What to include in your assessable income
Income that is subject to tax is called assessable income. Generally, when calculating the assessable income of your business, you must include amounts you receive (or earn) in the ordinary course of running your business, such as from selling trading stock or providing services.
Normally, you must also include any of the following amounts:
- amounts from isolated transactions outside the ordinary course of your business, if you intend to make a profit
- amounts over their written-down value when selling certain depreciating assets commission income
- compensation, such as workers’ compensation, or payments for trading stock losses, business interruptions or contract cancellations
- dividends and franking credits (credits from company tax already paid) on business investments
- fuel tax credits
- grants, such as an amount you receive under the Apprenticeship Incentives Program
- incentive payments, such as a cash payment to lease business premises
- income earned outside Australia and you are an Australian tax resident
- interest on business investments, and interest on overpayment or early payment of tax
- lease payments and hire charges
- net capital gains from selling certain capital assets, such as land or buildings payments for selling know-how
- personal services income (PSI) if the PSI rules apply to you (see Personal services income (PSI)
- prizes or awards for your business, such as a cash prize for being the best business in your region
- recovered bad debts for which you have received a tax deduction
- rental income from property owned by your business
- royalties, such as payments when other entities use your patent
- subsidies for running a business
- the value of goods you take from trading stock for your own private
- the value of trading stock on hand at the end of the income year, if it’s more than at the start of the year
- the market value of any transactions not involving money, such as barter transactions.
What to exclude from your assessable income
The following amounts are not assessable and do not need to be included in your assessable income:
- amounts you earned from a hobby
- gifts or amounts bequeathed to you
- prizes that are not related to your business
- betting and gambling wins, unless you operate a betting or gambling business
- goods and services tax (GST) you have collected
- any money you have borrowed
- most payouts from your own personal income protection insurance policy.
The amounts you include as assessable income in any income year depend on whether you account for your income on a cash basis or accruals basis.
Cash basis refers to payments received during the income year regardless of when the work was done.
Accruals basis refers to income you earned during the year even if you haven’t yet received payment.
|Accounting method||What to include in your assessable income|
|Cash basis||Only include the income you actually received during the income year.|
|Accruals basis||Include all amounts you earned during the income year, even if you haven’t received payment.Example:If you completed work in May worth $724 but were not paid by the end of the income year, you must still include the $724 (less any GST) in your assessable income for that year.|
Small business concessions
If you operate a business with an aggregated annual turnover of less than $2 million, you may be eligible for a range of concessions to help reduce your taxable income.
Aggregated annual turnover means the total normal sales of your business and that of any associated businesses during the income year.
Small business concessions include:
- CGT concessions
- simpler trading stock rules
- simpler depreciation rules
- immediate deductions for prepaid expenses
Personal services income (PSI)
If you’re a business involved in contracting or consulting and earn personal service income (PSI), special tax rules (the PSI rules) may affect which amounts you include in your assessable income and may limit the deductions you can claim.
These rules aim to ensure that those who provide individual personal services are assessed on the income they personally earn, and are not able to claim higher deductions than employees providing similar services.
You need to understand how PSI rules affect what you declare and what you can claim if:
- you earn PSI, and
- the PSI rules apply to you.
What is PSI?
PSI is income that is mainly a reward for, or the result of, your personal efforts or skills. Examples include income you earn:
- as a consultant by providing your personal expertise
- as a professional practitioner in a sole practice
- under a contract that is wholly or principally for your labour or services
- as a professional sportsperson or entertainer by providing your professional skills.
PSI does not include income you earn mainly:
- by supplying or selling goods
- by granting a right to use property
- using an income-producing asset, such as a truck, to derive income
- through a business structure, such as a large accounting firm, as opposed to a sole trader contracted exclusively to a large firm.
If the PSI rules apply
If you earn PSI (whether you operate your business as a sole trader, partnership, company or trust), you need to work through a series of tests to see whether the PSI rules apply to your income and deductions.
If you’re a sole trader, the PSI rules limit the deductions you can claim, for example, on:
- car expenses for a spouse
- rent, mortgage interest, rates or land tax on your residence
- wages or super payments for associates.
