If you inherit a deceased person’s dwelling, you may be exempt or partially exempt when a CGT event happens to it. The same exemptions apply if a CGT event happens to a deceased’s estate of which you are the trustee. [Flowchart 3.6](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/appendixes/appendix-3-flowcharts?anchor=Flowchart_3p6#Flowchart_3p6) in **appendix 3** sets out the full exemption rules if you inherit a dwelling. Alternatively, the rules are set out below.

If you are a joint tenant and another joint tenant dies, their interest in the dwelling is taken to pass in equal shares to you and any other surviving joint tenants on that date.

For the purpose of the main residence exemption, you are treated as if that interest in the dwelling has passed to you as beneficiary of the deceased estate, which means the following rules apply to that interest.

Changes to the law on 12 December 2019 may affect your entitlement to claim the main residence exemption on an Australian residential property that you inherited from a foreign resident. If you are a surviving joint tenant, beneficiary or trustee of a deceased estate and a CGT event happens to your residential property in Australia that you inherited from a foreign resident, you may no longer be entitled to claim the main residence exemption for the deceased’s ownership period.

If you inherit an Australian residential property from a deceased person who had been a foreign resident for six years or less at the time of their death, the main residence exemption that the deceased accrued for the dwelling is available to you as the beneficiary. The main residence exemption means you may not pay CGT on any capital gain made after you sell or dispose of the inherited property, depending on the use of the property by both you and the deceased.

If you inherit an Australian residential property from a deceased person who had been a foreign resident for more than six years at the time of their death, any main residence exemption that the deceased person may have accrued for that dwelling is not available to you. This means you may have to pay CGT when you sell or dispose of the property.

If you inherit an Australian residential property and you have been a foreign resident for more than six years when you sell or dispose of the property, you can't claim the main residence exemption for your ownership period.

There is a transitional period for properties acquired before 7.30pm AEST on 9 May 2017 which are disposed of on or before 30 June 2020.

**See also:**

- [Joint tenants](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/does-capital-gains-tax-apply-to-you/what-is-a-cgt-asset?anchor=Joint_tenants#Joint_tenants)
- [Foreign residents and main residence exemption](https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/foreign-residents-and-capital-gains-tax/main-residence-exemption-for-foreign-residents)

## Full exemption

## Deceased died before 20 September 1985

As you acquired the dwelling before 20 September 1985, any capital gain you make is exempt. However, major capital improvements you make to the dwelling on or after 20 September 1985 may be taxable, see [Major capital improvements to a dwelling acquired before 20 September 1985](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/major-capital-improvements-to-a-dwelling-acquired-before-20-september-1985?anchor=Major_capital_improvements_to_a_dwelling#Major_capital_improvements_to_a_dwelling).

## Deceased died on or after 20 September 1985

**A**. The deceased acquired the dwelling **before** 20 September 1985 (it does not matter whether the dwelling was the main residence of the deceased person).

You may have an ownership interest in a dwelling that passed to you as a beneficiary in a deceased estate or you may have owned it as trustee of a deceased estate. In either case, you disregard any capital gain or capital loss you make from a CGT event that happens to the dwelling if either of the following two conditions applies.

1. You disposed of your ownership interest within two years of the person’s death, that is, if the dwelling was sold under a contract, settlement occurred within two years. This exemption applies whether or not you used the dwelling as your main residence or to produce income during the two year period. The Commissioner has the discretion to extend the two year period for CGT events (such as a sale) happening in the 2008–09 income year and later years, see [Commissioner may extend the two year time period](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/inherited-main-residence#Commissioner_may_extend_time_period).
2. From the deceased’s death until you disposed of your ownership interest, the dwelling was not used to produce income and was the main residence of one or more of

1. a person who was the spouse of the deceased immediately before the deceased’s death (but not a spouse who was permanently separated from the deceased)
2. an individual who had a right to occupy the home under the deceased's will (including a right to occupy the home as a result of a court order under the relevant family provision legislation that takes effect as if it had been made as a codicil to the deceased's will)
3. you, as a beneficiary, if you disposed of the dwelling as a beneficiary.

