Deductions from Assessable Income (Division 8) & Entities Liable to Tax (Division-9)- Australian Taxation

8-1 General deductions: -

1. You can deduct from your assessable income any loss or outgoing to the extent that: (Set off Allowed Conditions)

(a) If it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

(This ensure that only losses related to non-commercial business will not allow to set off against commercial business. And that losses will be carried forward to upcoming year and will set off against income in the same nature.)

Scenario:

A Resident person running a small business as a side activity while working full-time.

Income from business: $10,000 per annum.

Expenses for Business: $12,000 Per annum.

Other assessable income: $90,000 per annum from her full-time job.

Net loss from business: $10,000 - $12,000 = $2,000 loss.

The business activity is evaluated to determine if it is considered a commercial business.  For this The ATO uses different tests, if the business fails the test it is considered as non-commercial business and will not be allowed for deduction.

Consequences

The Business loss cannot offset the $2,000 against the salary of $90,000.

Instead, the $2,000 loss is deferred and carried forward to future years, where it can only be used to offset profits from the that business (if any).

This prevents the resident person from using the business loss as a tax benefit to reduce her taxable income from her full-time job

1. Cases where you cannot deduct a loss or outgoing under this section to the extent that: (Set off Disallowed Cases)

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it. (Specific Provision)

For a summary list of provisions about deductions, see section 12-5.  

• For the effect of the GST in working out deductions, see Division 27.
• If you receive an amount as insurance, indemnity or other recoupment of a loss or outgoing that you can deduct under this section, may be included in your assessable income: see Subdivision 20-A.

8-5 Specific deductions

1. You can also deduct from your assessable income an amount that a provision of this Act (outside this Division) allows you to deduct.

2. Some provisions of this Act prevent you from deducting an amount that you could otherwise deduct, or limit the amount you can deduct.

                         This means there may be specific provision that may prevent deduction or the amount of deduction can be capped  

Note: If you receive an amount as insurance, indemnity or other recoupment of a deductible expense, the amount may be included in your assessable income: see Subdivision 20-A.

For a summary list of provisions about deductions, see section 12-5.

8-10 No double deductions

If 2 or more provisions of this Act allow you deductions in respect of the same amount (whether for the same income year or different income years), you can deduct only under the provision that is most appropriate.

Division 9—Entities that must pay income tax  

9-1 List of entities

Income tax is payable by the entities listed in the table.

Item 1-8: -Provisions of the Income Tax Assessment Act 1997

 Item 9-13 Bold Text: -provisions of the Income Tax Assessment Act 1936.

9-5 Entities that work out their income tax by reference to something other than taxable income

1. For some entities, some or all of their income tax for the *financial year is worked out as described in the table.: -