Claiming business expenses for a business with no income

Question

I'm currently working on a web application on the side to turn into a business one day.

I probably spend upwards of 20-30 hours a week working on it (I would like to spend more but not ready to quit my full time job yet) but the thing is we’re in the process of marketing and building it, so its not actually turning a profit. Like a lot of startups out there, the idea requires a critical mass before it can be monetised.

Anyway, the question is, I’ve spent a bit of money on things like new computer equipment, buying domain, server space, software licenses, ads to attract users, travel etc.

I want to be able to claim these on my tax return as a business expense. The question is would the tax office accept that this as a business instead of a hobby?

Since I don’t turn a profit yet, how would I differentiate this case from say another person who just pretends to be starting a business so that they can claim some “business expenses”.

At the same time, there must be tons of startups, in particular in the tech space, who has costs at the start and may not make money for years - a lot may fail and never make money.

PS - I'm in Australia if that helps.

Answer 1

Yes you can claim your business deductions if you are not making any income yet. But first you should decide what structure you want to have for your business. Either a Company structure or a Sole Trader or Partnership.

Company Structure

If you choose a Company Structure (which is more expensive to set up) you would claim your deductions but no income. So you would be making a loss, and continue making losses until your income from the business exceed your expenses. So these losses will remain inside the Company and can be carried forward to future income years when you are making profits to offset these profits. Refer to ATO - Company tax losses for more information.

Sole Trader of Partnership Structure

If you choose to be a Sole Trader or a Partnership and your business makes a loss you must check the non-commercial loss rules to see if you can offset the loss against your income from other sources, such as wages.

In order to offset your business losses against your other income your business must pass one of these tests:

• It produces assessable income of at least $20,000.
• It has produced a profit in three of the past five years (including the current year).
• It uses real property or an interest in real property worth at least $500,000 on a continuing basis.
• It uses other assets worth at least $100,000 on a continuing basis.

If you don't pass any of these tests, which being a start-up you most likely won't, you must carry forward your business losses until an income year in which you do pass one of the tests, then you can offset it against your other income. This is what differentiates a legitimate business from someone having a hobby, because unless you start making at least $20,000 in sales income (the easiest test to pass) you cannot use your business losses against your other income. Refer to ATO - Non-commercial losses for more information.