Carry Over Losses

The Commissioner-General of the Ghana Revenue Authority is empowered under paragraph 2 of the Seventh Schedule of the Income Tax Act, 2015 (Act 896) to issue

Commissioner-General. Accordingly, this Practice Note is issued in respect of the treatment of losses from business or investment under Section 17 of the Income Tax Act, 2015 (Act 896)

In this Practice Note the word “Act” means the Income Tax Act, 2015 (Act 896).

Definitions and expressions used in this Practice Note have the same meaning as they have in the Act.

The purpose of this practice note is to clarify the provisions of the Act that deal with carryover of losses in business or investment, including banking, general insurance, petroleum operations and mining operations.

It is also intended to provide direction and guidance to officers of the Ghana Revenue Authority, Tax Practitioners, Consultants, Taxpayers and the general public on the acceptable treatment of and procedures for carrying over losses in order to ensure consistency in the administration of the Act.

Definition – The definitions of a “Loss” and an “Unrelieved Loss” are as stated under section 17(5) of the Act.

A Business may suffer losses whereby its revenues from the sale of goods and services and financial income are insufficient to cover wages and salary costs,

materials, interest on borrowed money, other allowable expenses and appropriate depreciation of capital.

Again, losses for tax purposes may arise when some forms of income are not subject to tax or when costs are written off more generously for tax purposes compared to economic cost.

Losses arising from trade, profession or vocation constitutes business loss, whiles investment loss arises from losses other than from business and employment. Loss from holding of assets is an example of investment loss.

A person is allowed under the provisions of the Act (section 17) to carry forward a loss from business or investment incurred in a year of assessment to a subsequent year of assessment.

In ascertaining income from business or investment for a year of assessment, a person operating in a priority sector is allowed to deduct an unrelieved loss of the person for any of the five (5) previous years of assessment. The priority sectors are as stated under Regulation 19 of the Income Tax Regulations, 2016 (LI. 2244).

A person operating in a sector other than a priority sector is allowed to deduct an unrelieved loss for any of the three (3) previous years of assessment in ascertaining the person’s income from business or from investment for a year of assessment.

(a) ABC Mining Company Limited started operations in 2016. In its first year of operation it declared a loss of GHS500,000.00.

Determine the number of years ABC Mining Company may carry forward its losses.

SOLUTION

ABC Mining Company Limited is in the priority sector and may deduct the unrelieved loss that occurred in 2016 from the income of any of the subsequent five (5) years of assessment (2017, 2018, 2019, 2012 and 2021 years of assessment).

(b) XYZ Company is in the business of retailing ladies dresses. In its first year of operation ending in 2016, the company declared a loss of GHS140,000.00.

Determine the number of years XYZ Company may carry forward its losses.

SOLUTION

XYZ Company Limited is not in a priority sector hence may deduct the unrelieved loss that was incurred in 2016 from the income of any of the subsequent three (3) years of assessment (2017, 2018 and 2019 years of assessment).

A&B Limited started operation on 1st January, 2016 and declared tax losses as follows:

In 2023 year of assessment the company declared a profit of GHS800,000.00

Required

Determine the tax payable by A & B Limited in 2023 year of assessment if:

1. (i) The company operates in one of the specified priority sectors.
2. (ii) The company operates in a non-priority sector.

SOLUTION

(i) – COMPANY IN SPECIFIED PRIORITY SECTOR

2023 Year of Assessment

[Note that the tax losses for 2016 and 2017 years of assessment were not taken into account in the calculation because they were incurred earlier than the previous five years of assessment.

(ii) – COMPANY IN A NON- PRIORITY SECTOR

[Note that the tax losses for 2016, 2017, 2018 and 2019 years of assessment were not taken into account in the calculation because they were incurred earlier than the previous three (3) years of assessment.]

Where a person makes a loss and if the loss were a profit would have paid tax at a lower or reduced tax rate, the loss may only be deducted in calculating income that is taxed at the same reduced rate, a lower rate or exempt amount.

Where business operations are segmented with different tax rates, losses attributable to a segment with a particular tax rate can be deducted only from incomes that will be taxed at the same rate.

Where the business is segmented but the incomes are not segmented, there may the need for apportionment of the income of the business. The basis for apportionment of income is the contribution of each business line to the total turnover of the business.

ILLUSTRATION

XYZ Company Ltd deals in non-traditional exports as well as local sales. The company’s operations for 2016 year of assessment is stated below Turnover GHS

Losses on operations

Required: Determine how the unrelieved losses in 2016 will be dealt with in 2017 year

of assessment.

An unrelieved loss from business may be deducted in calculating income from investment. However an unrelieved loss from investment shall be deducted only in calculating income from investment.

ILLUSTRATION

Required

Determine how the unrelieved losses will be treated. Solution: For the 2017 year of assessment, the investment loss of GHS50,000.00 cannot be set off against the business income of GHS100,000.00. However, in 2018 year of assessment the investment loss of GHS50,000.00 for 2017 year of assessment and the business loss of GHS40,000.00 for the 2018 year of assessment may be deducted from the investment income of GHS120,000 for that year. The deductions will be as follows: 2017 Year of Assessment GHS

2018 Year of Assessment GHS

Losses from activities that are exempt from tax or from incomes that are taxed at reduced rates cannot be deducted from the profits of other businesses.

ILLUSTRATION

Yawaduse Company Limited declared a total loss of GHS430,000 in the 2016 year of assessment. The loss was made up of:

Required

Determine how the losses of the two business operations will be treated in the 2017 year of assessment.

SOLUTION

Income From Income from Year of Transport Hotel Assessment Operations Operation

GHS GHS GHS GHS

Unrelieved loss from transport business carried forward to 2018 - GHS150,000.00

The unrelieved loss of GHS150,000.00 from the Transport business at the end of 2017 year of assessment cannot be deducted from the chargeable income of GHS570,000.00 of the Hotel operations. (Please refer section 17(2)(a), (2)(b))

NB:

1. (i) Paragraph 3(1) of the first Schedule of the Act state that the chargeable income of a company other than a company principally engaged in hotel industry would be taxed at the rate of 25%.
2. (ii) Paragraph 3 of the first Schedule of the Act state that the chargeable income of a company principally engaged in hotel industry would be taxed at the rate of 22%.

Companies which were required to carry forward losses under the repealed Internal Revenue Act, 2000 (Act 592) will continue with the dispensation up to the end of the basis period in which the dispensation would have ended under the provisions of Act 592.