The ATO anticipates that in the 2019-20 and 2020-21 income years, there will likely be a number of businesses that would ordinarily be turning a profit that due to COVID-19 may be looking to make a loss, possibly for the first time. But it reminds businesses doing it tough as a result of COVID-19 that they have a range of options, including claiming a deduction for losses.
The ATO has reminded sole traders and individual partners in a partnership who meet certain conditions that they can offset current year losses against other assessable income (such as salary or investment income) in the same income year if they meet the non-commercial loss rules. Otherwise, they can defer the loss or carry it forward and offset it to a future year when the business next makes a profit.
The ATO also noted that businesses under a company or (listed) trust structure that have made a tax loss in a current year can generally carry forward that loss indefinitely — provided they meet the similar business test, or the continuity of ownership test.
ATO Assistant Commissioner, Andrew Watson, says small business owners may need to be reminded also that there are some deductions that can’t be used to create or increase a tax loss, such as donations or gifts and personal super contributions.
The ATO also acknowledged that businesses may be finding it difficult to estimate income for the purposes of pay-as-you-go instalments. “To assist businesses affected by COVID-19, we will not apply penalties or interest for excessive variations when you make your best attempt to estimate your end of year tax,” Watson says.
He also acknowledged that some businesses may need to close their doors — either temporarily or permanently — due to COVID-19, particularly in Victoria. Clients may then need reminding that there’s a few things they’ll need to do, like lodge any outstanding activity statements and instalment notices, make GST adjustments on the final activity statement and lodge final tax returns so the ATO can finalise their account and issue any refunds that might be owed.
After finalising their tax affairs, there may also be a need to cancel the ABN and perhaps GST registration. “You’ll also need to keep your business records for at least five years after the end of the financial year you sell or close your business in,” Watson says.