CLAIMING A TAX LOSS FOR YOUR BUSINESS

4 May 2022

CLAIMING A TAX LOSS FOR YOUR BUSINESS



With the challenges posed by the COVID-19 pandemic and the recent floods, many businesses have sustained severe losses. The ATO has issued some guidance that our professional advice should augment.

Before you claim a tax loss, make sure you have correctly claimed the expenses that you are entitled to. Overclaiming expenses can put your business in an incorrect tax loss situation.

It’s also important to remember to apportion your expenses correctly so that only the business portion of the expense is claimed and not any personal component of the expense.

Keeping accurate and complete records will help you keep track of your tax losses. It can help you avoid incorrectly carrying back a tax loss or carrying forward tax losses to deduct in future years.

If your business makes a tax loss in the current year, you can generally carry forward that loss and claim a deduction for your business in a future year.

You may be able to offset current year losses if you’re a sole trader or an individual partner in a partnership and meet certain conditions.

If you’re an eligible corporate entity (company, limited corporate partnership or public trading trust), you may be able to claim the loss carry-back tax offset. You can check your eligibility for this tax offset using the ATO loss carryback offset tool.

CENTS PER KM RATE: DRAFT LEGISLATIVE INSTRUMENT

On 3.3.2022, the ATO issued draft Legislative Instrument LI 2022/D8TD, which applies to eligible taxpayers who elect to use the cents per kilometre method and then calculate income tax deductions for their work-related car expenses. The Commissioner has determined that the rate is 75 cents per kilometre. It will apply to the income year commencing 1.7.2022 and remains applicable to subsequent income years until it is varied.

ELIGIBILITY AGE CHANGE FOR DOWNSIZER CONTRIBUTIONS

The ATO has issued a reminder on downsizing contribution.

As part of the 2021–22 federal Budget, the Australian government announced it would reduce the eligibility age for downsizer contributions from 65 to 60 years old. This measure has now become law, with the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 received royal assent on 22 February 2022.

What does this mean?
From 1 July 2022, eligible individuals aged 60 years or older can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home. There are no changes to the remaining eligibility criteria.
For contributions made before 1 July 2022, eligible individuals must still be aged 65 years or older when making their contribution.

What is the purpose of downsizer contributions?
The downsizer measure began on 1 July 2018, increasing the flexibility of older Australians to contribute to their super. This allows eligible individuals to contribute up to $300,000 from the proceeds of the sale of their home without impacting their contributions caps.

VARYING PAY AS YOU GO INSTALMENTS AND TAX SUPPORT

PAYG instalments allow you to make regular repayments towards the expected tax on your business and investment income throughout the year. By paying regular instalments throughout the year, you should not have a large tax bill when you lodge your tax return.

You can vary your PAYG instalments if you think your current payments will result in you paying too much or too little tax for the income year. You must make variations on or before the payment due date, and your varied amount will apply to all your remaining instalments unless you make another variation before the end of the income year.

If you continue to be affected by COVID-19, the ATO will not apply penalties or charge interest to varied instalments relating to the 2021-22 income year. This applies if you have taken reasonable care to estimate your end of year tax liability.

You must make variations on or before the payment due date. Your varied amount or rate will apply for the remaining instalments for the income year or until you make another variation.

The ATO recognises that many businesses in local government areas in Queensland and New South Wales have been affected by the floods. The ATO aims to support the community’s recovery efforts during this difficult time by providing administrative support to help taxpayers.

The ATO encourages taxpayers to regularly review their PAYG instalments so the amount you prepay is closer to your expected tax for the year.

Support is available if your small business is having financial difficulties and can’t pay tax or super on time. The ATO may be able to set up an affordable payment plan or offer interest-free periods for eligible overdue activity statement amounts.

If you have outstanding debt, can meet the requirements of a payment plan, or require additional assistance, contact them for further help. The ATO may ask for evidence that your business is experiencing financial difficulty to support your claim, such as:

  • bank notices (for example, overdraft call)
  • an eviction notice
  • a disconnection notice
  • a repossession notice
  • a notice of impending legal action
  • staff pay records
  • contract payment schedules
  • legal documents

They take many factors into account when assessing a claim. Sometimes the ATO may change their requirements depending on your circumstances.