Company, partnership or trust
If you operate your business as a company, partnership or trust:
- there are limits on the deductions you can claim
- The ATO treat income (less certain reductions) as your personal income and you must include it in your personal assessable income
- your business has an additional pay as you go (PAYG) withholding obligation on the income the ATO treat as your personal income.
Keeping good records
You must keep records of your business transactions for five years after the records are prepared or obtained, or the transactions are completed, whichever occurs later.
If you don’t have those records, your expense claim may later be denied or reduced and the ATO may apply penalties.
The records you need to keep include:
- sales and expense invoices
- sales and expense receipts
- cash register tapes
- credit card statements
- bank deposit books and cheque butts
- bank account statements
- employee records, such as copies of tax file number (TFN) declarations, wages books, time sheets and superannuation records.
You may also need to keep the following income tax records for each financial year:
- motor vehicle expenses, including logbooks
- debtors and creditors lists
- records of depreciating assets
- stocktake records
- records of any private use of business purchases or assets
- records of assets for capital gains tax (CGT) purposes
You can store records in either electronic or paper form. However, all your business records must be readily accessible and available in English. Please contact us if you wish to discuss ways to record keeping.
What you can claim and when
You can claim a deduction for most expenses you incur in running your business as long as they are directly related to earning your assessable income.
You can generally claim operating expenses (such as office stationery and wages) in the year you incur them. However, you typically claim capital expenses (such as buildings, machinery and equipment) over a longer period of time.
Most expenses you incur in running your business are tax deductible. You claim these deductions in the annual tax return for your business or, if you’re a sole trader, in your personal tax return.
What you can claim
You can only claim expenses that are directly related to earning your assessable income.
If you make a purchase or use an asset for both business and private purposes, you can only claim a deduction for the business portion of the expense. If you use an item in your business for only part of a year, you may need to restrict your claim to the period it was used for the business.
What you cannot claim
You can’t claim a deduction for the goods and services tax (GST) component of a purchase if you can claim it as a GST credit on your business activity statement. You also can’t claim:
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to income that is not taxable, such as money you earn from a hobby
- expenses that are specifically non-deductible, such as entertainment and parking fines.
Expenses you can claim in the year you incur them
Working or operating expenses you incur in the everyday running of your business – such as office stationery, renting office premises, and salaries or wages – are called revenue expenses.
You can generally claim a deduction for most revenue expenses in the same income year you incur them, including:
- advertising and sponsorship costs
- bad debts
- bank fees and charges
- business motor vehicle expenses
- business travel expenses
- clothing expenses (corporate wardrobes and uniforms, and occupation-specific and protective clothing)
- education, technical or professional qualification expenses
- electricity expenses
- fringe benefits – the cost of any fringe benefit provided and the fringe benefits tax on the benefit
- home office expenses when your home is used as a business premises
- insurance premiums, including accident or disability, fire, burglary, professional indemnity, public risk, motor vehicle loss of profits insurance, or workers’ compensation
- interest on money borrowed for income tax obligations, employer super contributions, or late payment or lodgement of tax – or to produce assessable income or purchase income-producing assets
- land tax on business premises
- legal expenses, such as those incurred defending future earnings, borrowing money, discharging a mortgage or obtaining tax advice
- losses from a previous year
- luxury car lease expenses
- stationery expenses
- costs for running a commercial website, such as site maintenance, content updates and internet service provider fees
- parking fees
- public relations expenses
- phone expenses
- rates on business premises
- registered tax agent and accountant fees
- renting or leasing a business premises
- repairing and maintaining income-producing property)
- salaries, wages, bonuses or allowances
- small-value items costing $100 or less
- subscription costs for business or professional journals, information services, newspapers and magazines
- costs for sunglasses, sunhats and sunscreen when your business activities require outdoor work
- super contributions for employees, and some contractors paid primarily for their labour
- tax-related expenses, such as:
- having a bookkeeper prepare your business records
- preparing and lodging tax returns and business activity statements
- objecting to or appealing against your assessment
- attending an ATO audit
- obtaining tax advice about your business
- tender costs, even if the tender is unsuccessful
- trading stock, including delivery charges
- transport and freight expenses
- travel expenses for relocating employees
- union dues and periodical subscription fees to trade, business or professional associations
- water expenses on business premises.
