Tax tips, tax loss, ato, small business, startupsWhat is a tax loss?

A loss is made when the total deductions you claim exceed your income in the financial year.

Why are tax losses important?

It is important to know how to treat a loss when you are starting up a new company, as generally, most businesses will not make a profit in there first year of trading. This is often due to the initial investment in setting up the business and getting it running leading to a loss in the business until sales catch up.

The treatment of tax losses

The way you treat losses depends on your entity structure. The following outline explains what needs to be done for each entity type:

  • If you are operating as an individual (Sole trader or partnership), you may be able to offset your loss against other income sources in your personal tax return, such as wages or bank interest income. To do so, you must the income requirement (your total non-business income must not be greater than $250,000) and you must meet one of the four business tests. Note, there are certain exceptions to this rule for artists and primary producers. Otherwise, if you do not satisfy the income requirement and one of the four business tests, your loss will remain indefinitely until it can be offset against your future income.
  • If your business is operated from a trust, you can carry forward a tax loss indefinitely however it must be used when a profit arises in the business. A loss cannot be distributed to the beneficiaries of the trust
  • Companies generally work in the same way an individual’s loss does except they can choose when the year in which they wish to deduct the loss as long as they have maintained substantially the same ownership or control or carried on the same business over this period.

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