How to Make the Most of Your Tax and Capital Losses in 2025

We’ve all heard the saying: “Don’t waste a good crisis.” When it comes to tax and capital losses, the same logic applies. A poorly timed or misunderstood loss can feel like money down the drain—but managed wisely, it can become a valuable asset for future tax savings.

At Wealth Factory, we help our clients use smart strategies to turn past investment losses or business setbacks into future opportunities. In this article, we break down how tax and capital losses work, what you can and can’t claim, and how to make them work harder for your financial goals in 2025 and beyond.

What Is a Tax Loss (and Why Should You Care)?

A tax loss occurs when your total allowable deductions exceed your assessable income in a given financial year. These losses might come from negatively geared properties, share portfolios, or small business operations.

Tax losses don’t expire—you can carry them forward to offset future income and reduce tax. But not all losses are equal, and you can’t just assume they’ll be available when needed. The ATO has strict rules around when and how you can use them, depending on your structure (individual, company, or trust).

How Tax Losses Work for Individuals

For individuals, a tax loss automatically carries forward and is applied against your income in the next profitable year. However, donations and personal super contributions can’t increase a tax loss, so timing matters.

Example:

Ben has a $10,000 tax loss in 2023. In 2024, he earns $25,000. That tax loss reduces his taxable income to $15,000—below the tax-free threshold—so no tax is saved.

Meanwhile, his sister Sarah also had a $10,000 loss but earned $210,000 in 2024. Her tax loss reduces her taxable income to $200,000 and saves her around $4,700 in tax. Same loss, different outcomes.

Non-Commercial Losses and the $250,000 Rule

If you’re a sole trader or partner in a business, your losses might be restricted under the non-commercial loss rules.

To offset these losses against your regular income, your adjusted taxable income must be below $250,000, and you must meet at least one of the following:

1. Business income is $20,000 or more

2. Made a profit in 3 of the last 5 years

3. Property used in business worth over $500,000

4. Other business assets worth over $100,000

If not, your loss gets quarantined and carried forward—only usable against future business income.

Capital Losses: A Different Beast

Capital losses arise when you sell an investment or asset for less than its cost base. These losses can only be used to reduce capital gains, not regular income.

If you don’t have any gains in the current year, you can carry the loss forward indefinitely. When applying capital losses:

1. Offset current year capital gains first

2. Then use prior year capital losses

3. Finally, apply CGT discounts or small business CGT concessions

Strategy tip: Prioritise using capital losses against gains that don’t qualify for CGT discounts to maximise the benefit.

Special Rules for Collectables and Personal Use Assets

• Capital losses on collectables (e.g. art, jewellery) can only offset gains on other collectables

• Personal use assets (boats, furniture, etc.) are excluded from CGT if purchased for under $10,000, and any capital losses are disregarded

These distinctions matter for people selling high-value items or those impacted by deceased estates and asset transfers.

Tax Losses in Companies: COT and BCT Rules

Companies have more flexibility when using past losses but must pass the Continuity of Ownership Test (COT) or the Business Continuity Test (BCT).

• COT requires that more than 50% of the company’s ownership hasn’t changed since the loss was incurred

• BCT requires that the same (or similar) business is being carried on since the loss occurred

Fail either test, and the loss may be disallowed. This is especially relevant for small businesses that restructure or bring in new investors.

Trusts and the Maze of Loss Provisions

Trusts can’t distribute losses to beneficiaries—they stay in the trust and can only offset future profits. To use them, the trust must meet specific tests such as:

• The 50% stake test

• The pattern of distributions test

• The business continuity test

• The income injection test

If you operate through a discretionary, hybrid, or unit trust, it’s crucial to plan carefully before using prior year losses.

Commercial Debt Forgiveness Can Affect Losses

If a lender forgives a debt you owe, the ATO may require you to reduce your tax and capital losses first before recognising any further benefit. This impacts both individuals and businesses, especially when loans are forgiven within family groups or trusts.

Before forgiving a debt (e.g. a parent forgiving a loan to a family trust), make sure you understand the impact on any accumulated losses—otherwise, you could lose them.

Strategic Tips to Maximise the Benefit of Tax Losses

• Time capital gains to match available capital losses

• Track ownership changes in companies and trusts carefully

• Review your business structure annually to ensure tax loss access

• Don’t assume carried forward losses are always available—verify first

• Use tax planning to offset high-income years with prior losses for greater impact

Final Thoughts: Don’t Let Your Losses Go to Waste

Tax and capital losses are often overlooked, but they can be just as valuable as investment gains—if used strategically. At Wealth Factory, we help clients unlock the true value of their past losses to build a smarter future.

Whether you’re carrying forward an old property loss, dealing with trust tax rules, or restructuring a business, we can help you get clarity and make the most of your financial position.