Expenses you can claim over time
A capital expense is either:
- the cost of an asset that has a longer life (usually more than one income year)
- an expense associated with establishing, replacing, enlarging or improving the structure of your business.
Generally, you can’t claim the total of a capital expense in the income year you pay for it. Instead, you normally claim an amount for the decline in value, or depreciation, each year over a number of years.
You can also ‘pool’ most capital assets and claim depreciation for the pool, which is simpler than depreciating the individual assets.
A small business with assets that cost less than $1000 ($20000 from 7.30pm 12 May 2015 to 30 June 2017) can claim the full amount in the year it incurred the expense.
Capital assets have a limited life expectancy (effective life) and can reasonably be expected to depreciate over the time you use them. They are also known as depreciating assets and include:
- electrical tools
- furniture, carpet and curtains
- motor vehicles
- plant and equipment
- improvements to land and fixtures on land, such as buildings, windmills and fences.
There is a general set of rules that applies across a variety of depreciating assets and certain other capital expenditure. Broadly, the effective life of the asset, expressed in years, will usually govern the number of years over which you will be required to apportion the cost.
There are exceptions to the general depreciation rules, such as those that apply to construction costs in relation to capital works. Capital works include:
- improvements to land such as buildings, windmills and fences
- structural improvements
- environment protection earthworks.
You can generally claim capital works construction expenses over 25 years at 4% per year, or 40 years at 2.5% per year.
Other capital expenses
You can claim a deduction for certain other business-related capital expenses you incur, as long as you can’t claim a deduction for them under any other part of tax law. Examples include the cost of setting up or ceasing a business, commonly known as blackhole expenditure, and project related expenses. You can claim black hole expenditure over five years.
When an expense is incurred
You can generally claim a deduction for an expense you incur in the everyday running of your business, in the year you incur it. You generally incur an expense when you have a current legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred.
Claiming expenses you pay in advance
There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.
If your aggregated annual turnover is less than $2 million, you can use the small business prepayments concession. This means you can claim a deduction for the total expense you prepaid if you receive the goods or services in full within 12 months. This applies even if the 12-month period extends into the next income year.
If you won’t receive the goods or services in full within 12 months, or your aggregated annual turnover is $2 million or more, you will usually need to apportion the expense across the whole supply or service period where the expense is $1,000 or more.
Aggregated annual turnover means the total normal sales of your business and that of any associated businesses during the income year.
Accounting for trading stock
Trading stock is generally anything your business produces, manufactures or acquires, to manufacture, sell or exchange. Livestock is also trading stock.
Valuing trading stock
You are required to undertake a stocktake as close as possible to the end of each income year.
An increase in your trading stock’s value over the year is assessable income, while a decrease is an allowable deduction.
Conducting a stocktake usually involves physically counting your stock and valuing each item, using one of the three methods summarised in the following table:
|Cost||Includes all costs associated with bringing the stock to its current condition and location. This may include the cost price plus freight, insurance, customs and excise duties, and delivery charges.|
|Market selling value||The current value of stock if sold in the normal course of business.|
|Replacement value||What it would cost to obtain an almost identical item that is available in the market on the last day of the income year.|
You can choose a different method each year for different items of stock.
The closing value for an item of trading stock at the end of one income year automatically becomes its opening value at the beginning of the next income year.
When calculating your trading stock’s value, you generally exclude the goods and services tax (GST) component if you are entitled to GST credits.
Simpler trading stock rules for small businesses
If you operate a small business and, at the end of the year, you estimate that your trading stock’s value has not changed by more than $5,000, you can choose not to conduct a formal stocktake and not to account for the changes in your trading stock’s value.
Your estimate will be reasonable if:
- you maintain a constant level of stock each year and have a reasonable idea of the value of your stock on hand, or
- your stock levels fluctuate, but you can make an estimate based on your records of the stock you have purchased.
You must conduct a stocktake where your trading stock’s value has varied by more than $5,000.
An increase in your trading stock’s value over the year is assessable income, while a decrease is an allowable deduction.
Using stock for private purposes
If you take an item of trading stock for your private use, you must account for it as if you had sold it and include the value of the item in your assessable income.
