Robert Goodman Accountants Blog

Made a tax loss? If you're a sole trader or individual partner, you may be able to apply the loss against other income like salary or investment income, or carry the loss forward to a future year. Learn what rules apply so you can start factoring losses into your business tax planning.

When you're starting a new business venture, it may take some time before the business becomes profitable. And there may be other situations where an established business operates at a loss in a particular year. So, what does this mean tax-wise? When your deductions in an income year are greater than your assessable income, you have a "tax loss". You generally can't receive a refund for a tax loss, but you can use it in other ways.

Using losses against other income

If you're a sole trader or individual partner, you may be able to use your business tax loss to offset other assessable income you earn personally. This includes salary and wages from employment and income from personal investments.

But watch out: if the loss is "non-commercial", you can't use it immediately to offset your other income. Instead, you must defer it (explained below). To pass the non-commercial loss rules, you generally must meet two requirements. First, your adjusted taxable income must be less than $250,000. For these purposes, you ignore your business losses, but must add any reportable fringe benefits, salary sacrifice or personal super contributions, and total net investment losses.

Second, you must pass one of the following four tests, which are designed to measure whether your business activities are sufficiently "commercial":

  • your assessable income from your business activity is at least $20,000;
  • your business has made a tax profit in three out of the past five years (including the current year);
  • you use real estate valued at $500,000 or more in your business on a continuing basis; or
  • the value of "other assets" (excluding vehicles and real estate) you use in your business on a continuing basis is at least $100,000.

If you don't pass any of these tests (or fail the $250,000 income requirement), you must defer the loss for use in future. You'll be able to apply the deferred loss against future business income when the business starts making a profit, or alternatively against other income sources when you start satisfying the non-commercial loss rules. Your losses can be deferred indefinitely until this happens.

The Commissioner of Taxation can use his discretion to allow you to apply the loss in the current year, but only in "special circumstances" or where the nature of your business is such that there will be a lead time before the business activities become profitable or sufficiently commercial.

There are also special rules for primary production and professional arts businesses. If your income from other sources (excluding any net capital gain) is less than $40,000, you can use your business tax loss against that income and you don't need to worry about the non-commercial loss rules.

Offsetting future income

What if you satisfy the non-commercial loss rules but don't have income against which you can offset your tax loss?

Sole traders and individual partners can carry forward tax losses to a later year to apply against future income. While losses can be carried forward indefinitely, you must use them to offset income at the first opportunity.

If you operate through a trust or company, talk to your tax adviser about the rules that determine when you can use carried-forward losses. These rules look at things like whether there has been a significant change in ownership or control since the loss was incurred (and for some entities, whether it carries on the same or a "similar" business after the change).

Expecting a loss?

Whether you're setting up a new business or need advice about using existing tax losses, contact our office to begin a discussion about tax loss planning to help your business succeed.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

The small business CGT concessions are a great tool for business owners to transfer wealth into super. Here, we break down the two essential requirements you must first meet in order to access any of the concessions. Could your business qualify? It may be time to see your adviser to start planning your business retirement strategy.

Have you considered the powerful tax and superannuation planning opportunities that the small business CGT concessions can offer your business? These concessions allow you to reduce – or in some cases, completely eliminate – the capital gain from the sale of a business asset, whether it's held directly by your business entity or in another related structure.

What's more, the concessions also allow you to make extra super contributions – sometimes up to $1,515,000 – in connection with the sale of business assets. This is an attractive opportunity for many small business owners heading for retirement, especially given the restrictive annual contributions caps that usually apply.

There are various concessions available, each with their own eligibility rules. However, there are two basic conditions you must meet before you can access any of the concessions.

Business size

The first requirement tests whether your business is "small" enough to qualify. There are two alternative tests: a turnover test and a net assets test.

The turnover test is met where you carry on a business and have annual "aggregated turnover" under $2 million.

This includes not just your business turnover, but also the business turnover of any entities that are "connected" or "affiliated" with you, which broadly means related entities that you control or influence. So, if you have another trust or company that carries on a separate business, its turnover will often be taken into account.

In terms of timing, you'll satisfy the test if your aggregated turnover last income year was under $2 million. Alternatively, it's also sufficient if your aggregated turnover this year is likely to be under $2 million, provided it was not $2 million or more in the previous two years.

