry-forward of losses was essential to overcome limitations of the annual period of measurement. It therefore recommended that losses be allowed to be carried forward indefinitely.

8.167. Numerous submissions have been received by this Committee requesting either that there should be an indefinite carry-forward period or alternatively the existing period should be extended to ten years or more. One reason given was that in the chemical, mining and other capital-intensive industries losses incurred during establishment years and in times of continuous expansion frequently cannot be recouped within the present limited period of seven years. Another reason was that the trend to larger manufacturing operations, combined with the development of new products and processes, are having the effect of extending the period of initial losses. Closely related is the claim by general insurance companies that in providing the greatly increased total covers required in a growth economy and in an economy experiencing heavy inflation, insurance companies stand to incur substantial losses which require periods in excess of seven years to recoup.

8.168. The Committee recommends that the Act be amended to permit all taxpayers to carry losses forward indefinitely. In implementing this change, it should be provided that losses qualifying for allowance on the indefinite basis be limited to losses incurred subsequent to a date seven years prior to the first year of application.

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