With the country officially in recession, the ATO is getting ready to help businesses that are struggling due to the economic downturn caused by COVID-19. It expects that for the 2019-20 and 2020-21 years, many businesses that ordinarily turn a profit may be making a loss, and for some businesses it may be the first time that they are making a loss. Businesses that find themselves in a loss-making position are urged to keep proper records to ensure that they can claim the deduction they are entitled to.

For sole traders or individual partners in a partnership, you may be able to offset your business losses against other assessable income (eg salary and wages or investment income) in the same income year if you meet at least one of the non-commercial loss requirements. If you do not meet any of the non-commercial loss requirements you can defer the loss or carry it forward and offset it when you next make a profit from your business.

Businesses set up under a company structure that make a tax loss can generally carry forward that loss as long as they want and claim a deduction for when the business makes a profit in a future year. Generally, records will need to be kept for 5 years for most transactions, however, if a tax loss is fully deducted in a single income year, records will only need to be kept for 4 years from that income year.

When calculating a business loss for the year, the ATO wants all taxpayers to double check their calculations to ensure that the expenses claimed are related to the business activity, apportionment (if any) has occurred, no private expenses have been claimed, and the amount is correct. Further, it notes that some deductions can’t be used to create or increase a tax loss such as donations, gifts, and personal super contributions, so business owners should be careful.

Business owners with businesses still temporarily closed due to COVID-19 restrictions nevertheless need to keep up with tax and super obligations according to the ATO. It says those businesses can ask for additional time or support if needed either from their tax professionals or from the ATO. For business owners intending to permanently close their businesses, any outstanding tax obligations will still need to be dealt with.

For example, outstanding activity statements and instalment notices will need to be lodged, a final activity statement and final tax return will also need to be lodged in order for the ATO to finalise the account and issue any refunds your business is entitled to. The ATO says it is ready to assist businesses navigate the economic conditions caused by COVID-19, including not applying penalties and interest in certain circumstances.