Tax losses

2019 – 2022 has been difficult for many businesses and you 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 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.

Personal services income

If you operate your business through a company or a trust, 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 conducting a PSB if at least one of a number of tests are satisfied. These are:

  • The results test (the most important test) – this is based on common law criteria for characterising an independent contractor (in contrast to an employee/employer relationship);
  • The unrelated clients test – this requires the PSI to be earned from at least 2 unrelated clients who contract your services as a direct result of an advertisement or other public offer of your services. A recent Full Federal Court case has confirmed that the test can be satisfied if your services are advertised through LinkedIn and the work is obtained as a direct result of that advertising;
  • The employment test – this requires at least 20% (by market value) of your work to be performed by employees who are not your associates;
  • The business premises test – this requires you to use business premises that meet certain conditions (e.g. 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. Otherwise, the company or trust will not be conducting a PSB.

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.

If the company or trust does not conduct a PSB, additional PAYG withholding obligations can arise.

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, eg occupancy expenses such as mortgage interest or rent.

The PSI rules are complicated, especially if you provide your services through a company or trust. Talk to our KMT Partners tax adviser if you have any questions.

Home office

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;
  • 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 deprecating 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.

If you are an employee working from home, you may be able to claim a portion of your running expenses and work-related phone and internet expenses.

To make it easier for people to claim deductions for working from home due to the COVID-19 pandemic, the ATO will allow a rate of 80 cents per hour from 1 March 2020 to 30 June 2022 for all additional running expenses. This also applies to anyone working from home, even if not operating a business.

This is different from the 52 cents per hour claim that covers fewer types of expenses. Talk to KMT Partners tax adviser about what method is most appropriate for your circumstances.

If you’re continuing to work from home this income year, don’t forget to keep records for future tax deductions. Check out our blog Work from home tax deductions during COVID-19 to learn more.

For further information and expert assistance with your tax, contact our KMT accountants today!

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from a qualified accountant at KMT Partners.