You can keep records of the actual value of goods you take from your trading stock for your own private use and report that amount. Alternatively, you can use the amounts the ATO will accept as estimates of the value of goods you have taken.
|Type of Business||Amount (excluding GST)|
|For each adult or child over 16 years $||For each child aged between 4 and 16 years $|
|Takeaway food shop||3410||1705|
|Mixed business (includes milk bar, general store and convenience store)||4230||2115|
These amounts are updated annually. The above figures are current for the 2015-2016 year.
Salary, wages and super
You can generally claim a deduction for salaries and wages you pay to employees, and for super contributions you make for them and for certain contractors.
If you’re a sole trader or partner in a partnership, you can usually claim a deduction for your own super contributions in your personal tax return.
Salaries and wages
Deductions are calculated depending on the type of business you operate:
- If you operate your business as a company or trust, you can generally claim a deduction for any salaries and wages the company or trust pays to you or other employees.
- If you operate your business as a partnership, the partnership cannot pay you salary or wages as you are a partner, not an employee. Any nominal payment of a salary or wages to a partner is usually a distribution of profit.
- If you operate as a sole trader, you are the business owner and not an employee, and therefore cannot pay yourself a salary or wages. Any nominal payment of a salary or wages to yourself is usually a distribution of profit. However, you can claim a deduction for the salaries and wages you pay to employees.
If your income includes personal services income, the amount you can claim for payments you make to an associate may be limited.
You can claim a deduction for super contributions you make to a complying super fund or retirement savings account for your employees and for certain contractors.
The amount you can claim may be limited if your income includes personal services income.
If you’re a sole trader or a partner in a partnership, you may be able to claim a deduction for your personal super contributions. However, you will not be able to claim a deduction if, during the year, you earned more than 10% of your total income from employment.
Running your business from home
If your home is also your place of business, you can claim income tax deductions for a portion of the costs of owning, maintaining and using your home for this purpose. When you sell your home you may be liable for capital gains tax.
Your home is your place of business if you run your business from home, and a room is set aside exclusively for your business activities. Examples of a place of business include:
- a small business operator whose main office is in their home
- a tradesperson or craftsperson who has their workshop at home
- a doctor or dentist who has their surgery or consulting room at home.
Deductions you can claim
If you run your business from home, you may be able to claim the following expenses:
- Utility costs – The cost of using a room’s utilities, such as gas and electricity – these should be apportioned according to actual usage.
- Business phone costs – if you used a telephone exclusively for business. You can claim for the rental and calls, but not the installation costs. If you used the telephone for both business and private calls, you can claim a deduction for business calls.
- Decline in value (depreciation) of office plant and equipment (for example, desks, chairs and computers). If you also used the equipment for private purposes, your claim must be apportioned.
- Decline in value of curtains, carpets and light fittings.
- Occupancy expenses – your costs of owning or renting the house (such as rent, mortgage interest, insurance and rates). You can claim the portion of these costs that relates to the room or workshop you use as a place of business. A common method of working out how much to claim is the floor area (as a proportion of the floor area in your whole home).
- If your income includes personal services income (PSI), you may not be able to claim a deduction for occupancy expenses.
If you have a place where you conduct business elsewhere – such as a factory, shop or office – generally your home will not be considered a place of business, and you can’t claim occupancy expenses.
Capital gains and the main residence exemption
Generally, when you sell your home or main residence, you can ignore a capital gain or loss you make. This is called the ‘main residence exemption’.
If your home is your place of business, you generally can’t obtain the full main residence exemption. However, you are probably entitled to a partial exemption.
To determine how much of the capital gain is not exempt, you generally need to work out the following:
- the proportion of floor area of your home that is set aside to produce income
- the period of time you used it for this purpose.
If you first used your home to produce income after 20 August 1996, the period before this is not taken into account in working out the amount of any capital gain or loss. Instead, you use the market value of your home at the time it was first used to produce income.
It’s a good idea to get a valuation of your home at the time you first use it as your place of business, so when you come to sell your home you don’t pay more capital gains tax than necessary.
You can claim a deduction for the decline in value, depreciation, of capital assets such as buildings, motor vehicles, furniture, and machinery and equipment.
The cost of an asset includes both the amount you paid for it as well as any additional amounts incurred transporting the asset and installing it in position.
