Income Tax Losses Case I & II

Case I & II Losses

This article deals with the provisions affording income tax relief for losses sustained in a trade or profession under:

• Section 381 TCA 1997: current year loss relief for losses sustained in a trade or profession or employment - available against all profits/gains
• Section 382TCA 1997: any loss not utilised under Section 381 can be carried forward against future profits/gains of the same trade or profession

General Rules

• Relief is not given more than once for the same loss whichever form of loss relief claim is made. This prevention of double relief rule is relevant due to the special rules that apply for the basis of assessment arising from the changeover to the calendar tax year, as part of the basis period in which the loss is incurred may be included in the basis period for a later tax year.
• It is the responsibility of the taxpayer to claim whichever form of available loss relief he/she requires, but in practice the inspector may grant carry forward relief even if no specific claim is made. Any other relief must be specifically claimed.

Current Year Loss - Section 381 Claim

Strictly it is the adjusted loss as actually sustained in the year of assessment and not the loss of the basis period that is the subject of a Section 381 claim.

Revenue accepts that in the case of a continuing business the loss for the basis period for the year of assessment may be taken as the loss of the year of assessment. This does not apply in respect of a tax loss in the opening years of a new business or in the case of a business, which has been permanently discontinued.

Particular difficulties may arise in relation to losses of the years of assessments 2000/2001, 2001 and 2002, in view of the change to the calendar year basis.

For the short tax year 2001 Revenue will accept a claim for loss relief under Section 381 based on 74% of the losses of a basis period ending in that tax year. However, where the basis period for 2001 ends in the period 1 January 2002 to 5 April 2002, a claim under Section 381 for 2001 will be based on the actual losses of the tax year 2001. These will be arrived at by apportionment of the losses of that basis period.

Computation of Section 381 loss:

• The amount of the loss available for set off against other income is the tax loss for the tax year or its basis period computed under the rules of Schedule D Case I or II in the same manner as any taxable profits would be computed: Section 381(4)
• The loss is taken before giving effect to any capital allowance or balancing charges
• The taxpayer has the option of claiming under Section 392 TCA 1997 to have the loss increased by the appropriate capital allowances less any balancing charges for the year of loss.

Who can claim the loss?

Any person sustaining a loss in a year of assessment in the carrying on, either solely or in partnership, of any trade, profession (including vocation) or employment is entitled to relief in respect of a loss in that activity.

Availability of loss relief

• The availability of loss relief is restricted or ring-fenced in the case of certain trades and activities. This may involve allowing the loss to be offset against income arising to the person from the same trade or activity.
• The restriction can also apply where the losses are created or increased by the use of capital allowances, e.g. Section 403 TCA 1997 restricts the use of capital allowances for certain leased assets.
• Loss relief is not available in respect of a loss sustained by the owner or by the part owner of a stallion from the sale of services of mares by the stallion or from the sale of rights to such services: Section 381(2) TCA 1997.
• Special provisions also apply on the way losses may be used where they arise in a trade of farming or market gardening (Sections 661 and 662 TCA 1997).
• If a trade or profession is permanently discontinued any tax loss and/or unused capital allowances may be carried back for set off against unrelieved taxable profits of the trade assessable in any of the three tax years prior to that in which the trade is permanently discontinued: Section 385 TCA 1997.
  • Loss relief is not available in respect of a loss sustained in an activity that has been completely disregarded for the purposes of the Income Tax Acts e.g. losses arising from the occupation of woodlands managed on a commercial basis and with a view to a realisation of profits: Section 232 TCA 1997.

How is this Section 381 Loss Relief Granted?

• The taxpayer must make a claim for the relief
• Relief for any such loss is granted to a taxpayer by deducting the amount of the loss from the taxpayer’s income from all sources for the year in question i.e. the deduction is to be made in arriving at total income
• Where this recalculation reveals an overpayment of income tax, the overpayment is repaid.

Order of relief against taxpayer’s income

Section 381 Loss Relief is granted in the following order:

• Against the income of the individual which is of the same class as the type of income, which could have arisen from the business in which the loss is sustained, had a profit rather than a loss been made
• Against the other income of the individual
• Against income of the individual’s spouse, which is of the corresponding class
• Against other income of the spouse.

Normally, income of the corresponding class will be earned income and, accordingly, the loss will be set off in the order of (i) own earned income, (ii) own unearned income, (iii) spouse’s earned income, and (iv) spouse’s unearned income. Unearned income can be income of a corresponding class where the loss arises in a business where, for instance, the claimant is a sleeping partner. In such a case the order of set-off is (i) own unearned income, (ii) own earned income, (iii) spouse’s unearned income, and (iv) spouse’s earned income. For this purpose the income of the spouses must be assessed on the aggregation basis.

Section 382 TCA 1997

Where an individual in any trade or profession sustains a loss in respect of which relief has not been given under Section 381, relief may be carried forward and set against future profits of that trade or profession. Relief will be given as far as possible for the first subsequent year of assessment and in so far as it cannot be so given, for the next year of assessment and so on.

Terminal Loss Relief (Section 385 TCA 1997)

Terminal Loss Relief may be claimed in respect of a loss incurred in the last 12 months of a trade or profession. The amount of the terminal loss may be deducted from or set off against the amount of profit or gains on which the individual was charged to income tax in respect of the trade or profession, for the 3 years of assessment, prior to the year of assessment in which the discontinuance occurs.