Even if you can’t pay on time, keeping lodgements up to date is important. This will give you a clear idea of your tax position, and the ATP can tailor help, such as advice, payment plans, or deferrals, to your situation.

DIGITAL GAMES TAX OFFSET

On 21.3.2022, the Federal Government released draft legislation and explanatory material to implement a new Digital Games Tax Offset (DGTO).

As part of the Digital Economy Strategy, the government announced a 30 per cent refundable tax offset which will be capped at $20 million per year. The DGTO will be available to eligible companies that spend a minimum of $500,000 on qualifying Australian development expenses related to the development of new games or the expansion of existing eligible games. The DGTO will apply from 1 July 2022.

The DGTO will strengthen the domestic digital games industry and make Australia a more attractive and competitive destination for international games development. It will also support investment and highly skilled, transferable jobs.

The government is seeking stakeholder views on the draft legislation and explanatory memorandum to ensure that it is fit for its purpose and meets the aims of the DGTO.

Further information on the draft bill and explanatory memorandum can be found, and submissions can be made through the Treasury website.

DISCLOSURE OF BUSINESS TAX DEBT

The ATO has started writing to all their clients that may be eligible to have their tax debts disclosed to credit reporting bureaus (CRBs). This is to raise awareness of the actions they can now take under the Disclosure of Business tax debts measure. The letter will be sent to all clients with business tax debts that currently meet the criteria for disclosure.

This letter provides information on how to engage with them to manage their debt effectively. Taxpayers can avoid disclosure by making payments in full or negotiating a payment plan.

If you do not take steps to manage their debt actively, they will remain eligible for disclosure. Before the ATO take any final action to disclose their tax debt, they will issue a formal Intent to Disclose Notice.

If you receive an Intent Notice asking to ‘Act now or your tax debt will be reported to credit reporting bureaus’, you must contact the ATO within 28 days of receiving the notice to avoid the debt being reported. The ATO will then work with you to manage their debt or help them understand the next steps.

There is information on the ATO website if you need help with paying and support in difficult times. You must engage with the ATO early before your debts become unmanageable.

You can access the payment plan estimator to work out an affordable plan.

 

 

DIRECTOR PENALTY NOTICES

In March, the ATO began contacting relevant clients via letter about their potential personal liability for company tax debts under the Director Penalty Notice (DPN) program.

The letter will be sent to directors of companies if the company has not met their debt obligations regarding PAYG withholding, Superannuation Guarantee Charge and GST.

Directors will be notified that the ATO is considering issuing them with a DPN, which makes them personally liable for their business debts if the company does not actively manage their debt.

The ATO’s focus is on making directors aware of their obligations and personal liabilities and the actions that may be taken if they don’t engage. The ATO maintains it will be providing clear pathways for clients to re-engage, work with them, and avoid escalation.

There is information on their website if a director needs help with paying and support in difficult times. You must engage with the ATO early before their debts become unmanageable.

You can access the ATO payment plan estimator to work out a plan.

Generally, general interest charges continue to apply when you have a debt. It is essential to bring all their lodgments up to date to avoid further penalties.

While your client has a debt, general interest charges continue to apply. Encourage your client to bring all their lodgments up to date to avoid further penalties.

CASH FLOW SUPPORT AND RED TAPE REDUCTION TO HELP SMALL BUSINESSES

On 23 March 2022, the government announced a package of new measures to slash red tape and provide cash flow support for millions of small and medium businesses.

Treasury and the ATO will consult on the following measures to automate tax administration:

  • Aligning instalment payments with financial performance and Improved cash flows through an improved pay as you go instalment system
  • Smarter reporting of taxable payments
  • Digitalising trust income reporting

Consultation with the community, tax practitioners and digital service providers to finalise the policy scope, design and specification will take place over the coming months. Further information on the consultation process will be provided shortly.

Subject to completion of consultation and advice from software providers about their capacity to deliver, the measures are proposed to apply from 1 January 2024 for Aligning instalment payments with financial performance, and Improved cash flows through an improved pay as you go instalment system; and 1 July 2024 for Digitalising trust income reporting.