The dwelling can be the main residence of one of the above people (even though they may have stopped living in it) if they choose to treat it as their main residence under the [continuing main residence status after dwelling ceases to be your main residence](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/continuing-main-residence-status-after-dwelling-ceases-to-be-your-main-residence?anchor=Continuing_main_residence_status_after_d#Continuing_main_residence_status_after_d) rule.

The requirement that the dwelling is the main residence of an individual who had a right to occupy it under the deceased’s will is satisfied if the individual moves into the dwelling when it is first practicable to do so. This requirement will be satisfied where the delay in moving is because the dwelling cannot be occupied until probate and administration of the estate is granted.

**B**. The deceased acquired the dwelling **on or after** 20 September 1985.

You disregard any capital gain or capital loss you make when a CGT event happens to the dwelling or your ownership interest in the dwelling if either of the following two points applies.

1. Condition 2 in **A** above is met and the dwelling passed to you as beneficiary or trustee on or before 20 August 1996. For this to apply, the deceased must have used the dwelling as their main residence from the date they acquired it until their death, and they must not have used it to produce income.
2. One of the conditions in **A** above is met, and the dwelling passed to you as beneficiary or trustee after 20 August 1996, and just before the date the deceased died it was

1. their main residence
2. not being used to produce income.

A dwelling can still be regarded as the deceased’s main residence even though they stopped living in it, see [Continuing main residence status after dwelling ceases to be your main residence](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/continuing-main-residence-status-after-dwelling-ceases-to-be-your-main-residence?anchor=Continuing_main_residence_status_after_d#Continuing_main_residence_status_after_d).

Start of exampleExample 86: Full exemption

Rodrigo was the sole occupant of a home he bought in April 1990. He did not live in or own another home.

He died in January 2020 and left the house to his son, Petro. Petro rented out the house and then disposed of it 15 months after his father died.

Petro is entitled to a full exemption from CGT, as he acquired the house after 20 August 1996 and disposed of it within two years of his father’s death.

If Petro did not sell the house within two years of his father's death due to circumstances beyond his control, he may ask the Commissioner to grant an extension of time, see [Commissioner may extend the two year time period](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/inherited-main-residence#Commissioner_may_extend_time_period).

End of example
## Partial exemption

If you do not qualify for a full exemption from CGT for the home, you may be entitled to a partial exemption.

You calculate your capital gain or capital loss as follows:

Capital gain or capital loss amount × (non-main residence days ÷ total days)

## Non-main residence days

‘Non-main residence days’ is the number of days that the dwelling was not the main residence.

1. If the deceased acquired the dwelling before 20 September 1985, non-main residence days is the number of days in the period from their death until settlement of your contract for sale of the dwelling when it was not the main residence of one of the following

1. a person who was the spouse of the deceased (except a spouse who was permanently separated from the deceased)
2. an individual who had a right to occupy the dwelling under the deceased’s will, or
3. you, as a beneficiary, if you disposed of the dwelling as a beneficiary.
2. If the deceased acquired the dwelling on or after 20 September 1985, non-main residence days is the number of days calculated under (a) plus the number of days in the deceased’s period of ownership when the dwelling was not their main residence.

## Total days

1. If the deceased acquired their ownership interest before 20 September 1985, ‘total days’ is the number of days from their death until you disposed of your ownership interest.
2. If the deceased acquired the ownership interest on or after 20 September 1985, total days is the number of days in the period from when the deceased acquired the dwelling until you disposed of your ownership interest.

A further adjustment may be required if the dwelling was a main residence, but was partly used to produce income, for example, if, for a period, part of it was rented out or used as a place of business.

Start of exampleExample 87: Partial exemption

Vicki bought a house under a contract that was settled on 12 February 1995 and she used it solely as a rental property. When she died on 17 November 1998, the house became the main residence of her beneficiary, Lesley. Lesley sold the property under a contract that was settled on 27 November 2020.

As Vicki had never used the property as her main residence, Lesley cannot claim a full exemption from CGT. However, as Lesley used the house as her main residence, she is entitled to a partial exemption from CGT.