What if you, the asset owner, don't carry on a business but passively hold the asset and it's used by another of your entities in its business? You can still qualify, provided that entity is sufficiently related to you and it passes the turnover test itself.

The alternative test is the net assets test. You meet this test if the combined net assets of you and certain assets of your "connected" and "affiliated" (ie related) entities is no more than $6 million in total. Being a "net" assets test, you can subtract the liabilities related to the assets. You can also ignore assets like your main residence (provided it's not used to produce income), personal use assets, superannuation entitlements and shares or units in your related entities.

Asset requirements

The second major requirement is that the capital gain must arise from the sale (or other CGT event) of an "active" asset. This means it must have been used or held in a business carried on by you or one of your "connected" or "affiliated" entities for the following time periods:

  • if you owned the asset for 15 years or less – for at least half the ownership period; or
  • if you owned it for more than 15 years – for at least 7.5 years.

What about property you hold in another structure and lease to your business? Property can be tricky because of a rule that specifically excludes assets where the asset owner's main use is to derive rent or other passive income. However, where the property is used by your "connected" or "affiliated" entity in its business, it will generally qualify as an active asset.

If you're planning to sell shares in a company (or interests in a trust), talk to your adviser about the special rules that apply to these types of assets.

Ready to explore your opportunities?

The small business concessions can provide significant tax and super benefits if implemented correctly. Contact our office to begin exploring the concessions for your business.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Unpaid super is a big problem, and the compliance landscape is changing. If you're an employer, now is the time to take action and protect yourself against penalties. Find out how enforcement activity will pick up under Single Touch Payroll reporting and learn about a new extended amnesty for disclosing past unpaid super.

The government is getting tough on unpaid compulsory super guarantee (SG) contributions, but fortunately for businesses it has recently announced a revised "grace period" to rectify past non-compliance. All businesses should review their super compliance to consider what action they may need to take.

How big is the unpaid super problem?

Estimates of the problem vary. Official ATO figures place the annual unpaid super "gap" at $3.26 billion (based on 2015–2016 data) before factoring in ATO intervention, or 5.7% of the super that should be paid by employers. However, some argue the problem is bigger, with Industry Super Australia placing the gap closer to $6 billion, affecting 2.85 million workers.

The extent of the problem can be obscured by "black economy" activity where workers are paid cash-in-hand, and also "sham contracting" where workers are misclassified as independent contractors to avoid paying entitlements like super contributions.

Compliance changes for businesses

The launch of Single Touch Payroll (STP) will dramatically improve the ATO's ability to monitor employers' compliance with compulsory super laws moving forward. This electronic reporting standard is now mandatory for all Australian businesses, and gives the ATO fast access to income and superannuation information for all employees.

What about past unpaid super you might already owe? You may have previously heard about an "amnesty" for coming forward and voluntarily disclosing historical underpayments of SG contributions without incurring penalties. After many hiccups with implementing this policy in 2018 and 2019, the returned Coalition government has finally taken steps to relaunch the policy. Under proposed legislation currently before parliament, the amnesty will work as follows:

  • The scheme applies to any unpaid super you still owe dating back to 1992 until the quarter starting on 1 January 2018.
  • To qualify, you must not only disclose but also pay the outstanding contributions – including interest.
  • You must make this disclosure to the ATO before it begins a compliance audit of your business (or informs you it intends to audit you).
  • If you qualify, the ATO will waive certain penalties that would usually apply. You will also be able to deduct your catch-up payments, provided they are made before the amnesty ends.

If you don't come forward and you're later caught out, the ATO will be required to apply a minimum penalty of 100% on top of the amount of unpaid super you owe (although this can be as high as 200%). Additionally, catch-up payments made outside of (or after) the amnesty are not deductible.

The timing of your disclosure is important. The proposed new amnesty will cover both previous disclosures made since 24 May 2018 (under the old amnesty scheme that the government failed to officially implement) and, importantly, disclosures made up until six months after the proposed legislation passes parliament.

Watch this space for confirmation of the final amnesty deadline once the legislation passes. But in the meantime, businesses with unpaid super should give serious thought to making a disclosure.

While there's a risk that the amnesty legislation may never pass parliament – which would mean the protections against ATO penalties for disclosing businesses wouldn't be guaranteed by law – businesses do face significant penalties if they're caught by the ATO, with or without an amnesty in place.

