If you have made a loss in your business, it is necessary to pass certain tests to be able to offset that deduction against other income. The rules are designed to stop people conducting small businesses which may be boarderline hobbies from getting a tax benefit.
First you need to pass the income requirement. Your adjusted income, excluding the business loss, must be less than $250,000. If yes, you then need to pass one of the below four tests to be able to claim the loss. If not, you are required to apply to the ATO for a private ruling to request permission. This is allowed only in limited situations.
If the loss is from a primary production business and your income from other sources is less than $40,000 you are able to claim the loss without applying the tests.
Assessable Income test - Income from the business must be at least $20,000. If you have only traded for part of a year you can make a reasonable estimate of what the income would have been for a full 12-month period.
Profits test - If you made a tax profit in three out of the past five years including the current year.
Real property test - If you use real property in your business activity on a continuing basis and its market value is at least $500,000. Real property includes land and structures but excludes your private house.
Other assets test - You will pass this test if the value of other assets you use in your business is at least $100,000. This includes items of plant and equipment, trading stock, assets that are leased and trademarks etc. It does not include real property or vehicles. For this test plant and equipment is valued at tax written down value, trading stock is valued at either cost or market value depending on which method you use for tax purposes.
If you are carrying on more than one business activity and they are similar you can group them for the tests. If not similar the tests need to be applied to each business.
If you are unable to pass a test in a particular year, the loss is carried forward each year until such time as you do pass a test.
- Helen Warnock is a partner in a Central Qld Chartered Accountant firm. This article offers general information only. You should consult your personal adviser to seek advice relevant to your personal circumstances before taking action.