Vicki owned the house for 1,375 days and Lesley then lived in the house for 8,047 days, a total of 9,422 days. Assuming Lesley made a capital gain of $100,000, the taxable portion is:

$100,000 × (1,375 ÷ 9,422) = $14,594

In working out her capital gain, Lesley can use either the discount method or the indexation method. This is because, for the purposes of using those methods, she is taken to have acquired the property on 12 February 1995 (when Vicki acquired it) and this is before 11.45am AEST on 21 September 1999, and more than 12 months before Lesley entered into the contract to sell it.

End of example
If you dispose of your ownership interest in a dwelling within two years of the person’s death, you can ignore the main residence days and total days in the period from the person’s death until you dispose of the dwelling if this lessens your tax liability. See [Commissioner may extend the two year time period](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/inherited-main-residence#Commissioner_may_extend_time_period).

You also ignore any non-main residence days before the deceased’s death in calculating the capital gain or capital loss if:

- you acquired the dwelling after 20 August 1996
- the dwelling was the deceased’s main residence just before their death, and
- the dwelling was not being used to produce income at the time of their death.

## Using a home you inherited to produce income

If a person acquired their main residence on or after 20 September 1985, and they died and it passed to you as a beneficiary (or as trustee of their estate) after 20 August 1996, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income if:

- you first used the dwelling to produce income after 20 August 1996
- when a CGT event happens to the dwelling, you would get only a partial exemption because you used the dwelling to produce assessable income during the period you owned it
- you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income
- the CGT event did not happen to the dwelling within two years of the person’s date of death.

If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.

## Cost to you of acquiring the dwelling

If you acquire a dwelling the deceased had owned, there are special rules for calculating your cost base.

These rules apply in calculating any capital gain or capital loss when a CGT event happens to the dwelling.

The first element of the cost base and reduced cost base of a dwelling (its acquisition cost) is its market value at the date of death if either:

- the dwelling was acquired by the deceased before 20 September 1985, or
- the dwelling passes to you after 20 August 1996 (but not as a joint tenant), and it was the main residence of the deceased immediately before their death and was not being used to produce income at that date.

In any other case, your acquisition cost is the deceased’s cost base and reduced cost base on the day they died. You may need to contact the trustee or the deceased’s recognised tax adviser to obtain the details. If that cost base includes indexation, you must recalculate it to exclude the indexation component if you prefer to use the discount method to work out your capital gain from the property.

If you are a beneficiary, the cost base and the reduced cost base also include amounts that the trustee of the deceased’s estate would have been able to include in the cost base and reduced cost base.

## Continuing main residence status

If the deceased was not living in the home at the date of their death, they or their trustee may have chosen to continue to treat it as their main residence. You may need to contact the trustee or the deceased’s recognised tax adviser to find out whether this choice was made. If it was, the dwelling can still be regarded as the deceased’s main residence:

- for an indefinite period, if the dwelling was not used to produce income after the deceased stopped living in it, or
- for a maximum of six years after they stopped living in it, if it was used to produce income after they stopped living in it.

Start of exampleExample 88: Continuing main residence status

Aldo bought a house in March 1995 and lived in it.

He moved into a nursing home in December 2016 and left the house vacant. He chose to treat the house as his main residence after he stopped living in it under the [Continuing main residence status after dwelling ceases to be your main residence](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/continuing-main-residence-status-after-dwelling-ceases-to-be-your-main-residence?anchor=Continuing_main_residence_status_after_d#Continuing_main_residence_status_after_d) rule.

Aldo died in February 2021 and the house passed to his beneficiary, Con, who uses the house as a rental property.

As the house was Aldo’s main residence immediately before his death and was not being used to produce income at that time, Con can get a full exemption for the period Aldo owned it.

If Con rented out the house and sold it more than two years after Aldo’s death, the capital gain for the period from the date of Aldo’s death until Con sold it is taxable, unless the Commissioner grants Con an extension of time, see [Commissioner may extend the two year time period](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/inherited-main-residence#Commissioner_may_extend_time_period).

If Con had sold the house within two years of Aldo’s death, he could have ignored the main residence days and total days between Aldo’s death and him selling it, which would have given him exemption for this period.