Even in the event that the amnesty does not become law, the ATO would still look favourably upon businesses who make voluntary disclosures. This may be a basis for negotiating a partial waiver of penalties.

Review your super arrangements

Contact us for assistance in reviewing your business' compliance and whether you may qualify to make a disclosure under the proposed amnesty. We can help you plan for any large amounts of unpaid super you'll need to pay and help put you in the best position to minimise penalties.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Selling shares: how does tax apply?

Did you know that when you sell your shares, the size of your capital gains tax bill is affected by how long you've held the shares, and how you offset your capital gains and losses? Knowing the tax rules can help you plan ahead.

Whether you own just a few listed shares or have an extensive portfolio, understanding how capital gains tax (CGT) applies when you sell your shares can help you plan your trades effectively. Here, we break down the rules for taxpayers who hold their shares as a passive investment. If you trade shares on a scale that amounts to a business of share trading, talk to your tax adviser about the different tax regime that applies.

Each time you sell a parcel of shares, you trigger a "CGT event" and you must work out whether you've made a capital gain on that parcel (where the proceeds you receive exceed the cost base) or capital loss (where the cost base exceeds the proceeds). You also trigger a CGT event if you give the shares away as a gift – perhaps to a family member. For tax purposes, you're deemed to have disposed of the shares at their full market value.

Here's how the CGT rules work: all of your capital gains for the income year are tallied and reduced by any capital losses.

This includes your gains and losses from all of your assets that year, not just shares. If you have an overall "net capital gain", this is included in your assessable income and taxed at your marginal tax rate. If you have a "net capital loss", you can't offset this against ordinary income like salary or rental income. Instead, a net capital loss can be carried forward to future years to apply against future capital gains.

The 12-month discount rule

As an individual, you can reduce your capital gain by 50% if you've held the shares for at least 12 months. This "discount" is also available to trusts (also 50%) and superannuation funds, including SMSFs (33.3%), but not companies. This is an important consideration when you're deciding what structure to hold investments in.

There's a further detail that may make a big difference if you have multiple gains and losses: the 50% discount is only applied after you subtract any capital losses for the year (and any capital losses carried forward from earlier years). Importantly, you can choose which gains to offset losses against. So, if you have any gains that don't attract the discount because you held the asset for less than 12 months, it's often best to subtract your losses against these non-discountable gains first in order to maximise the benefit of the 50% reduction to the discountable gains.

If you bought the shares before 21 September 1999, you have an alternative option of applying an indexation factor to increase the cost base (rather than applying the 50% discount). Your tax agent can help you determine which choice gives you a better tax outcome.

Working out the "cost base"

Where you bought the shares at market value, your cost base includes what you paid for the shares and also incidental costs like brokerage fees (for both the purchase and sale). Watch out for special situations like dividends you chose to reinvest as additional shares – the amount of reinvested dividends is included in those shares' cost base.

If you received the shares as a gift, you're deemed to have received them at market value on the date of the gift. What if you inherited them from a deceased estate? If the deceased acquired the shares before 20 September 1985, you must adopt the market value on the date of death. But if the deceased acquired the shares after that date, you inherit the deceased's own cost base for the shares as at the date of death.

Looking to invest in the share market?

Contact our office for expert advice on managing your share portfolio to achieve the most tax-effective investment returns.

Need help?

Have you sold some shares during the year and need to calculate the tax impact? Contact us for expert assistance.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants.  

You may have heard a lot recently about super funds providing either opt-in or opt-out insurance and have wondered how will affect you and your retirement savings. Perhaps you've heard horror stories about super funds cancelling people's insurance. Don't fret, in most cases cancellation of insurance only happens in limited instances, and your fund will most likely notify you before any cancellation occurs. As for opt-in and opt-out insurance, the changes are coming, but not until 1 April 2020, so if you're affected you'll have plenty of time to prepare.

Insurance within superannuation has always been a mixed blessing, good for some who enjoy having cheaper insurance, while others see as an erosion of their super balances. It doesn't matter which camp you fall into, the recent changes to the way super funds provide insurance may impact you depending on your super balance, age, and when your last contribution was.

Since July this year, super funds have been required to cancel insurance on accounts that have not received any contributions for at least 16 months unless the member elects to continue the cover. In addition, inactive super accounts with balances of under $6,000 will either be automatically consolidated by the ATO with other accounts you may hold or transferred to the ATO. If your super is transferred to the ATO, any insurance will also be cancelled.

