Have you lodged your tax return?
If you lodge your own income tax return, you have to do so by October 31 (unless you have a substituted accounting period). Because October 31, 2021 falls on a Sunday this year, the effective last day to lodge a return is the following Monday, November 1, 2021. Australians who fail to submit their income details to the ATO by this date will face a fine totalling more than $1100.
If you use a registered tax agent to lodge your return, they will likely be allowed to lodge the return at a later date, even as late as May 2022 in some cases. But you must “engage” the tax agent prior to October 31.
Lodging a tax return
Are you a sole trader?
- Even if your income is below the tax-free threshold ($18,200), you still need to lodge a tax return.
- Do you pay PAYG instalments? Lodge your activity statements and pay all your PAYG instalments before you lodge your tax return, so your income tax assessment takes into account the instalments you’ve paid throughout the year.
Are you a partnership?
If you operate your business in a partnership:
- The partnership lodges the partnership tax return, reporting the partnership’s net income or loss (assessable income less allowable deductions).
As an individual partner, you report on your individual tax return:
- Your share of any partnership net income or loss
- Any other assessable income, such as salary and wages, dividends and rental income.
The partnership doesn’t pay income tax on the income it earns. Instead, you and each partner pay tax on the share of net partnership income (if any) you receive.
Are you a trust?
- If you operate your business through a trust, the trust reports its net income or loss (this is the trust’s assessable income less allowable deductions).
- The trustee is required to lodge a trust tax return.
- As a trust beneficiary, you report on your individual tax return any income you receive from the trust.
Are you a company?
- If you operate your business through a company, you need to lodge a company tax return.
- The company reports its taxable income, tax offsets and credits, PAYG instalments and the amount of tax it is liable to pay on that income or the amount that is refundable.
The company’s income is separate from your personal income.
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 superannuation contributions, are greater than your total income for the income year.
If you make 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 income year (note that only companies can carry a loss back to offset against profits of an earlier income year – sole traders, trusts and partnerships cannot do that).
Meeting the ‘non-commercial loss’ tests
If you’re a sole trader or in a partnership of individuals 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 or to losses made by companies and trusts.)
What are the ‘non-commercial loss’ tests?
Broadly, the four non-commercial loss tests are:
- The Assessable income test – this is satisfied if the business activity generates at least $20,000 of assessable income a year (or would reasonably be estimated to generate at least $20,000 of assessable income if the activity were carried on for the whole year);
- The Profits test – this is satisfied if the business activity has made a profit in at least 3 of the last 5 tax years, including the current year (in the case of a partnership, the test looks at the individual partner’s share of partnership income and deductions);
- The Real property test – this is satisfied if the total value of real property used on a continuing basis in carrying on the business activity is at least $500,000;
- The Other assets test – this is satisfied if the total value of other assets (eg depreciating assets, trading stock and intellectual property) used on a continuing basis in carrying on the business activity is at least $100,000.
If you meet one of the ‘non-commercial loss’ tests, 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 any of the ‘non-commercial loss’ 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 whose adjusted taxable income exceeds $250,000 are quarantined.
The rules for record-keeping still apply when it’s related to business losses. You need to keep records for 5 years for most transactions. However, if you fully deduct a tax loss in a single income year, you only need to keep records for 4 years from that income year.
Talk to our KMT tax adviser about the best way to utilise tax losses.
The non-commercial loss rules are complicated. Talk to your tax adviser if you have any doubts about whether a business activity satisfies any of the non-commercial loss tests.
Personal services income
Suppose you operate your business through a company or a trust. In that case, income earned by the company or trust from the provision of your personal services (personal services income or PSI) will be attributed to you unless:
- The company or trust is carrying on a personal services business (PSB); or
- The PSI was promptly paid to you as salary or wages.
The company or trust will be carrying on a PSB if at least one of a number of tests are satisfied. These are the:
- Results test (this is the primary test) – this is based on common law criteria for characterising an independent contractor (in contrast to an employee/employer relationship);
- Unrelated clients test – this requires the PSI to be earned from at least two unrelated clients who contract your services as a direct result of making offers or invitations (for example, by advertising) to the public to provide your services;
- Employment test – this requires at least 20% (by market value) of your work to be performed by employees;
- Business premises test – this requires you to use business premises that meet certain conditions (eg you have exclusive use of the premises and the premises must be physically separate from any premises you use for private purposes).
If 80% or more of your PSI (with certain exceptions) is income from one client (or the client and their associate(s)) and the results test is not met, the company or trust will need to obtain a PSB determination from the ATO.
The company or trust cannot deduct amounts that relate to gaining or producing your PSI, unless you could have deducted the amount as an individual or the company or trust received the PSI in the course of carrying on a PSB.
Even if you don’t use a company or trust to derive your PSI, there are limitations on the deductions that you may claim against your PSI. For example, you may not be able to deduct certain home office expenses, e.g. occupancy expenses such as mortgage interest or rent.
The PSI rules are complicated, so talk to our KMT tax adviser if you provide your services through a company or trust.
A lot more people are working from home because of the COVID-19 pandemic. If you operate your business from a home office, you can deduct the expenses of running that office. A home office is a room in your home that is used exclusively (or almost exclusively) for business activities.
Expenses you can claim a deduction for include:
- Occupancy expenses – these include rent, mortgage interest, water rates, land taxes and house insurance premiums. Occupancy expenses are usually calculated by apportioning the expenses between the home office and the rest of the property on a floor area basis (there can be capital gains tax implications when you sell your home if you have claimed occupancy expenses);
- Running expenses – these are the increased costs from using your home for your business, including electricity or gas charges for heating, cooling and lighting, cleaning costs and the decline in value and the cost of repairs of depreciating assets such as furniture, furnishings and equipment; and
- Work-related phone and internet expenses, including the decline in value of the handset – an apportionment will be required if the phone or computer is not used exclusively for work.
To make it easier for people to claim deductions for working from home due to the COVID-19 pandemic, the ATO allows a rate of 80 cents per hour for running expenses incurred from 1 March 2020 until 30 June 2021. Under this ‘shortcut’ method, you don’t need a dedicated work area in your home. You need to have kept a record of the hours you have worked from home, such as a diary. Of course, you can still make a claim based on your actual running expenses if it produces a larger deduction.
Small business income tax offset
Suppose you are a sole trader, an individual who is a partner in a business partnership or an individual who is a beneficiary of a trust that carries on a business. In that case, you may qualify for the small business income tax offset if the business’ aggregated turnover is less than $5 million (yes, $5 million and not the general $10 million small business threshold). The offset is not available to an individual acting as a trustee of a trust.
The tax offset for 2020–21 equals 13% of the income tax payable on the sole trader’s or other individual’s taxable income that qualifies as their net small business income (the offset rate is 16% for 2021–22).
The offset is capped at $1,000.
The article is provided for general information purposes only and is not intended as professional advice. Readers should not act on the information contained therein without professional advice from a suitably qualified accountant.
Contact our KMT registered tax agent if you need assistance with your tax!
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