If Aldo had rented out the house after he stopped living in it, he could also have chosen to continue to treat it as his main residence, see [Continuing main residence status after dwelling ceases to be your main residence](https://www.ato.gov.au/forms-and-instructions/capital-gains-tax-guide-2021/whats-new/real-estate-and-main-residence/continuing-main-residence-status-after-dwelling-ceases-to-be-your-main-residence?anchor=Continuing_main_residence_status_after_d#Continuing_main_residence_status_after_d). The house would be considered to be his main residence until his death because he rented it out for less than six years.

If this choice had been made, Con would get an exemption for the period Aldo owned the house.

End of example
## Commissioner may extend the two year time period

A trustee or beneficiary of a deceased estate may apply to the Commissioner for an extension of the two year time period, where the CGT event happened in 2008–09 or later. Generally, the Commissioner would exercise the discretion in situations where the delay is due to circumstances which are outside of the control of the beneficiary or trustee, for example:

- the ownership of a dwelling or a will is challenged
- the complexity of a deceased estate delays the completion of administration of the estate
- a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two year period (for example, the taxpayer or a family member has a severe illness or injury), or
- settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control.

These examples are not exhaustive.

In exercising the discretion, the Commissioner will also take into account whether and to what extent the dwelling is used to produce assessable income and for how long the trustee or beneficiary held the ownership interest in the dwelling.


## Common conditions of release

The most common conditions of release for paying benefits are when the member:

- has reached their preservation age and retires
- has reached their preservation age and begins a transition-to-retirement income stream
- ceases an employment arrangement on or after the age of 60
- is 65 years of age (even if they haven't retired)
- has died (see [Paying superannuation death benefits](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/paying-superannuation-death-benefits)).

There are some special circumstances where at least part of a member’s super benefits can be released before the member has reached preservation age.

### Preservation age

Access to super benefits is generally restricted to members who have reached their preservation age.

Date of birth

Preservation age

(years)

Before 1 July 1960

55

1 July 1960 – 30 June 1961

56

1 July 1961 – 30 June 1962

57

1 July 1962 – 30 June 1963

58

1 July 1963 – 30 June 1964

59

After 30 June 1964

60

### Retirement under super laws

For retirement there are no restrictions on the form in which the benefits can be taken.

If the member is:

- under 60 years of age – they can access their preserved benefits only when they reach preservation age, cease gainful employment and have no intention to become gainfully employed in the future
- at least 60 years of age – they can access their preserved benefits when they leave a job.

If a member who is 60 or over ceases one employment arrangement but continues in another employment arrangement, they may cash all benefits accumulated up to that time. All amounts accrued after that date will be preserved or restricted non-preserved benefits and can't be cashed until a fresh condition of release is met.

### Preservation age – transition to retirement

Preservation age is the minimum retirement age at which a member is normally able to access their preserved benefits. Subject to the governing rules of your fund, members who have not retired may access their super with a transition to retirement income stream once they have reached their preservation age.

A [transition to retirement](https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-smsf-benefits/income-stream-pension-rules-and-payments/transition-to-retirement-income-streams) income stream must:

- be account-based
- not be commuted unless the member has met a condition of release with no cashing restrictions
- meet the [minimum pension standards](https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/paying-smsf-benefits/income-stream-pension-rules-and-payments#ato-Minimumpensionstandards)
- not exceed a maximum of 10% of the account balance at the start of each financial year.

### Turning 65

A member who has reached age 65 may cash their benefits at any time. There are no cashing restrictions, which means the benefits can be paid as an income stream or a lump sum.

A fund member is not compelled to draw down their super once they reach a particular age. They can keep their benefits in the fund indefinitely. The only time it is compulsory for a fund to pay out a member’s benefit is when a member dies.

## Special conditions of release

In special circumstances at least part of a member’s super benefits can be released before the member has reached preservation age.

As trustee, you must ensure that the member has met a condition of release before you release any funds, and check that the governing rules of your fund allow it. It's possible that a benefit may be payable under the super laws but not under the rules of your fund. For more, see [Release authorities](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/release-authorities).

Generally, rollovers to other super funds don’t require the member to satisfy a condition of release, subject to the governing rules of your fund. For information on the Kiwi Saver scheme, see Trans-Tasman retirement savings portability.

