Offsetting profit and losses between businesses 043-03100070

A person may operate more than one business and be able to offset the losses from one against the profit from others, for taxation purposes. Under section 1075 of the Social Security Act 1991, only expenses that relate to each business can be deducted from that business's income. This applies regardless of whether the business activities are conducted under the umbrella of the same business structure. That is a business that operates in more than one field or by separate businesses entities.

Businesses that are not necessarily related cannot be offset against each other. Unrelated fields of activity are to be treated as separate sources of income.

A loss from one business activity can only be offset against the assessable profit from another business activity if the assessable income relating to the second business could not have arisen without the losses by the first business being incurred, that is, the loss was necessarily incurred to produce the income for the other profitable activity.

When the loss made by one business activity is related to the profit of a second business activity, offsetting is allowed for the specific portion of the losses which directly relate to the profits of the second business activity. In some cases this will be the total loss. In other cases it will only be a portion of the overall loss made by a business that is able to be offset against the profitable business activity.

In all cases it is up to the customer to identify the specified portion of the losses of the first business that were necessarily incurred to earn the income of the second business. This situation would usually only arise at the request of the customer. The Australian Taxation Office will allow a loss from a business to be offset against income from salary/wages, interest on investments, dividends or almost any other sources of income. Offsetting, in this case, is not allowed for Social Security income test purposes. Each source of income is assessed separately with no offsetting except in the circumstances mentioned above.

The income received from renting, letting or a lease, is considered to be derived from a profit-making activity and not from a business. Accordingly, in most situations offsetting of rental income is not allowed for Social Security income test purposes either:

• between rental properties, or
• between income from rental activities and income from business activities

If the net income from a property is a negative amount, the income for social security purposes is nil

The customer may be a controller, partner or sole trader in one business which owns the real estate which is occupied and rented by another business in which they are a controller, partner or sole trader. For example:

• A farming property is owned by a private company which the customer controls. The farm is leased by the sole trader farming business owned by the customer
• A partnership between two customers which own a commercial laundry, the premises are rented by one of the partners. This partner operates a laundry/dry cleaning business, from the rented laundry

When the loss made by one business activity is related to the profit of a second business activity, offsetting is allowed for the specific portion of the losses which directly related to the profits of the second business activity. In some cases this will be the total loss. In other cases it will only be a portion of the overall loss made by a business that is able to be offset against the profitable business activity.

If the rental activity profit is dependent upon the loss generated by the second business activity, then the loss that directly relates to the rental activity profit may be offset against the rental activity profit.

Only expenses/loss that relate to the generation of the rental activity profit may be offset. The losses need to be necessarily related (for example, land rates expense, rent expense, maintenance and repairs). If the total amount of loss distributed to the customer from one related activity exceeds the profit of another, this does not mean there is no income to be assessed.

The amount allowed to reduce the profitable entities income is limited to the loss distributed to the customer.

Property developers are considered to be carrying on a business, therefore income from this source can be offset by losses from a necessarily related business.

If more assistance is required in determining whether the profit and losses of the businesses are related, the case can be referred to a Complex Assessment Officer for assessment.

Offsetting of business losses also applies to controlled private trusts and companies. A sole trader or partner in a partnership is allowed to offset any loss from that business operation against their share of any attributed income from a private controlled trust or company (and vice versa), provided the loss of one business is necessarily related to the profit of the other.