This applies to life insurance, total and permanent disability (TPD) insurance and income protection (IP) insurance that you may have with your super fund. Before cancelling your insurance, your super fund will most likely notify you, although if you're worried about your insurance being cancelled, you can contact your super fund to discuss your options.

Remember, once your insurance is cancelled, you can no longer make a claim and it doesn't matter how long you had held the policy previously.

Whilst this change is designed to stop people from paying unnecessary insurance premiums, it can have unintended consequences for those on longer periods of leave such as parental leave and long-term sick leave. The best thing to do is to engage with your super fund regularly to ensure that an adequate level of insurance is maintained and you're not paying too much for insurance cover you don't need.

Another change coming to super funds in the not too distant future of 1 April 2020 is opt-in insurance for members under 25 years old and those with account balances of less than $6,000. From that date, members under 25 who start to hold a new choice or MySuper product will need to explicitly opt-in to insurance. Currently, the onus is on the member to opt-out of insurance if they do not want it. This change is designed to protect younger people on their first jobs from super balance erosion stemming from unnecessary insurance but may disadvantage those who assume that they will automatically have insurance based on previous rules.

For members with active super account balances less than $6,000, super funds will be required to notify them of the change in the opt-in insurance requirements by 1 December 2019. This will give members plenty of opportunity to opt-in to the relevant insurance policies by 1 April 2020 if they choose to do so.

However, if you work in a "dangerous occupation" such as a member of the police force, fire service or ambulance service, among other occupations, the change in the opt-in insurance requirement will not apply to you even if you're under 25 years or have balances below $6,000.

The insurance changes may be good for some and not so for others, it is difficult to strike the right balance between the two camps. The best thing you can do for yourself is have an awareness of your superannuation, including fees, insurance and other outgoings. After all, it is your hard-earned money and you want it to be working hard for your retirement.

Need help?

Do you need help in figuring out if you're affected by the changes in insurance rules in superannuation? Perhaps you'd like help in working out how much insurance cover you really need to protect you and your family? Or maybe you'd just like to get your super organised by consolidating your accounts? We can help you with this and more, contact us today.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants.  

The qualifying age to receive a genuine redundancy payment has recently been increased to the age pension age, so even if you're over 65 you may still be able to receive the payment. The advantage of that is you'll potentially be able to work longer and retire later in life whilst still being able to receive a tax-free genuine redundancy payment. However, the rules surrounding this area is quite complex and is largely dependent on the facts of each case, so caution is advised.

With everyone retiring later in life and working longer, the government has been playing catch up to align some outdated age provisions in the tax law to today's standards. One such change brings into line the genuine redundancy payment's qualifying age with the age pension age. In real world terms, it means the qualifying age has been increased from 65 to between 66 or 67 depending on the year you were born. So, if you're dismissed on or after 1 July 2019, and are between 65 and 67, you may potentially qualify for more of your redundancy payment to be tax-free depending certain eligibility conditions.

Apart from the age requirement, to receive a part of the payment as a tax-free genuine redundancy payment the following conditions must also be met:

  • payment must be received in consequence of an employee's termination;
  • termination must involve the employee being dismissed from employment;
  • dismissal must be caused by redundancy of the employee's position;
  • redundancy payment must be made genuinely because of redundancy;
  • if dismissal was not arm's length, the payment must not exceed the amount that could reasonably be expected to be made on an arm's length basis; and
  • at the time of dismissal, there was no arrangement between employee or employer or employer and another person to employ the employee after the dismissal.

In the context of a genuine redundancy payment, "dismissal" usually involves a termination by an employer without an employee's consent. It also includes constructive dismissal if the employee has little option other than resigning.

However, an employee can be "dismissed" even in circumstances where they have expressed an interest in accepting a redundancy package, provided that the final decision to terminate employment remains solely with the employer.

As each workplace is different, the circumstances of dismissal will also vary wildly. The determination of whether a payment qualifies as genuine redundancy will depend on the facts in each case. This area of law is quite complex and there are many factors that could sway the decision one way or the other, especially in instances of company restructures.

