In last week’s Federal Budget, the Australian government announced an extension of the anti-avoidance provisions that deal with non-commercial business losses.
First, some background.
For some years, the government and the Tax Office have been concerned about people obtaining tax deductions for what are, in effect, hobbies. For example, a person has a small vineyard from which they make small quantities of wine. There are some sales of the wine, but it is nowhere near enough to cover the costs of production. So, the “business” makes a loss and the person claims this as a tax deduction. Often, the person claiming the tax deduction has a high salary income. Hence the expression “Pitt Street farmer” (for New South Wales) and “Collins Street farmer” (for Victoria). (Those living in other states will have to make up their own phrase).
So, for a number of years now, we have had in the Australian taxation law what are known as the non-commercial loss provisions. If these provisions apply, they prevent the claiming of a tax loss immediately from what the legislation defines as a non-commercial activity. However, the tax loss can be carried forward to be set off against future income from the business activity.
In certain circumstances, even though a loss has been made, the losses can still be claimed as a tax deduction. The idea of these exceptions was to try and ensure that people who are carrying on genuine businesses are not get caught by these provisions. Broadly, you can offset losses from the business activity against other income if the business activity passes at least one of the following four tests:
- Does the business have assessable income of at least $20,000 in an income year?
- Has the business produced a profit in three out of the past five years?
- Does the business use real property or an interest in real property worth at least $500,000 on a continuing basis?
- Does the business use other assets worth at least $100,000 on a continuing basis?
Passing these tests, particularly for wealthy people, is not that difficult. So, the government has reacted to make it even more difficult for people on high incomes to be able to claim a tax deduction for losses from their business activities.
The change is that people with “adjusted taxable income” of over $250,000 will have excess deductions quarantined to the business activity. This appears to be a “blanket” exception to the four tests I mention above. For people with an adjusted taxable income of $250,000 or less, the existing rules will continue to apply.
The Treasurer has referred to the ability of wealthy people to claim tax deductions in the circumstances outlined above as a “loophole”. Accordingly, the government will move quickly to close this tax planning opportunity from 1 July 2009. It should be remembered, that this is only an announcement and the legislation must be passed by Parliament before it is effective. The exact application of the changes to the non-commercial loss provisions may be somewhat different after it has passed through the parliamentary process.
Wishing you easier business…