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Assessment of Business Losses for Sole Traders and Partnerships

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This topic provides information on the following:

Assessment of business losses

If a business runs at a loss, a nil amount is included in the income tests. Only the pensioner's share of the net result from a partnership, trust or company is assessed.

Business losses from the current year, or from previous years, are not allowed as deductions from other profits or income derived from unrelated sources, such as:

  • earnings,
  • superannuation,
  • profits from investments, or
  • profits from unrelated businesses.

Although the Taxation Office allows losses to be deducted from other income, this is not the case for income testing of pensions..

Losses which can be offset

Losses within a partnership can be offset against the profits of other necessarily related activities if a pensioner is involved in:

  • a business or partnership which operates in more than one field, or
  • 2 businesses, each operating under a different business structure.

Necessarily related means that if the activity which made a loss had not occurred, then the income from the other activity would:

  •       not have been earned, or
  •       have been substantially less.
Example of losses which can and cannot be offset

If a pensioner has an interest in a partnership that consists of a farm operation and a quarrying operation.

The following table describes when the losses can and cannot be offset.

If the farm and quarry operation are carried out on...

then the losses from the farm...

the same site and the farm tractor is used on the farm and to transport material and equipment to and from the quarry site

that relate specifically to the use of the farm tractor can be offset against the business income from the quarry operation.

Even though the farm and quarry are two separate operations, they are necessarily related, as the income from the quarry would not have been generated without the use of the farm tractor.

different sites and are run as unrelated businesses not using equipment in common

cannot be offset against the quarry. They are separate operations which are not necessarily related.


For the purposes of income and assets assessment, a sole trader is a business owned by one person.



The business:

  • is not a separate legal entity from the owner,
  • is not a separate accounting entity, which means that sole traders need ONLY lodge a personal tax return,
  • may be run in the owner's name OR under a registered business name, and
  • may or may not have employees.



The owner is:

  • liable for all the debts of the business, and
  • entitled to all the profits of the business.

For the purposes of income and assets assessment, a partnership is the relationship which exists between people carrying on business in common, with a view to making a profit. A partnership agreement may be oral OR written. The business may be run:

  •       in the owners' name(s), or
  •       under a registered business name.

The business is not a separate legal entity, which means that although the partnership lodges a tax return, the profit or income is assessable in the hands of the individual partners.

Each partner:

  •       owns an agreed portion of the business assets,
  •       receives an agreed portion of the profits, and
  •       is 'jointly and severally' liable for all business debts.

According to section 5H of the VEA income is:

  • an amount earned, derived or received by a person for the person's own use or benefit;
  • a periodical payment by way of gift or allowance; or
  • a periodical benefit by way of gift or allowance.

 

 

Company has the same meaning as in the Income Tax Assessment Act 1997.

 

 

Profit, for a business, is the amount of earnings in excess of its expenses over 12 months.