If a payment does not meet the conditions of a genuine redundancy or if you are over the qualifying age, the payment will most likely be taxed as an Employment Termination Payment (ETP) instead. Depending on your age and the amount you have received, you may be taxed concessionally under an ETP. For example, for those 56 years and over, amounts up to $205,000 may be taxed at 15%

If a payment does qualify as a genuine redundancy payment, then the amount that will be tax-free depends largely on your years of service and the year in which the redundancy was paid. For example, if you received a genuine redundancy payment in the 2019-20 income year and you had 10 years of service with your employer, then potentially $63,838 of any payment that you receive will be tax-free. Any amounts in excess of that will be taxed as an ETP.

Want to find out more?

If you've received a payment as a part of a dismissal and you're unsure whether or not it is a genuine redundancy payment or an employment termination payment, we can help you figure it out. Contact us today to ensure you're not paying too much tax.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Tax relief for drought-stricken farmers

With the drought sweeping across the country, everyone is doing what they can to help. Farmers have been offered access to concessional loans, grants, and special allowances to help ease the immediate financial burden. While it is difficult to predict when the drought will break, for those who are in the process of navigating their way out of immediate financial strain, there are ways to future proof your farm or primary production business by taking advantage of various tax concessions.

As the ongoing effects of the drought sweeps across the nation, the financial effects are no doubt weighing heavily on the minds of farmers and other primary producers. While the government cannot make it rain, it is doing its bit to ease the financial strain by giving those affected by drought more time to pay their taxes, waiving penalties and interest charges, adjusting PAYG instalments, and promoting tax incentives.

Some of the immediate assistance measures include concessional loans and the farm household allowance in which lump sum payments of up to $12,000 can be paid to eligible farm households.

The allowance can also be in the form of fortnightly payments for a maximum period of 4 cumulative years at the same rate as the Newstart allowance. This allowance may be available to both the farmer and his/her partner provided certain conditions are met. An activity supplement of up to $4,000 to pay for study, training or professional financial advice may also be available to eligible households.

In addition to the immediate assistance, primary producers can also obtain ongoing benefits of various tax concessions including the instant asset write-off, immediate deductions for fodder storage assets, and income averaging to assist with cash flow.

Instant asset write-off

This financial year (from 1 July 2019 to 30 June 2020) is the last year you can get an immediate deduction for assets you've purchased that cost less than $30,000 (depending on the date of purchase), provided you're classified as a small business. From 1 July 2020, you can only obtain an immediate deduction for assets that cost less than $1,000. Make sure you make the most of this concession, if you're thinking of buying a water storage or other drought proofing assets, it may be wise to bring forward the purchase.

Fodder storage assets

In addition to the other assets that you can get an immediate deduction for, any structural improvement, capital repair, alteration, addition or extension to an asset or structural improvement that is primarily and principally used for storing fodder is immediately deductible in the year you incurred the expense. Increasing the capacity or changing the way the feed is stored will almost certainly provide an insurance policy for dry times and lessen the financial strain of having to purchase feed for livestock.

Income averaging

If you're an individual carrying on a primary production business, you can apply income averaging to account for what may be significant fluctuations year on year from environmental and other factors. This ensures that you will not be subject to an unreasonably high marginal tax rate one year when it is not representative of your income levels over a longer period.

Income averaging does not apply automatically when you start to carry on a primary production business. Some basic conditions must also be satisfied such as the business being carried on for 2 or more years in a row, and the basic taxable income in one year being less than or equal to the basic income in the next year.

When using income averaging, tax is still calculated on your actual basic taxable income at the usual rates, however, you will be entitled to a tax offset if the average income is less than the taxable income. Conversely, you may have to pay extra income tax if the average income exceeds the taxable income.

Here to help.

If you are experiencing hardship due to drought, we can help contact the ATO on your behalf or assist with your application for farm household allowance to ease the immediate financial burden. Contact us today to start laying the ground work to take advantage of tax concessions and drought-proof your future.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

As a business owner you can deduct the cost of work trips you need to take for business. But what happens when you mix business with some hard-earned time for relaxation? Find out how major expenses like airfares and accommodation are treated when you take mixed-purpose business trips.

Do you sometimes take work trips for your business – perhaps to conferences, trade shows or interstate clients? When a trip is clearly for business purposes only, the rules for deducting your expenses are fairly straightforward.

