Many strata buildings are sitting on small tax losses without realising they could be turned into tax-free income. In this article, we explain how such losses work — and how they can be used by strata buildings to earn tax free investment income.
Understanding How Tax Losses Work
When an Australian company (strata or otherwise) makes a tax loss—meaning its deductible expenses are greater than its assessable income—the ATO allows that loss to be carried forward into future years. This ensures the loss isn’t simply lost; the value of that tax loss is preserved and can be used as a deduction against income earned in later years, reducing the amount of tax payable once the company becomes profitable again. In effect, you still get the benefit of the loss—it’s just delayed until income is earned to apply it against.
For strata properties, this rule still applies, but the practicalities can be a little nuanced due to the nature of how often and when returns are lodged.
No Tax Return? What Happens to the Loss?
Strata companies don’t always need to lodge a tax return. In years where there is no assessable income—such as interest from investments or income from status certificates—a strata company can simply submit a Return Not Necessary (RNN). But what happens to any carried forward tax loss from a prior year?
The ATO’s guidelines provide some clarity here. If the carried forward loss is under $1,000, the company does not need to lodge a tax return just to keep the loss alive. It can still be used in a future year when assessable income returns. However, if the carried forward loss exceeds $1,000, a tax return must be lodged each year to preserve the loss.
A Practical Example
Let’s say a strata company made a tax loss of $300 in 2023. This might have come from $280 of income from status certificates, with a matching $280 fee paid to the manager, as well as $300 for the 2022 tax return). That $300 loss can be carried forward.
In 2024 and 2025, there’s no assessable income. Rather than lodging a full return, a Return Not Necessary is submitted for each year. Then, in 2026, with higher rates available, the strata company earns $700 in bank interest. Even though no tax returns were lodged in 2024 or 2025, the $300 loss from 2023 can still be applied in the 2025 return... meaning only $120 on $700 of interest income.
The $1,000 Threshold
This $1,000 threshold matters. If the carried forward loss is less than $1,000, you’re not required to lodge annual returns to keep it active. But once the loss exceeds $1,000, you must lodge a tax return every year to preserve it.
To put that in perspective: a $1,000 tax loss is worth $300 in future tax savings (assuming the standard 30% company tax rate). In practical terms, the company could earn $1,000 of investment income in a future year and not pay any tax on it.
Is It Worth Chasing Small Losses?
If a building has no intention of ever opening a term deposit or earning other investment income, there’s limited benefit in paying to lodge tax returns just to keep a small loss on the books. The value of preserving the loss needs to be weighed against the ongoing cost of annual tax return preparation.
However, if losses start building up over time—say, $2,000 or $3,000—it may be worth reassessing, as the potential tax savings increase.
For example, a $10,000 carried forward loss could save $3,000 in tax, which may well justify the cost of preparing tax returns for a few years. In the strata context, this is uncommon but not impossible.
Most strata tax losses come from status certificate activity, where the income is typically offset by a matching expense paid to the strata manager. On top of that, the cost of preparing the previous year's tax return can create a net tax loss for the year. If no assessable income appears in future years, those losses will simply sit there unless action is taken to use them. In some cases, opening a term deposit—even at modest interest rates—could allow the strata company to earn tax-free income by using up those losses.
Check the History – It’s Often Overlooked
One common oversight is not checking the last lodged tax return when preparing the current year’s return. If no returns have been lodged in recent years (but RNNs were submitted), it’s worth asking your accountant to review the historical ATO records at the time you commence the management to see whether a carried forward loss was recorded. This can help identify opportunities early and ensure no value is missed in the first tax return you lodge. At the very least, it's a good discussion point to raise with your new clients if the check does reveal an opportunity.
At Ascend, we routinely check the most recent tax returns for new strata companies you take on. If a loss is sitting there waiting to be used, we’ll let you know so you can advise your clients and make them aware of the opportunity.
Quick Takes:
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Carrying forward losses can be worthwhile where investment income is expected in future years.
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Tax losses under $1,000 can be preserved even if no return is lodged.
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Tax losses over $1,000 require a return to be lodged each year to remain valid.
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Reviewing prior tax returns can uncover unused losses ready to be applied.
If you require assistance in regards carried forward losses or tax return obligations for the buildings you manage, please reach out to our admin team.
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The above content is of a general nature and should not be relied upon as professional advice. Ascend encourages readers to seek advice from suitably qualified professionals in relation to their specific circumstances and not to rely solely on the information provided above. Please contact our office for more information.
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