 

 

Lowering tax instalments in 2022–23

The government will set the GDP uplift rate that applies to pay-as-you-go (PAYG) instalments and GST instalments to two per cent for the 2022–23 income year. This measure will apply to instalments due after 31 March 2022. This measure is now law.

Facilitating pre-filling of payroll tax returns through data sharing

The government will facilitate sharing of single touch payroll data with State and Territory Governments on an ongoing basis to cater for pre-filling payroll tax returns.


Aligning the excise and other reporting requirements

The government is lowering the costs of doing business for manufacturers, importers and distributors in the alcohol and fuel sectors by enabling businesses with an annual turnover of less than $50 million to lodge and pay excise and excise-equivalent customs duty on a quarterly basis, from 1 July 2023. This measure is not yet law.

FEDERAL BUDGET 2022-2023 KEY ISSUES OVERVIEW

Cost of living relief

The government is introducing a new temporary, targeted, and responsible cost of living package to take the pressure off household budgets.

  • One-off Cost of Living Tax Offset – From 1 July this year, more than 10 million individuals will receive a one-off $420 cost of living tax offset. As a result, eligible low- and middle-income earners will be up to $1,500 better off for a single income household or $3,000 better off for a dual-income household.
  • One-off Cost of Living Payment – To help Australians most in need, the government is providing a one-off, income-tax-exempt payment of $250 to 6 million eligible pensioners, welfare recipients, veterans and eligible concession cardholders in April 2022.
  • Temporary fuel excise relief – The Government will reduce fuel excise by 50 per cent for six months. This will see excise on petrol and diesel cut from 44.2 cents per litre to 22.1 cents per litre. The excise reduction will flow through to lower petrol prices over the next two weeks, as petrol stations replenish their stocks.

Backing small businesses

Small businesses will have access to a new 20 per cent bonus deduction for eligible external training courses for upskilling employees.

The Skills and Training Boost will apply to expenditure incurred from Budget night until 30 June 2024, providing $550 million in tax relief.

The government also provides $1 billion for a new Technology Investment Boost to encourage small businesses to go digital.

Small businesses will be able to deduct a bonus 20 per cent of the cost of expenses and depreciating assets that support digital uptake.

This new measure will support spending up to $100,000 per year, which applies from Budget night until 30 June 2023.

One-off cost of living tax offset

From 1 July this year, over 10 million individuals will receive a one-off $420 cost of living tax offset. Combined with the low and middle-income tax offset (LMITO), eligible low- and middle-income earners will receive up to $1,500 for a single income household or up to $3,000 for a dual-income household.

Case Study

Kate and Dan live together in their house in Toowoomba. Dan works in construction and is earning $63,000 in 2021‑22, and Kate works as an emergency nurse earning $90,000 in 2021‑22. With the one-off cost of living tax offset, Kate and Dan will receive a total reduction in their tax liability of $3,000 when they lodge their tax return, $840 more than they would have received without the increase. With the cost of living tax offset, and the Government’s Personal Income Tax Plan, Kate and Dan will pay $5,295 less tax when compared to the 2017‑18 tax settings.

Comment

While taxpayers will undoubtedly be grateful for this tax relief, this is confined to the year ending 30 June 2022. Of course, the “one-off” tax benefit of $420 will not continue, but LMITO will not continue until 2022-23.

Tax relief to support investment and create jobs

The coalition maintains its record on providing relief to small businesses is a follows:

Cutting taxes for small businesses

  • Reduced the company tax rate for small businesses from 30 per cent in 2013‑14 to 25 per cent from 2021‑22.
  • Introduced the unincorporated small business tax discount, and lifted the rate from 5 per cent in 2015‑16 to 16 per cent from 2021‑22 (up to a cap of $1,000).
  • Combined, these changes will deliver more than $21 billion in tax cuts to small businesses from 2015‑16 to 2024‑25, with around $2.6 billion flowing in 2022‑23.

Encouraging business investment and supporting cash flow

  • Reducing the GDP uplift rate for 2022‑23, delivering $1.85 billion in cash flow support for 2.3 million taxpayers, including small businesses.
  • Introduced rules to allow businesses with annual turnover or total income less than $5 billion to instantly write‑off assets to strengthen business investment and create more jobs, and extended them to 30 June 2023.
  • Enabled companies with annual turnover of less than $5 billion to offset losses against previously taxed profits to generate a refund and extended it to include the 2022‑23 income year.

Greater access to tax concessions

  • Expanded access to 10 small business tax concessions by lifting the annual turnover threshold from $10 million to $50 million, providing tax relief and reducing red tape.

Incentives to upskill staff

The government continues to deliver for small businesses by introducing the Skills and Training Boost.

Small businesses with an annual turnover of less than $50 million will have access to a new bonus of 20 per cent deduction for the cost of external training courses delivered to their employees by providers registered in Australia.

The boost will apply to eligible expenditures incurred from Budget night until 30 June 2024, such as a cyber security course delivered by a registered training provider.

This initiative will provide $550 million in tax relief for small businesses, supporting them in investing in their employees and growing their businesses.

Case Study

Andrew owns a transport company, Distribute R Us Pty Ltd, that has an annual turnover of $30 million and 120 employees.

In April 2022, Distribute R Us pays for a registered training provider to upskill their employees to run supply chain training courses, costing $200,000.

Distribute R Us pays for its employees to undertake specialist logistics training, costing a further $400,000, across 2022‑23 and 2023‑24 income years.

Under the government’s new Skills and Training Boost, Distribute R Us can claim a bonus deduction of $120,000, reducing its tax bill by $30,000. This is extra money that Distribute R Us can use to reinvest and grow the business.

Supporting businesses to go digital

The government is providing $1.0 billion to support small businesses to go digital by introducing the Technology Investment Boost.

Small businesses with an annual turnover of less than $50 million will have access to a new bonus of 20 per cent deduction for the cost of expenses and depreciating assets that support digital uptake, up to $100,000 of expenditure per year.

Around 3.6 million small businesses are eligible to access the new boost, which will apply from Budget night until 30 June 2023.

These changes will benefit small businesses by supporting them to invest in items such as an online sales platform, cyber security enhancements, cloud computing and digital tracking for livestock.

The government is also investing in digital capabilities through its Digital Economy Strategy. This will support businesses in boosting productivity, becoming more globally competitive, and generating rewarding and high-paying jobs.

Case Study

Harley owns a furniture manufacturing company, Star Sofas Pty Ltd, that has an annual turnover of $35 million and 120 employees.

In April 2022, as part of an overseas expansion, Star Sofas invested $100,000 to develop an online presence and build a digital inventory tracking system.

In July 2022, Star Sofas purchased multiple software subscriptions to enhance customer data analytics and marketing. Star Sofas incurs a total expenditure of $100,000.

The government’s new Technology Investment Boost means that Star Sofas can deduct an extra $40,000, reducing their tax bill by $10,000. The company can use the extra money to reinvest and grow.

Practice Update April 2025

31 March 2025
A foreign entrepreneur’s guide to starting a business in Australia Starting a business as a foreign entrepreneur can be an exhilarating way to access new markets, diversify investment portfolios, and create fresh opportunities. Many countries around the globe provide pathways for non-residents and foreign nationals to register businesses. However, understanding different countries’ legal requirements, procedures, and opportunities is crucial for success. In this issue, we will navigate the process of establishing a business in Australia to help foreign entrepreneurs looking to register a company in Australia. Key takeaways Foreign entrepreneurs can fully own Australian businesses with no restrictions on ownership. Registered office and resident director requirements are key legal considerations. ABN and ACN are essential for business registration. The application process can be done online, simplifying the process for foreign entrepreneurs. Why register a business as a foreign entrepreneur? There are various reasons why a foreigner may want to register a company in another country. These reasons include expanding into a foreign market, taking advantage of favourable tax laws, leveraging local resources, or benefiting from business-friendly regulatory environments. Before registering, conducting thorough market research to assess whether establishing a business abroad aligns with your objectives is essential. Understanding the country’s political and economic climate, legal framework, and tax system will help ensure the success of your venture. The general process for registering a business as a foreign entrepreneur While the exact requirements may differ from country to country, some common steps apply to most jurisdictions when registering a company as a foreign entrepreneur: Choosing the business structure The first step is deciding on the appropriate business structure. The structure determines liability, taxation, and governance. Common types of business structure include: Sole proprietorship: A single-owner business where the entrepreneur has complete control and entire liability. Limited Liability Company (LLC): Offers liability protection to the owners, meaning their assets are not at risk. Corporation (Inc.): A more complex structure that can issue shares and offers limited liability to its shareholders. Different countries have varying rules regarding foreign ownership, so understanding the options available is essential before registering a company. Registering with local authorities Regardless of the jurisdiction, most countries require you to register your company with the relevant local authorities. This process typically includes submitting documents such as: Company name and business activities: You need to choose a unique company name that adheres to local naming regulations. Articles of incorporation: This document outlines the company’s structure, activities, and bylaws. Proof of identity : As a foreign entrepreneur, you will likely need to provide a passport and other identification documents. Proof of address: Many countries require a physical address for the business, which may be the address of a registered agent or office. Tax Identification Number (TIN) and bank accounts After registering the company, you will typically need to apply for a tax identification number (TIN), employer identification number (EIN), or equivalent, depending on the jurisdiction. This number is used for tax filing and reporting purposes. Opening a business bank account is another critical step. Some countries require a local bank account for business transactions, and you may need to visit the bank in person or appoint a local representative to help with the process. Complying with local regulations Depending on the type of business, specific licenses and permits may be required to operate legally. For example, food service, healthcare, or transportation companies may need specific licenses. Compliance with local labour laws and intellectual property protections may also be necessary. Appoint directors and shareholders To register a company, you’ll need to appoint at least one director who resides in Australia. The director will be responsible for ensuring the company meets its legal obligations. You will also need to appoint shareholders, who can be either individuals or corporations. For foreign entrepreneurs, the requirement for a resident director is one of the key challenges. If you don’t have a trusted individual in Australia to act as the director, you can engage a professional service to fulfil this role. This ensures your business remains compliant with local regulations. Choose a company name Next, you need to choose a company name. The name should reflect your business but must be unique and available for registration. You can check the availability of a name through the Australian Securities & Investments Commission (ASIC) website. Remember that the name must meet legal requirements and cannot be similar to an existing registered company. If you’re unsure, seeking professional advice is always a good move. Apply for an Australian Business Number (ABN) and Australian Company Number (ACN) Once you’ve selected your business structure and appointed your directors, it’s time to apply for an Australian Business Number (ABN) and an Australian Company Number (ACN). These are essential for running your business in Australia. ABN: This unique 11-digit number allows your business to interact with the Australian Taxation Office (ATO) and other government agencies. ACN: This 9-digit number is allocated to your company upon registration with ASIC and serves as your business’s unique identifier. You can easily apply for both numbers online through the Australian Business Register (ABR) and the ASIC websites. Register for Goods and Services Tax (GST) If your business expects to earn more than $75,000 in revenue annually, you must register for GST. This means your business will charge customers an additional 10% on goods and services. The GST registration threshold for non-profit organisations is higher at $150,000 annually. If your company is below these thresholds, registering for GST is optional, but registration becomes mandatory once it exceeds the limit. Set up a registered office Every Australian company must have a registered office in Australia. This is where all official government documents, including legal notices, are sent. You can use your premises or hire a foreign company registration service to provide a virtual office address. Common challenges for foreign entrepreneurs While the process is relatively simple, there are a few hurdles that foreign entrepreneurs may encounter when registering a company in Australia: Resident director requirement: You’ll need a director residing in Australia. If you don’t have one, you’ll need to engage a service provider to fulfil this role. Understanding local tax laws: Australia has a corporate tax rate of 25% for small businesses with annual turnovers of less than $50 million. However, larger companies with turnovers exceeding $50 million are subject to a standard corporate tax rate of 30%. Foreign entrepreneurs must also understand the implications of the Goods and Services Tax (GST) and payroll tax. Compliance with Australian regulations: Navigating Australia’s various regulations and compliance requirements can be time-consuming. An accountant or adviser can help you in this regard. FAQs Can I register a company in Australia as a foreigner? Yes, foreign entrepreneurs can register a company in Australia. The only requirement is to have a resident director. Do I need to be in Australia to register a company? No, you can complete the registration process online. However, you must appoint a resident director. Do I need an Australian bank account to start a business in Australia? You will need an Australian bank account to handle your business’s finances and transactions. Can I operate my Australian company from abroad? Yes, you can operate your company remotely, but you must comply with all local tax laws and regulations.

