Tax Losses and Your Business
This has been a difficult year, and your business may have made a tax loss. A tax loss is when the total deductions you can claim, excluding gifts, donations, and personal super contributions, are greater than your total income for an income year.
If your business makes a tax loss, you may be able to:
- offset the loss in the same income year against other assessable income; or;
- carry forward the loss and claim it as a business deduction in a later year.
If you’re a sole trader or in a partnership and want to offset a tax loss, first check if the business activity meets at least one of the “commerciality” tests under the non-commercial loss rules. (Those rules do not apply to losses made by primary producers and professional artists whose income from other sources is less than $40,000.)
If you do meet one of the “commerciality” tests, then you can offset the loss against other assessable income (such as salary or investment income) in the same income year.
If you don’t meet the “commerciality” tests, you can defer the loss or carry it forward to future years. For example, you can offset it when you next make a profit.
Non-commercial losses made by an individual with adjusted taxable income exceeding $250,000 are quarantined.
If your business is a company, you can generally choose the year you want to claim a loss.
If your business has made more than one tax loss in a year, you will need to consider each tax loss separately.
The rules for record-keeping still apply when it’s related to business losses. You need to keep records for five years for most transactions. However, if you fully deduct a tax loss in a single income year, you only need to keep records for four years from that income year.