The amount you can claim will generally be less if you:
- own the asset for less than one year
- only partly use the asset for business purposes – that is, if you use it for 60% business purposes, you can only claim 60% of its total depreciation for that year
- own the asset for some time before you start the business – in this case, you must work out how much the asset depreciated before you started the business and use the reduced value as the asset’s base value.
Land and trading stock items are not depreciating assets. However, certain improvements to land and fixtures on land (such as buildings, windmills and fences) are depreciating assets.
Simpler depreciation for small business
You can choose to use simplified depreciation rules if you have a small business with an aggregated turnover of less than $2 million.
Under these simpler rules, you can:
- claim an immediate deduction for most depreciating assets that cost less than $20,000 each that was acquired and installed ready for use from 7.30pm (AEST) on 12 May 2015 until the end of 30 June 2017
- pool most other depreciating assets into a general small business asset pool and claim
- a 15% deduction in the first year (regardless of when you purchased or acquired them during the year)
- a diminishing value rate of 30% deduction on the opening pool balance each year after the first year (regardless of their effective life)
- also deduct the balance of your general small business pool at the end of an income year if the balance of the pool at the end of the year is less than $20,000.
Aggregated annual turnover means the total normal sales of your business and that of any associated businesses.
For certain depreciating assets, you must use the normal depreciation rules rather than these simpler rules. You cannot use the simpler depreciation rules for:
- assets you rent or lease, or are expected to be leased out, to others for more than 50% of the time on a depreciating asset lease
- assets allocated to a low-value pool
- horticultural plants, including grapevines
- in-house software where development expenditure is allocated to a software development pool
- capital works
- research and development.
The example below shows how depreciation has been calculated for an asset pool, using the simpler depreciation rules.
|Calculation of general small business pool balance||Depreciation claim|
|Closing pool balance from previous year||$100,000|
|Opening pool balance for current year||$100,000|
|Add new asset purchase||$28,000|
|Proceeds of disposal||$8,000|
|Pool deduction claim (30% of $100,000)||$30,000||$30,000|
|New asset deduction claim (15% of $28,000)||$4,200||$4,200|
|Total depreciation for current year||$34,200|
Capital works deductions
You can claim a deduction for the construction costs of buildings and other capital works – such as structural improvements – that are used for producing income.
The deduction is available for the following capital works:
- buildings or extensions, alterations or improvements to a building
- structural improvements such as sealed driveways, fences and retaining walls
- earthworks for environmental protection, such as embankments.
If it is not possible to determine the actual construction costs, you can obtain an estimate from a quantity surveyor or other independent qualified person. You can claim a deduction for the cost of the estimate.
Different deduction rates apply (2.5% or 4.0%) depending on the date on which construction began, the type of capital works, and how it’s used.
Other capital expenses
You can claim a deduction for some other business-related capital expenses you incur. However, the costs must not:
- be deductible under any other part of the tax law
- form part of the cost of a depreciating asset or of land.
Examples include the cost of setting up or ceasing a business, and project-related expenses.
Setting up or ceasing a business
You may be able to claim a deduction for pre- and post-business capital expenses, such as the costs associated with setting up or ceasing a business or with raising finance. Setting up costs could include company establishment legal fees.
You can claim a deduction of 20% of these expenses in the year you incur them and in each of the following four years.
You can also claim a deduction for certain capital expenses directly related to a project, such as feasibility studies or environmental assessments.
These expenses can be allocated to a pool and written off over the effective life of the project using the diminishing value method.
Business travel expenses
You can claim deductions you incur when travelling for business – for example:
- train fares
- bus fares
- taxi fares.
However, there are special rules for claiming expenses you incur while:
- using a motor vehicle for business purposes, or
- travelling overnight on business.
Overnight business travel expenses
If you stay away from home for one or more nights on business travel, you generally need to keep written evidence of all expenses.
Employees who travel for less than six nights in a row don’t need to keep receipts unless their travel allowance exceeds the Commissioner’s reasonable travel allowance limits.
If you were away from home for six or more consecutive nights, you must use a diary or similar document to record the particulars of each business activity before your travel ends, or as soon as possible afterwards. You must record:
- the nature of the activity
- the day and approximate time the business activity began
- how long the business activity lasted
- the name of the place where you engaged in the business activity.