Payments of benefits to members who have not met a condition of release are not treated as super benefits – instead, they will be taxed as ordinary income at the member's marginal tax rate. This is also known as illegal early release of super. Significant penalties may also apply to you as trustee and to your fund. For more, see [TA 2009/1 Superannuation illegal early release arrangements](https://www.ato.gov.au/law/view/document?DocID=TPA/TA20091/NAT/ATO/00001&PiT=99991231235958).

Special conditions of release include:

- [Terminating gainful employment](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#Terminatinggainfulemployment)
- [Permanent incapacity](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#Permanentincapacity)
- [Temporary incapacity](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#Temporaryincapacity)
- [Severe financial hardship](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#Severefinancialhardship)
- [Compassionate grounds](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#Compassionategrounds)
- [Terminal medical condition](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#Terminalmedicalcondition)
- [First home super saver scheme](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/releasing-benefits/conditions-of-release#FHSSscheme).

### Terminating gainful employment

Subject to the governing rules of your fund, where a member (who has not met another condition of release) has ceased employment with an employer who had contributed to the member's fund, on termination:

- all preserved benefits may be paid, but they must be taken as a lifetime pension or annuity, which can't be commuted into a lump sum (unless the preserved benefits are less than $200, in which case the member can cash the benefits without restriction)
- all unrestricted non-preserved benefits can be cashed out on request from the member (no cashing restrictions).

### Permanent incapacity

A member's benefits may be cashed if you're satisfied that their ill health makes it unlikely that they will engage in gainful employment that they are reasonably qualified for by education, training or experience.

Members may still be eligible where they meet the above criteria, but are undertaking other work, such as light duties in a different position or casual work in a different field.

There are no cashing restrictions on payment of benefits.

### Temporary incapacity

A member's benefits may be paid if you're satisfied that the member has temporarily ceased work due to physical or mental ill health that does not constitute permanent incapacity. In general, temporary incapacity benefits may be paid only from the insured benefits or voluntary employer funded benefits.

It's not necessary for the member's employment to fully cease but, generally, a member would not be eligible for temporary incapacity benefits if they were receiving sick leave benefits. The benefit must be paid as an income stream for the period of the incapacity and can't be commuted to a lump sum.

### Severe financial hardship

To release benefits under severe financial hardship you need to be satisfied that the member:

- can't meet reasonable and immediate family living expenses
- has been receiving relevant government income support payments for a continuous period of 26 weeks and was receiving that support at the time they applied to the trustees.

The payment must be a single gross lump sum of no more than $10,000 and no less than $1,000 (or a lesser amount if the member's benefits are less than $1,000). Only one payment is permitted in any 12-month period.

Alternatively, if the member has reached their preservation age plus 39 weeks, you need to be satisfied that the member:

- has been receiving relevant government income support payments for a cumulative period of 39 weeks since reaching their preservation age
- was not gainfully employed on a full-time or part-time basis at the time of applying to the trustees.

If you release benefits under these circumstances, there are no cashing restrictions.

More information can be found by visiting, [Services Australia – Early release of superannuationExternal Link](https://www.servicesaustralia.gov.au/individuals/services/centrelink/early-release-superannuation).

### Compassionate grounds

Benefits may be released on specified compassionate grounds if all the following conditions are met:

- a member does not have the financial capacity to meet an expense
- release is allowable under the governing rules of your fund.

The amount of super that you can pay on compassionate grounds is limited to what is reasonably needed. It is paid as a lump sum, see [Early access to your super](https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super).

### Terminal medical condition

If a member has a terminal medical condition and 2 medical professionals certify that the condition is likely to result in the member’s death in the next 24 months, the balance of their super account may be paid as a tax-free lump sum benefit. There are no cashing restrictions. See more about [access to super for members with a terminal medical condition](https://www.ato.gov.au/tax-and-super-professionals/for-superannuation-professionals/apra-regulated-funds/paying-benefits/access-to-super-for-members-with-a-terminal-medical-condition).

### First home super saver scheme

The [First home super saver](https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super/first-home-super-saver-scheme) (FHSS) scheme allows your fund members to save for their first home inside their super. Your members can do this by making voluntary concessional and non-concessional contributions to their super. When your members are ready to receive their FHSS amounts, they can request a release from us to withdraw personal contributions they have made into super since 1 July 2017, along with associated earnings.

