THE NON COMMERCIAL LOSS RULES JUST BECAME HARDER TO PASS.

As you will no doubt be aware, if you run a loss making business as a partnership or a sole trader, the loss may be set off against your other income, reducing your overall tax liability.

In order to prevent individuals setting up businesses that were expected to make a loss, with the intention of using the losses purely to reduce taxable income, the non-commercial loss rules were introduced many years ago.

These state that in order to set off the loss, the loss must satisfy at least one of the following, which I like to call the “fair dinkum” tests:

Your loss is from primary production or professional arts and your income from other sources, excluding capital gains, is less than $40,000, or

The assessable income from your business is at least $20,000 in the income year, or

Your business has made a profit in three of the past five years (including the current year), or

Your business uses or has an interest in real property (excluding your private residence) worth at least $500,000, or

The value of other assets used in the business on a continuing basis is at least $100,000 (excluding motor vehicles, depreciable assets, trading stock, leased assets and trademarks, copyrights and similar rights).

Failure to pass any of the above tests results in the loss being carried forward, i.e. deferred. The loss can only be used to offset against future profits from the relevant business activity or any other income which passes one of the above tests.

THE CHANGE

From 1 July 2009 a further rule has been introduced. Specifically designed to hit the high net worth individuals, there is now a further requirement that, assuming a loss passes the non-commercial loss rules, it can only be deducted if your taxable income, before deducting the loss, is less than $250,000.

Taxable income in this instance includes total reportable fringe benefits, reportable superannuation contributions and total net investment losses (including financial investments and rental properties).

Should you be preparing to pay more tax or do you need to restructure your affairs NOW in the light of these rules?