What were they thinking

Adjusted income calculations - double counting of losses

Some odd outcomes can arise when working through adjusted income calculations for certain tax and other purposes. The problem seems to mainly arise when someone has a net investment loss for the year as well as an overall tax loss for the year.


For example, for some purposes a taxpayer will need to calculate their 'income for surcharge purposes' (eg, to determine whether Division 293 applies, applying the private health insurance rebate rules and Medicare levy surcharge). A similar issue can arise in other areas such as when applying the $250,000 adjusted income test under the non-commercial loss rules.


These calculations generally require you to start with the taxpayer's taxable income for the year. If the taxpayer actually has an overall tax loss for the year then their taxable income is taken to be nil (section 4-15 ITAA 1997). It will often then be necessary to add other items such as reportable fringe benefits, reportable super contributions and net investment losses. This process can basically lead to investment losses being added back twice.


For example, assume someone has investment income of $100,000 and investment related deductions of $150,000. They have a tax loss of $50,000 for the year. However, when calculating income for surcharge purposes this ends up being a positive amount of $50,000. This is because their taxable income is taken to be nil (ie, the tax loss is basically ignored) and we then need to add back the investment loss. The result of the formula / process does not seem to truly reflect their financial position for the year.


It is not clear whether this is an intended outcome.


Idea No. 73