If your member's request to release an FHSS amount is successful, we will issue you with a release authority showing the amount you are required to send to us. We will also send you a release authority statement form, which you will need to complete (this must be completed in all cases, including for partial releases or where you are unable to release any amounts).

We will issue the release authority electronically via SuperStream where you are SuperStream enabled. When you receive an electronic release authority you are required to respond with an electronical release authority statement via the SuperStream Rollover message.

For both paper and electronic forms, you are required to comply with this release authority within 10 business days of the date of the release authority.

Even if your member has not made voluntary contributions to your fund, the FHSS amount can still be released from their account subject to the applicable cashing order of benefit rules. Once you have sent any FHSS release amounts to us, we will withhold the appropriate amount of tax, and in some cases offset the remaining amount against any outstanding Commonwealth debts. We will then pay the balance of the FHSS release amount to your member.


## Non-commercial loss rules

Work through the following non-commercial loss rules to work out if you need to:

- claim and offset the loss against your other income, such as salary and wages
- defer the loss and claim it in a later year.

## 1. Are you in business?

To claim a loss or apply for the Commissioner's discretion to allow you to claim a loss, your activity must be '[in business](https://www.ato.gov.au/businesses-and-organisations/starting-registering-or-closing-a-business/starting-your-own-business/are-you-in-business)'.

In addition, you normally need to have commenced the business activity. Broadly, business is considered 'commenced' if you have:

- decided to commence the business activity
- acquired the minimum commercial level of business assets to allow that business activity to be carried on, and
- actually commenced business operations.

### Example: commencing business operations

In the first year, Bob built a shed, repaired fences and cleared a part of the block. In the second year, he planted pumpkin seeds on a commercial scale.

In the first year, the venture didn't have the significant purpose or character of a business venture as the activities were done in preparation.

In the second year, with the planting of the pumpkin seeds, the activities constitute the commencing of business operations.

End of example
## 2. Similar business activities

If you are carrying on more than one business activity and they are [similar business activities](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/non-commercial-losses/offset-or-defer-the-loss-individuals-or-sole-traders/similar-business-activities), you may group them together when considering the non-commercial loss rules. For example, you could group activities if you decided to plant and sell corn in addition to pumpkins.

If you are running multiple business activities that are not similar, you must apply the non-commercial loss rules separately to each activity. For example, if Bob decided to build and sell cubby houses in addition to farming pumpkins. This may mean that you can claim a tax deduction for a loss on one business activity but not for the other.

## 3. Excepted activity

If your loss-making business is in primary production or in professional arts (we call these '[excepted business activities](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/non-commercial-losses/offset-or-defer-the-loss-individuals-or-sole-traders/excepted-business-activities)'), and your assessable income from other sources is less than $40,000 (excluding any net capital gain), you can offset your losses from your other income.

## 4. Less than $250,000 income requirement

The total of your taxable income, reportable fringe benefits, reportable super contributions and total net investment losses must less than $250,000 for you to be eligible to offset your losses in the current year. Find out more about [the income requirement](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/non-commercial-losses/offset-or-defer-the-loss-individuals-or-sole-traders/the-income-requirement).

If you do not meet the income requirement or don't pass any of the four tests, you must:

- defer the loss, or
- you can apply for the Commissioner's discretion in limited circumstances.

## 5. Four tests

If you meet the income requirement, check if you pass any of the [four tests](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/non-commercial-losses/offset-or-defer-the-loss-individuals-or-sole-traders/four-tests). If you pass, you can offset the loss in the year in question.

## 6. Commissioner's discretion

If you do not meet the income requirement or any of the four tests, you can apply for the [Commissioner's discretion](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/losses/non-commercial-losses/commissioner-s-discretion) to allow the claim. The Commissioner will only exercise the discretion in limited circumstances if:

- there are special circumstances outside your control that have prevented you passing one of the four tests, or
- because of the nature of the business, there is a lead time before your business can pass one of the four tests or make a profit.

If there are no grounds for the Commissioner to exercise the discretion, you need to defer the loss for that income year.


## What are self-education expenses?

Self-education expenses are the costs you incur when you:

- undertake courses at an educational institution (whether or not the courses lead to a formal qualification)
- undertake courses provided by a professional or industry organisation
- attend work-related conferences or seminars
- do self-paced learning and study tours (whether within Australia or overseas).

