Usually losses are a bad thing - but tax losses aren't!
/Generally, a loss is a bad thing. But a tax loss, can be a good thing!
A tax loss occurs when your total deductions for a year, equal more than your total income for the year. In this instance, you can deduct a maximum 100% of assessable income, and also carry forward the loss to deduct against future income. This can result in zero tax payable this year, and less tax payable in a future year, which means more cash in your pocket both now and then.
Of course, there are always complicating factors. For example, the type of entity you operate your business from – whether it’s a company, sole trader, or trust – will affect how you claim a tax loss.
Given companies have been used extensively as the go-to business entity, there are additional tests around ownership and control.
If you operate your business as a sole trader or individuals in a partnership, there are separate non-commercial loss rules that need to be checked.
If a trust incurs a loss, that loss cannot be distributed and must be carried forward. To deduct the loss, there are specific tests that must be satisfied.
Different rules also apply depending on whether your business could be considered a hobby.
And it’s worth noting that a tax loss is different from a capital loss. A capital loss occurs when a capital asset is sold for less than its cost, for example the sale of a property.
So all this boils down to two things:
Keeping accurate records is critical to your ability to carry forward a tax loss for later years;
And as always, this is complex stuff, so it’s always best to get advice from your trusted accountant.
If you have any questions, don’t hesitate to get in touch.
