Treatment of Losses

23.71. One of the distinguishing features of capital gains in comparison with other income is that the taxpayer will usually be able to choose the time at which he realises his gains and losses. If half the gains were included as income and half the losses allowed as a deduction from income, there would be a considerable incentive for taxpayers to realise their unprofitable investments, thus obtaining a deduction, and retain their profitable ones, thus deferring the tax on their gains: in short, a taxpayer would realise his losses and ‘hoard’ his gains. Such an approach cannot be countenanced and the Committee recommends that in general capital losses should be taken into account only as an offset to capital gains. However, special provisions should be made for capital losses unrecouped at death, for small capital losses (on administrative grounds) and for the carrying back of capital losses by re-opening past assessments of capital gains, the allowable capital loss being assumed, in line with the treatment of a capital gain, to be half the actual loss. Accordingly, it is recommended that:

  • (a) There should be a limited carry-back of allowable capital losses, the extent of the carry-back to be the same as that recommended by the Committee for income losses.
  • (b) Allowable capital losses should be permitted to be carried forward indefinitely as an offset to future taxable capital gains.
  • (c) A limited allowance of, say, $1,000 of allowable capital loss (i.e. up to $2,000 of actual capital loss) should be permitted to be offset against other income.
  • (d) Special provisions will be needed to counter artificial losses and sale-and-buy-back transactions.

The order of application of allowable capital losses should be:

firstly against taxable capital gains of the same income year;

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secondly against taxable capital gains made during the period allowed for carry-back;

thirdly as to (say) $1,000 of allowable capital loss (i.e. $2,000 actual capital loss) against other income;

any excess to be carried forward with the first (say) $1,000 of the excess allowable capital loss available as an offset to other income in the next year.

Where a taxpayer dies with unrecouped or unrealised capital losses, the allowable capital loss should be applied:

firstly against taxable capital gains made in the income year of death and gains deemed to be realised at death;

secondly against taxable capital gains made during the period allowed for carry-back;

thirdly against any other income (without limit) of the income year of death or the preceding income year.

23.72. The treatment of capital losses proposed in the Budget diverges quite considerably from the recommendations of the Committee. In general the Budget proposals appear to be harsher than the Committee's recommendations in that they allow no general carry-back of capital losses (other than a three year carry-back at death) and there is no provision for offset of any part of a capital loss against other income.