By: Max Newnham
The rules relating to the deductibility of business losses differs depending on the type of business structure used. When individuals run a business, either as a sole trader or a partnership, one of the four non-commercial loss tests must be passed. These tests do not apply to other business structures such as companies and family trusts.
When a business is operated through a company losses can be offset against other income of the company. When a company only makes losses, and these are carried forward over a number of years, one of two tests must be passed before the losses can be offset against that future income.
They are the continuity of ownership test and the same business test. To meet the continuity of ownership test there cannot be change of more than 50 per cent in the ownership and control of the company. If this test is not passed, as long as the company is still operating the same type of business, the losses can be claimed.
Q. I have a family trust that suffered business losses. I am changing the type of business from car repairing to hiring staff to do courier work. I am sure to make a profit but am changing the name slightly because of the change of “business type”. Can I still claim a business loss if I am changing the type of business?
A. The ability for family trusts to claim accumulated losses differs depending on whether the trust has lodged an election with the Australian Taxation Office to be classed as a family trust. These elections can be made at any time and can be retrospective, as long as the trust passes the family control test and the distribution test.
The family control test is based on a specified individual nominated as the person whose family group the election will apply to. The family group of the specified individual is very broad and includes their spouse, parents, grandparents, brothers, sisters, nephews, nieces, and children. It also includes any legal descendant of nephews, nieces or children and any one of their spouses.
The family group also includes trusts, companies or partnerships controlled by the family and other family trusts that have the same individual specified in the election lodged.
The distribution test is passed as long as distributions are only made to members of the family group.
If a family trust does not lodge the election it will need to pass the family control test and a pattern of distributions test. To meet this latter test there cannot be a 50 per cent or greater change in the pattern of income or capital distributions of the trust. This basically means there cannot be a major change in the percentage of the distributions of income among the family.
The changing of the type of business operated within your trust will not affect whether those accumulated losses can be claimed. To ensure that you can claim the losses you should lodge a family trust election as long as you can pass the relevant tests.
Source: Sydney Morning Herald
