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Tuesday, 5 October 2021

Not being allowed to claim a deduction for my business losses in FY 2019 or 2020

I finally was notified of the ATOs decision regarding my application (made at the start of July) for 'discretion' to claim the losses made by my financial planning business in my tax returns for 2020 and 2021. I had hoped that due to Covid-19 'lock-downs' and the general economic conditions I might be allowed to claim deductions for my business expenses in those financial years even though I haven't managed to get any paying clients as yet. Unfortunately the ATO has advised that the ruling would be 'unfavourable'. The person who phoned to let me know the outcome suggested that I might withdraw my application rather than get the official 'unfavourable' response from the ATO. She wouldn't explain exactly why I might want to do that, although she mentioned something about 'not challenging the law' (IMHO applying for the commissioner's discretion is a perfectly normal administrative process, as there is obviously the possibility of discretion being applied within the law, otherwise the ATO would not have a form to apply for a ruling on this matter). It doesn't matter financially to me whether I 'withdraw' my application or get the official 'unfavourable' (ie declined) outcome in writing, so I agreed to just withdraw my application.

Upon reflection I suspect the ATO staffer preferred me withdrawing the application, as this probably means this application doesn't get reported in their KPIs regarding 'resolution time for applications' (taking from 3 July to 5 October is probably a LOT longer than these things are supposed to take - from memory the website said a decision would only take 3-4 weeks...)

This means that I can't claim a deduction for the annual fees paid to my AFSL ($13,800 pa), the membership fees for the FPA and AFA (around $1,000 pa in total), my marketing/advertising costs (around $1,000 pa), or my self-education costs (the master of Financial Planning cost around $14,000 pa) as the degree is a requirement for my financial planning business, but not for my normal full-time 'day job'. All these expenses (around $30,000 pa) will instead 'carry forward' and can only be claimed against any future net income from my financial planning business.

Hopefully with lock-downs in Sydney ending soon I can start making some 'cold calls' in my neighbourhood and possibly arrange free lunchtime seminars for workers in local business, which are common ways for financial planners to find prospective clients. I'd like to 'break even' on my business this financial year (I'll only be paying $7,000 in uni fees this FY as I will have completed the masters degree this semester), but I might not have enough clients to cover the basic expenses until next FY.

By that time I'll have accumulated a large amount of losses 'carried forward' so it may be quite a while before I have to pay any tax on revenue generated by my financial planning business. It would have been nicer to be able to claim the deductions 'up front' against my other salary income, as then I could have the funds invested and earning some income, rather than effectively being an interest-free loan to the taxman.

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