If you operate your business as a company or trust, fringe benefits tax may apply if the travel includes private activities.
Motor vehicle expenses
The deductions you can claim for the business use of a motor vehicle depend on the business structure you operate under, the type of vehicle you use and whether you also use the vehicle for private purposes. Fringe benefits tax (FBT) – a tax paid by employers on certain benefits, usually provided to employees – may apply in some circumstances.
Your business structure affects your deductions
The motor vehicle expenses you can claim depends on your business structure (sole trader, company, partnership or trust), and whether your income includes personal services income (PSI).
Company or trust
If you operate your business as a company or trust, you can claim a full deduction for expenses you incur in running a motor vehicle that your company or trust leases or owns. If you, or other company or trust employees (or their associates), use the vehicle for private purposes, you may have to pay fringe benefits tax (FBT). The FBT cost is also tax deductible.
Sole trader or partnership
If you operate your business as a sole trader, or a partnership that includes at least one individual, you can claim:
- a full deduction for a business-purpose vehicle: a truck or van, or a smaller vehicle – such as a ute, wagon or panel van that has been heavily modified for business use – when private use is restricted to home-to-work travel and very minor other use
- a deduction for the business use of a vehicle you own, lease or hire under a hire purchase agreement – this can include an ordinary car, station wagon or four-wheel drive, or most other vehicles designed to carry less than one tonne or fewer than nine passengers.
Calculating your deduction
Before you can claim motor vehicle expenses, you need to select a method to calculate your claim so you know which records you need to keep.
When choosing a claim method, you:
- can choose the one that gives you the best result if you satisfy the method’s requirements
- can use different methods for different vehicles
- can change methods from year to year
- must keep appropriate records.
Cents per kilometre
If you use the ‘cents per kilometre’ method:
- your claim is based on a set rate for each business kilometre travelled
- you can claim a maximum of 5,000 business kilometres per vehicle
- you do not need written evidence to show how many kilometres you have travelled, but the ATO may ask you to show how you worked out your business kilometres
- you cannot make a separate claim for depreciation of the car’s value.
To work out how much you can claim, multiply the total business kilometres you travelled by the number of cents allowed for your car’s engine capacity – see the table below. This figure takes into account all your vehicle running expenses.
The rates are adjusted each year.
Keeping a logbook
If you use the logbook method, you:
- can claim the business-use percentage of each car expense, based on the logbook records of your car’s usage
- must keep a logbook so you can work out the percentage
- must have written evidence of your fuel and oil costs, or odometer readings on which your estimates are based
- must have written evidence for all your other expenses
Getting a logbook
You can use pre-printed logbooks (available from stationery suppliers) or make your own.
Valid for five years
Each logbook you keep is valid for five years, but you may start a new logbook at any time.
If you establish your business-use percentage using a logbook from an earlier year, you must keep that logbook and maintain odometer readings in the following years.
Your first year
If this is the first year you have used the logbook method, you must keep a logbook during the income tax year for at least 12 continuous weeks. That 12-week period needs to be representative of your travel throughout the year.
If you started to use your car for business purposes less than 12 weeks before the end of the income year, you can continue to keep a logbook into the next year so it covers the required 12 weeks.
Two or more cars
If you want to use the logbook method for two or more cars, the logbook for each car must cover the same period. The 12-week period you choose should be representative of the business use of all cars.
Information your logbook must contain
Each logbook you keep must contain the following information:
- when the logbook period begins and ends
- the car’s odometer readings at the start and end of the logbook period
- the total number of kilometres the car travelled during the logbook period
- the number of kilometres travelled for each journey recorded in the logbook (if you made two or more journeys in a row on the same day, you can record them as a single journey). You will need to record the
- start and finishing times of the journey
- odometer readings at the start and end of the journey
- kilometres travelled
- reason for the journey.
Repairs, maintenance and replacement expenses
You can claim a deduction for repairs and maintenance to machinery, tools or premises you use to produce business income, as long as the expenses are not capital expenses.
What you can claim
You can claim the cost of allowable repairs and maintenance, which can include:
- conditioning gutters
- maintaining plumbing
- repairing electrical appliances
- mending leaks
- replacing broken parts of fences or broken glass in windows
- repairing machinery.
To repair something generally means to fix defects, including renewing parts. It does not mean totally reconstructing it. You do not have to own the property or item that is repaired in order to claim a deduction.
What you can’t claim
Repairs do not include:
- substantial improvements to an item or property – for example, installing a new ceiling
- repairs made to machinery, tools or property immediately after you purchase or acquire them – this is because the price you paid reflects the item’s condition.
- These are capital expenses. You can generally claim a deduction for such expenses under the general depreciation provisions (for items), or the capital works provisions (for property). Building improvement costs, and capital works deductions claimed, would also be taken into account when working out a capital gain or loss on disposal of the property.
Claiming tax losses
If you operate a business that makes a loss, you can generally carry forward that loss and may be able to claim a deduction for it in a future year.
The rules differ for different business structures. If you’re a sole trader or a partner in a partnership, you may be able to claim business losses by offsetting them against other income – for example, income you earn from salary
You incur a tax loss when the total deductions you can claim for an income year (excluding tax losses from earlier income years) are more than your total assessable income and net exempt income. (Net exempt income is income that is exempt from tax but taken into account when carrying forward losses.)
There are some deductions you cannot use to create or increase a tax loss, including donations or gifts and personal super contributions.
Offsetting current year losses against other income
If you operate as a sole trader or an individual partner in a partnership, you may be able to claim business losses by offsetting them against your income from other sources, such as wages. However, you will need to meet the requirements of the non-commercial business loss rules
If you’re a sole trader or an individual partner in a partnership and you make a net loss from your business activity, you may be able to claim that loss by offsetting it against your other income (such as salary or investment income) for that year.
You may be able to offset the loss against your other income if one of the following applies:
- your business is a primary production business or a professional arts business and you make less than $40,000 (excluding any net capital gains) in an income year from other sources
- your income for non-commercial business loss purposes is less than $250,000, and either:
- your assessable business income is at least $20,000 in the income year
- your business has produced a profit in three out of the past five years (including the current year)
- your business uses, or has an interest in, real property worth at least $500,000, and that property is used on a continuing basis in a business activity (this excludes your private residence and adjacent land)
- your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.
- you have been granted a Commissioner’s discretion allowing you to offset the loss.
If you do not meet any of these requirements, you cannot offset your business loss against any of your other assessable income for that income year. However, you can defer the loss or carry it forward to future years. If your business makes a profit in a following year, you can offset the deferred loss against this profit.
Claiming tax losses from previous years
If your business made tax losses in previous years, you can carry forward those losses and claim a deduction for those losses in a later year. If you are a sole trader or individual partner in a partnership, you may also be able to offset the business losses carried forward against other income under the non-commercial business loss rules.
How to claim losses
- If you have tax losses from several previous years, you must claim the entire loss you incurred from the earliest year before you can claim all or part of a tax loss from a later year.
- You can use your tax losses from earlier income years to reduce your Australian income to zero only.
- If your tax losses from earlier income years are more than your Australian income, you must keep a record of the tax losses to claim the extra tax loss amount in a later year.
- You can carry forward most tax losses indefinitely.
Your business structure
Companies can generally choose the year in which they claim a deduction for a carried forward tax loss.
However, if you operate as a sole trader, partnership or trust, you cannot choose the year or years in which you claim a deduction for your prior-year tax losses. Rather, your tax losses are simply carried forward from year to year and applied until they are exhausted.
If you operate your business as a trust and you incur a tax loss, you cannot distribute the loss to the trust’s beneficiaries.
There are special rules that restrict when you can claim a deduction for a tax loss as a trust.
If you operate your business as a company, you cannot distribute any loss to your shareholders. The company must carry the tax loss forward and offset it against assessable income in a later year
As a company, you cannot deduct a tax loss unless either of the following applies:
- It has the same owners and the same control throughout the period from the start of the loss year to the end of the income year.
- It carried on the same business throughout a specified period.
As a company, under certain conditions you may be able to:
- choose the amount of a previous year’s tax loss you want to claim
- carry forward to a later year a tax loss you would have incurred in a particular year had you not received income from franked dividends.
Unclaimed foreign losses
Special deduction rules apply to unclaimed foreign losses relating to the income years 1998–99 through to 2007–08.