You can claim airfares, taxis and car hire (and fuel). You can also deduct accommodation costs for overnight travel if the business requires you to be away from your permanent home overnight. Meals are also deductible when you're required to be away overnight.

But what happens when you've planned a holiday to coincide with your work trip, or while you're travelling for business you also catch up with family or friends?

It's important that you keep records to show which expenses are business-related and which are private.

Can I claim my full return airfares?

What is the tax deductibility of airfares when you combine business and private travel? Let's assume you travel to London for a two-week trade show and stay a few extra days for sightseeing. The ATO says that if the primary purpose of the trip is for business, you can claim the whole cost of the return airfares as a business deduction, as well as related costs like travel to and from the airport. In this London example, the additional sightseeing is just incidental.

If you're undertaking a significantly longer holiday so that the primary purpose of the trip is not just the business activity, you may need to apportion your airfares. And if the primary purpose is clearly private with some merely incidental work activities (eg you attend a half-day work event while you happen to be on an extended personal holiday), you generally couldn't deduct the airfares.

How is accommodation treated?

Your deductions for accommodation are limited to those nights that you're required to be away for the business purpose. This will depend on the facts of your trip. In the London example above, you couldn't deduct your accommodation costs for the few extra nights you stayed for sightseeing. (Similarly, any meals and transport around London would not be deductible for the days you spent sightseeing.) This is the case, even though you could deduct your full airfares.

On the other hand, if you have to be away for an extended period and some days don't involve work activities, you may still be able to claim your full accommodation costs. The ATO gives the example of being interstate for two full weeks to complete a project on-site for a client. Your accommodation costs on the middle weekend (when you're not working at the client's site) would still be deductible. Of course, private weekend activities like sightseeing, entertainment and having dinner with friends would not be deductible.

Watch out for these traps

The following expenses are not allowed as deductions:

  • Travel before you start carrying on your business.
  • Visas, passports and travel insurance.
  • The costs of bringing family members (eg a spouse) along with you.

Record-keeping requirements

Sole traders and partners must keep a travel diary if they travel for six or more consecutive nights. This must detail each business activity undertaken, the location, the date and time it began and how long it lasted.

If your business is run through a company or trust structure, the ATO says it's not compulsory to keep a diary, but it's strongly recommended. And if you're a company, be careful about your business paying for any private part of your travel as this could have consequences under the Division 7A "deemed dividend" rules about benefits for shareholders and their associates.

Travelling for business?

Don't attract unwanted ATO attention to your business. Talk to us to ensure you're getting the maximum deduction for your business trips while staying within the ATO guidelines.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Crowdfunding: is it income?

Crowdfunding has fast become the go to place for people in need of large amounts of money quickly, but is the money raised considered to be income and therefore taxable? Campaigns on various platforms range from the shameless (lavish weddings/honeymoons) to ground-breaking (new innovative products), and whether each campaign is taxable depends entirely on the circumstances of each case. Generally, if the campaign is related to running/furthering your business or is a profit-making plan, then any money received would be classed as income.

These days it feels like everything is being crowdfunded, you may have heard the ridiculous story of a man who wanted to raise US$10 for a potato salad and ended up with US$55,000 from complete strangers. Or perhaps you've heard stories of shameless couples who wanted to people to fund their lavish weddings or honeymoons? Crowdfunding has fast become the go to place for people in need of large amounts of money quickly, but is the money raised taxable?

If you're unfamiliar with crowdfunding, it is where individuals or businesses (ie the promoter) upload a description of the campaign (eg to fund a potato salad or a new invention) along with the amount they want to raise to a third-party internet platform (eg Kickstarter, GoFundMe, Indiegogo etc). Other netizens can then choose to support the campaign or cause through pledging money (ie contributors).

There are several types of crowdfunding and each may attract different tax consequences for the promoter of the campaign. A large number of campaigns are what can be described as donation-based. This is where a contributor to the campaign pledges an amount of money without receiving anything in return. If you're a contributor in this case, you will not able to deduct an amount contributed in a crowdfunding campaign as a "donation" in your tax return unless the cause you've donated to is a Deductible Gift Recipient (DGR). An exception is if you carry on a business, and the cost of contributing to the campaign falls under business expenses such as sponsorship or marketing.

