I work full time as a mechanic, but I also operate a small manufacturing business which has run at a loss each year. Am I able to offset these losses against my wages to reduce my tax?
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There are certain tests which must be satisfied in order to claim losses from a business you operate as an individual (whether alone or in partnership) against other income.
Firstly, the total income test must be satisfied. This is an overriding test which must be satisfied before considering any of the other four tests.
To satisfy the total income test, the total of your taxable income, reportable fringe benefits and reportable superannuation contributions (from any source) must be less than $250,000.
Provided the total income test is satisfied, you then need to pass at least one of the following four tests.
The assessable income test, your business must generate assessable income of $20,000 or more. The profits test, your business must make taxable income (ie profit) in at least three of the past five years. The real property test requires you to own and use in your business, land or buildings worth $500,000 or more. The other assets test requires you to use business assets, being mainly plant and equipment and trading stock, worth $100,000 or more.
There are certain tests which must be satisfied in order to claim losses from a business you operate.
If you do not pass any of the above four tests, you will not be able to offset those losses against your other taxable income. However, you can carry forward the losses for use in the future once you do pass one of these tests.
If you carry on a primary production or professional arts business, the rules do not apply provided your income from other sources is less than $40,000.
Given the complexity of these rules, it is recommended you discuss their application with your tax agent or business advisor. For more information on this topic or another tax question, email tax.albury@crowehorwath.com.au.