For most people, when it comes to dealing with taxes, it can quite literally be taxing. Tax management requires a certain level of focus, expertise and organisational skills. 

If you are running a business, tax management can become even more complicated. If you are an aspiring entrepreneur, you’ve probably encountered the term ‘tax loss’ more than once.

Understanding tax loss and using it to your advantage can be challenging, but once you know the requirements and considerations, you may be able to benefit financially.

To better understand what tax loss is and how it can help your business, consult with a financial adviser or a business adviser. In the meantime, here’s what you should consider:

A Closer Look at Tax Loss

Typically, you make a tax loss when the total deductions that can be claimed for a financial year are greater than the total income for the year (this includes both assessable income and exempt income).

• Assessable income refers to all the money you earn that can be taxed. For example: salary, interest from bank accounts, commission, dividends, and other income from investments.
• Meanwhile, exempt income refers to tax-free income, which can be used to work out tax losses from earlier income years that you can deduct.

If the business you’re running makes a loss in an income year, you may be able to carry that loss forward, and claim a deduction for it in the next year. You can potentially claim business losses by offsetting them against other personal income (in particular, investment income) within the same income year if you are a sole trader or an individual in a business partnership. 

Seeking a business adviser or financial adviser can help you determine how you might be able to benefit from an expected tax loss.

Tax-Loss Considerations

There are some considerations to take into account before investing in a tax loss strategy. 

If you are a sole trader or an individual partner in a partnership, it’s important to check if you meet the non-commercial business loss requirements before offsetting your losses against other income.

If you are someone who doesn’t meet the requirements or are operating through a company or a trust, you may be able to defer your loss for use in a future year. Usually, when the business begins to make a profit is when you can offset the deferred loss against your income

Determining if You Can Offset Or Defer Your Tax Loss:

• Are you in business? According to the ATO, there is no single aspect that determines whether you are in business, however, there are some characteristics that can determine if you are classified ‘in business’. These include:
  • You’ve made a decision to start a business and have taken action to commence operations (registered a business name or obtained an ABN)
  • You intend to make a profit
  • You repeat similar types of activities
• Is your business activity planned, organised and carried out in a businesslike manner?
• Is your business included in the ‘Excepted Business Activities’ list? This may include tree farming, fishing, or performing arts. 
• Did you pass the ‘Four Income Tests’? This includes the:
  • assessable income test
  • profits test
  • real property test
  • other assets test

Once you determine how you can claim a tax loss and utilise either the offset loss or defer loss strategy, you will be able to make the appropriate financial decisions for yourself and your business.

This is especially beneficial because it allows companies to form better strategies for using tax losses.

Consider seeking a business adviser who can help you explore other options on how best to leverage your tax loss for your business.

How You Can Put Tax Loss to Good Use

Sole traders

Timeliness is one of the most important factors if you are a sole trader or a business partner and are wanting to carry forward a tax loss. 

Claiming the loss once you earn a taxable income is vital. This means you are in a position to offset your tax loss rather than defer it and be able to use it against your future income.

The tax losses that you carry forward will be offset first against your exempt income—pension, government allowances, and so on. After that, it can be used against your assessable income. It’s important to note that losses must be claimed in the order that they were incurred. 

Non-Commercial Losses

Non-commercial losses refer to any loss you incur as a sole trader or a partner in a business that is your secondary source of income. Your business must also fulfil the legal requirements to be defined as one. If your business doesn’t meet the appropriate requirements, it can be classified as just a hobby or lifestyle choice. This may prevent you from being able to claim tax losses.

To claim non-commercial business losses, it’s important to consider the following requirements:

• your business is a primary production business or a professional arts business, and you make less than $40,000 (excluding any net capital gains) in an income year from other sources,
• your income for non-commercial business loss purposes is less than $250,000, and either;
  • your assessable business income is at least $20,000 in the income year
  • your business has produced a profit in three out of the past five years (including the current year)
  • your business uses or has an interest in real property worth at least $500,000, and that property is used continuingly in business activity (this test excludes your private residence and adjacent land)
  • your business uses certain other assets (excluding motor vehicles) worth at least $100,000 continuously.

Companies

The case is different for companies. As mentioned above, if your business is a bigger company, you may be able to choose to carry forward a tax loss. 

To claim the tax loss, your company must do the following:

• maintain the same majority ownership and control, or
• carry on the same business once the ownership test is failed.

Be sure to keep thorough and detailed records related to your taxes dating back to at least five years. 

If you need help managing your finances and handling your taxes, our tax accountants and business advisers can help you. 

123 Financial Group is an accounting, business advice and financial planning company based in Newcastle. We offer a wide range of financial services. You can trust our team of professionals to help you with everything financial including accounting, loan broking, financial planning, and business advisory services. 

Book an appointment with us today and learn more about how we can help your company.