There are other campaigns which can be referred to as rewards-based in which the promoter provides a reward including goods, services or rights to contributors in return for their payment. An example of this may be differing levels of campaign-related merchandise that can be received depending on the amount pledged by the contributor. Usually, the acquisition of goods or services by the contributor is considered to be private in nature and not deductible.

As the promoter of a campaign (either donation-based or rewards-based), whether or not the money you receive is considered to be taxable depends on the circumstances.

In general, if the money received is to be used to further your business or is a profit-making plan, then it is considered to be income. Remember, the hurdle for something to be a profit-making plan is much lower than that of a business. Therefore, if you as a promoter launch a crowdfunded project with intention of making a profit, and then carry out the project in a business-like way, the money raised could very well be considered to be income.

The difference between whether or not the money is classified as income can be minor and will be determined by the facts in each case. For example, money received from crowdfunding the making of a movie may or may not be income for the promoter depending on factors such as: whether the promoter draws a personal salary from the crowdfunded income; whether the promoter will keep any of the funds raised; or whether the movie made will be widely distributed.

Want to find out more?

If you're thinking of starting a crowdfunding campaign or have already had success with one, we can help you deal with all the tax consequences, so you can concentrate on more important things, like making your business or project a success.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

If you have a business in addition to your main employment, the non-commercial loss rules could apply to you, which may prevent you from deducting your business losses against your other income. Depending on your business activity, as long as you satisfy certain conditions, your business will not be subject to the non-commercial loss rules. If your business does not satisfy these conditions, don't fret, you can also apply to the Commissioner for an exemption under certain circumstances.

Do you run a side business in addition to your main employment? This could be in primary production (ie a farm or winery), retail or any other profession, trade, vocation or calling, provided it is not in a role of an employee. If you do, you may be subject to non-commercial loss rules, which are designed to restrict losses from "non-commercial" business activities from being offset against income from other sources, say your employment income.

A "non-commercial" business activity in this context is any business where the deductions exceed the assessable income in any particular year. However, the non-commercial loss rules will not apply (ie you are able to offset losses from the business activity against other income) under the following circumstances:

  • the assessable income from the business for the year is at least $20,000;
  • the business made a profit (for tax purposes) in at least 3 of the past 5 income years including the current year;
  • the total value of real property (or interests in real property) used on a continuing basis to carry out the business is at least $500,000; or
  • the total value of other assets (excluding cars, motorcycles or similar vehicles) used on a continuing basis in carrying on the business is at least $100,000.

The above conditions only apply to those with an adjusted taxable income of less than $250,000.

Those with an adjusted taxable income of $250,000 or more are considered to be "high-income earners" and will have their deductions from the business quarantined to the business activity.

As such, they will only be allowed to deduct the loss when the business makes a profit. However, high-income earners and those that who do not satisfy the above conditions can still make a request to the Commissioner of Taxation to exercise his or her discretion not to apply the rules.

The Commissioner may exercise his or her discretion to not apply the non-commercial loss rules if:

  • the business was or will be affected by special circumstances outside of your control (eg natural disasters, unforeseen major accidents, government restrictions, illnesses affecting key personnel);
  • if you are not a high-income earner, and the nature of the business means you will not satisfy the conditions, however, the business is objectively expected to make a profit or pass one of the conditions within a commercially viable period for the industry; or
  • if you are a high-income earner, and the nature of the business is such that it has not and will not produce a tax profit for the year in question and there is an objective expectation that it will make a tax profit within a commercially viable period for the industry.

The exercise of discretion is based on an assessment of the facts in each case, as such, any application should be accompanied by supporting evidence of special circumstances, and/or evidence from independent sources including industry bodies, professional associations, and government agencies as to what a "commercially viable period" for the industry is.

If you're a primary producer or a professional artist (eg authors, playwrights, artists, sculptors, composers, performing artists and production associates) and your income from other sources that do not relate to the business is less than $40,000 (excluding net capital gains), you can ignore all of the above, as the non-commercial loss rules will not apply to you. You will be able to deduct any losses from the business against your other income, but you should beware of the $40,000 threshold which may change from year to year based on your personal circumstances.

Still not sure?

If you get the bulk of your income from being an employee and run a business on the side, we can help you figure out if you're subject to the non-commercial loss rules. Alternatively, we can help you apply for the Commissioner to exercise his or her discretion in relation to any business activity you may run so you can start deducting the losses while building your business.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants.