Can you claim a business tax loss?

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In the now distant days of December 2019, we were all eagerly anticipating the year 2020.

A new decade, a fresh start.

There was a collective feeling in the business community that this would be ‘our’ year to strike out. To grow. Even prosper.

Unfortunately, those grand plans came crashing down for many small and medium-sized enterprise (SME) owners just weeks into the Australian summer.

First it was the brutal bushfires that burnt through more than 12.6 million hectares across Australia, then the fierce floods and tropical cyclones.

And, just as our communities were starting to recover, the global COVID-19 pandemic hit.

Since January, many business owners have had to make the heartbreaking decision to close their doors indefinitely, facing bankruptcy, while others in the hospitality and tourism industries have been significantly impacted by border closures and travel restrictions.

On top of this, many owners that continue to trade have had to rewrite their business model – significantly changing the way they operate, or the goods and services they produce.

If your business has been affected by the extreme environmental and financial events of 2020, there’s a very good chance that you may have suffered a tax loss.

What is a tax loss?

Despite all of our best intentions as SME owners, simply operating a business doesn’t guarantee a profit. If you’re a new business owner, or you’ve been impacted by external events, it’s possible to experience a loss even if you haven’t closed your doors. In fact, despite appearing busy, some owners run their business at a loss for multiple years.

In simple terms, a tax loss occurs if your allowable deductions are higher than your assessable income.

Our tax laws are complex and there are very specific rules regarding income and deductions. A regime of interest and penalties can apply if a business does not comply with the rules.

Your business structure will determine how you can treat a tax loss and we recommend consulting a business tax specialist such as BridgePointGroup for further clarification. However, here are some general guidelines.

For sole traders or partnership structures

If you’re a sole trader or a partner in a partnership and want to offset a tax loss, provided you meet  certain conditions, you can offset the loss against other assessable income (such as salary or investment income) in the same tax year.

However, if you don’t meet the conditions, the loss may be “quarantined” and only be available to offset certain types of income. If that applies to you, you can carry the loss forward and use it in future years, such as when you next make a business profit.

For company structures

If your business is a company, you can generally carry forward the tax loss and use it in a later year.

If you’ve carried forward a prior year loss, you’ll need to make sure you meet certain rules before deducting it against your income. Changes to the ownership of the company, for example, may mean you need to pass further tests to show your eligibility to claim the loss.

Capital losses

Capital gains and losses are made on the disposal of a ‘capital gains tax asset’. Property and shares are examples of capital gains tax assets.

Whilst a net capital gain is included in your assessable income, a capital loss can only offset a capital gain (and cannot offset other types of income like salary and wages). So, if your capital losses (including carried forward losses) exceed your capital gains, you will need to carry forward those losses to offset future gains.

Talk to a business tax specialist

Depending on your business structure and circumstances, identifying the most effective treatment of tax losses can be complex. If you think you may have made a loss and you need guidance, reach out to the BridgePoint Group team on 1300 656 141 or email info@bridgepointgroup.com.au.

Together, we will work on a strategy to ensure the best possible taxation outcome for your business.

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