Normally you can't claim a loss (tax deduction) for a business that is only a hobby or lifestyle choice. Even if it has business-like characteristics, if it is unlikely to ever make a profit AND doesn't have a significant commercial purpose you can't offset the loss against your other income. In that situation you can only defer the loss until you make a profit from the business (at which time the carried forward losses can be offset against the profits to reduce the tax liability).
If you're a sole trader or an individual partner in a partnership, and you meet at least ONE of the non-commercial losses requirements ( the four 'standard tests'), you can offset your business losses against other assessable income (such as salary or investment income) in the same income year.
The non-commercial business loss requirements if you have income under $250,000 are:
1. your assessable business income is at least $20,000 in the income year, OR
2. your business has produced a profit in three out of the past five years (including the current year), OR
3. 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), OR
4. your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.
Since my financial planning business hasn't generated any income yet, has not yet broken even or made a profit, and is run from a home-office, it doesn't pass any of the four 'standard tests' yet. So normally I would simply have to carry forward the losses until eventually the business makes more than $20,000 income. My original business plan had projected getting my first client in year 1 (2018/19), and then have enough clients during FY 2019/20 to 'break even'. Due to Covid-19 and repeated lockdowns I have yet to sign up my first paying client. Business costs have included paying $1,150 each month as an Authorised Representative of my dealer broker (and remain registered as a financial adviser), paying annual membership fee to the Financial Planning Association, paying university fees for the Master of Financial Planning degree I'm undertaking to meet the new FASEA educational requirements, and paying small amounts for marketing (my business website, and a couple of magazine ads). Overall, the annual business expenses were approximately:
2018-19: $25,095
2019-20: $29,271
2020-21: $25,637
and projected expenses for the current FY:
2021-22: $22,245 (slightly lower as I finish my uni degree this year, but will upgrade from student to full membership of the Association of Financial Advisers). At this stage I'm expecting to sign up my first paying clients during 2021-22, although the amount of income will depend on the number and nature of the clients.
I'm a bit behind in lodging my annual tax returns, so it would be nice to claim a deduction for these expenses, but I normally wouldn't be able to claim a deduction as I haven't meet any one of the four 'standard tests'.
However, if you are a sole trader and have income under $250,000 you can apply for the tax "commissioner's discretion" to allow the losses from the business activity to be offset against your other income. There are only two reasons for obtaining the discretion:
1. the business activity has commenced and has a standard lead-time before it can pass one of the four standard tests or produce a taxable profit. But this normally only applies where an inherent characteristic of the business prevents making a profit - for example the time taken after planting a new vineyard due to the nature of grape growing. It does NOT include situations starting out small or building up a client base. So no chance of my business qualifying on this basis.
2. special circumstances such as drought, flood, bushfire or other circumstance outside your control that have prevented the activity from passing one of the four tests. This is where I *might* be able to get the commissioner's discretion, due to the impact of Covid-19 preventing me from producing a tax profit as yet.
So, I've applied for the tax commissioner's discretion regarding non-commercial business losses for 2018-19, 2019-20, 2020-21, and 2021-22. We'll see what he/she decides.
I also have to lodge a backlog of annual BAS (business activity statements), which should at least provide a refund of GST paid on inputs (the fees paid to my dealer broker, ads etc.) as I have had no business outputs (SOAs) subject to GST.
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