Practice Update March 2025

5 March 2025
Do bucket companies help build wealth at retirement? Bucket companies are familiar with wealth-building strategies, particularly as individuals approach retirement. By distributing profits to a bucket company, individuals can benefit from reduced tax liabilities and enhanced investment growth opportunities. This essay explores how bucket companies influence wealth building at retirement, their impact on age pension eligibility and tax positions, and strategies to maximise economic outcomes. Understanding bucket companies A bucket company is used to receive distributions from a family trust. Instead of distributing profits directly to individuals, which may attract high marginal tax rates, the trust distributes income to the bucket company, which is taxed at the corporate tax rate (currently 30% or 25% for base rate entities). The company can then retain the after-tax profits for reinvestment or distribution. Impact on wealth building at retirement Tax efficiency and compounding growth Using a bucket company can result in significant tax savings compared to personal marginal tax rates, reaching up to 47% (including the Medicare levy). Retained earnings within the bucket company are taxed lower, allowing more capital to compound over time. Example of Tax Efficiency: Income DistributedPersonal Marginal Tax (47%)Bucket Company Tax (25%)Savings $100,000$47,000$25,000$22,000 Over 20 years, if the tax savings of $22,000 per year are reinvested at an annual return of 7%, they would accumulate to approximately $1,012,000. Age pension and means testing The age pension is subject to both an income test and an assets test. Holding wealth in a bucket company can impact these tests: Income Test: Distributions to individuals count as assessable income. Retained profits within the company do not. Assets Test: The value of the bucket company shares is counted as an asset, which may affect pension eligibility. Strategic use of the company can help individuals control their assessable income, potentially increasing their age pension entitlement. Strategies to maximise economic outcomes Timing of Distributions By deferring distributions from the bucket company until retirement, individuals can benefit from lower marginal tax rates or effectively use franking credits. Dividend Streaming Using franking credits from company-paid tax can reduce personal tax liabilities when distributed dividends. Investment within the Company Reinvesting retained earnings within the bucket company in diversified assets can enhance compounding returns. Family Trust Distribution Planning Strategically distributing income to lower-income family members before reaching the bucket company can reduce overall tax. Winding Up or Selling the Company Carefully planning an exit strategy to wind up the b ucket company or sell its assets can minimise capital gains tax liabilities. Example of a retirement strategy with a bucket company Assume that John and Mary, aged 65, have distributed $100,000 annually from their family trust to their bucket company over 20 years. Corporate tax paid: 25% Annual return on reinvestment: 7% After-tax reinvested earnings annually: $75,000 YearAnnual ReinvestmentTotal Accumulated Amount (7% p.a.)5$75,000$435,30010$75,000$1,068,91420$75,000$3,867,854 At retirement, they can distribute dividends with franking credits to minimise personal tax and supplement their income while potentially qualifying for some age pension benefits due to strategic income timing. FAQ What is a bucket company? A bucket company is a corporate entity that receives trust distributions, taxed at the corporate rate rather than personal marginal rates. How does a bucket company impact my age pension eligibility? While retained earnings do not affect the income test, the value of the company shares is considered an asset under the assets test. Can bucket companies help reduce tax during retirement? Yes, by using franking credits and strategic distribution timing, bucket companies can minimise tax liabilities. Are there risks associated with using bucket companies for retirement planning? Yes, risks include changes in tax laws, corporate compliance costs, and potential capital gains tax upon winding up the company. Should I consult a professional before using a bucket company? Absolutely. Professional advice is essential to ensure compliance with tax laws and optimise wealth-building strategies.

Personal super contribution and deductions

11 February 2025
Personal super contribution and deductions