Understanding Your Business Income, Use of Funds, and Losses: Key Insights from the ATO

Do you know what business income is?

On 12 September 2024, the ATO released a guide about the different types of business income. Broadly, business income is income earned from selling goods or services through physical stores, websites, apps or even personal advertisements. However, individuals who earn extra income, have a 'side hustle', or have turned their hobby into a business need to declare this income also.

Business income includes both cash and other forms of payment, such as clothing, jewellery, flights, vouchers, or crypto assets. These non-cash benefits need to be recorded as income at their market value on the individual’s tax return, although they may be reduced by the amount the individual would have been able to claim as a deduction for business purposes.

Some payments are not assessable income and do not need to be included on the individual’s tax return. This includes non-assessable non-exempt (NANE) government grants, genuine gifts or inheritances, and collected GST.

Businesses must also comply with record-keeping obligations. Most records need to be kept for five years and should be stored in a secure place.

What you need to know about using business money

Th ATO have also provided guidance on using business money and the potential tax implications involved. To prevent unexpected tax issues from using business money and assets for personal purposes, business owners must record these transactions in the relevant company, trust, or individual tax return and maintain accurate records.

Business money and assets used for private purposes can include:

• Salary and wages
• Director fees
• Fringe benefits, such as an employee using the company car
• Dividends paid by the company to the individual as a shareholder
• Trust distributions, if the business operates under a trust and pays the individual as a beneficiary
• Loans from a trust or company
• Ad hoc drawings or takings
• Allowances or reimbursements of expenses received from a trust or company.

The ATO has provided examples to help business owners determine whether they are correctly reporting business money or assets used for private purposes.

Is it a business loss or a non-commercial loss?

Business tax losses

Business tax losses occur when the total deductions claimed in an income year exceed the total assessable and net exempt income in the same income year. Tax losses can be carried forward, and the loss can be claimed as a deduction in a later year if all the requirements are met. The rules differ for sole traders, partners in a partnership, and companies.

Non-commercial losses

A non-commercial business loss is a loss incurred, either as a sole trader or in a partnership, from a business activity that is not related to the individual’s primary source of income. Losses from a non-commercial business activity cannot be offset against other assessable income in the year where the loss occurred, unless an exception applies, or a profit was made.

If these circumstances sound like yours, or you have a similar query, please get in touch.