## Eligibility to claim self-education expenses

You can claim a deduction for a self-education expense if, at the time you incur the expense, it has a sufficient connection to earning income from your employment activities.

Self-education has a sufficient connection to earning your employment income if it either:

- maintains or improves the specific skills or knowledge you require for your current employment activities
- results in, or is likely to result in, an increase in your income from your current employment activities.

Your employment activities are the duties and tasks expected of you to perform your job and are usually set out in your duty statement.


## Expenses you can claim

If your self-education expenses meet the [eligibility criteria](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Eligibilitytoclaimselfeducationexpenses), you can claim a deduction for the following expenses:

- [Tuition, course, conference or seminar fees](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Tuitioncourseconferenceorseminarfees)
- [General course expenses](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Generalcourseexpenses)
- [Decline in value of depreciating assets](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Declineinvalueofdepreciatingassets)
- [Car and other transport expenses](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Carandothertransportexpenses)
- [Accommodation and meal expenses](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Accommodationandmealexpenses) (incurred when the self-education requires you to travel and be away from your home for one or more nights)
- [Interest on borrowings](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Interestonborrowings).

For [self-education expenses incurred before 1 July 2022](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses/self-education-reduction-in-expenses), you generally can't claim the first $250 of expenses.

### Tuition, course, conference or seminar fees

You can claim a deduction for tuition fees, including student and amenities fees you incur if you are enrolled in a full fee-paying place at a university or other higher education institution. If you pay the fees up front, you will incur the amount when you pay it. If you withdraw from the course before the census date and the fees are subsequently refunded to you, you can't claim a deduction for them. In all other circumstances, you incur deductible course or tuition fees when the debt becomes a legal obligation you need to pay back (for example, on the census date). This is not when you make a repayment.

This includes fees that you pay with the assistance of a:

- FEE-HELP loan
- VET Student Loan (VSL).

You can't claim a deduction for voluntary or compulsory [repayments of these loans](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Expensesyoucantclaim) in your tax return.

If you're unsure whether you are enrolled in a full fee-paying place, you can check with your university or higher education institution.

#### Example: deduction for course fees

Tara enrols in 2 subjects for her Master of Business Administration course. The course has a sufficient connection to her current employment duties. Each subject cost $10,000. Tara has deferred payment of the course fees through a FEE-HELP loan.

Tara's subjects have a census date of 22 March, meaning she will not need to pay the course fees if she withdraws from the subject before this date.

Tara decides to withdraw from one subject on 17 March due to an unexpected increase in workload. On 22 March, Tara incurs the course fees of $10,000 for the remaining subject she enrolled in.

Tara can claim a deduction for the course fees of $10,000 she incurs on 22 March in the income year it occurs, even though she has a deferred payment through a FEE-HELP loan.

On 15 June, Tara gets a bonus of $5,000 from her employer. She decides to use the bonus to make a voluntary repayment of $5,000 to her FEE-HELP loan.

Tara can't claim a deduction for the voluntary repayment of $5,000 that she makes to her FEE-HELP loan. She also can't claim a deduction for any compulsory repayments included on her notice of assessments that she is required to make to her FEE-HELP loan.

End of exampleThere are certain [tuition fees you can't claim as a deduction](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/deductions-you-can-claim/work-related-deductions/education-training-and-seminars/self-education-expenses#Expensesyoucantclaim).

For seminars, conferences and similar courses, you can claim a deduction for the cost you incur to attend the event or enrol in the course.

You can't claim a deduction for tuition, course, conference or seminar fees if your employer reimburses you or pays the fees on your behalf.

### General course expenses

You can claim a deduction for the following general course expenses you incur as a result of undertaking your work-related self-education:

- computer consumables – for example, printer cartridges
- equipment repairs – for example, the cost of repairing a computer
- internet and data usage (excluding connection fees)
- phone calls
- postage
- stationery
- student union fees
- textbooks
- trade, professional, or academic journals.

### Decline in value of depreciating assets

A depreciating asset is an asset that loses its value over time. You can claim a deduction each year for the decline in value (depreciation) until the value of the asset is nil. This period is called the effective life of the asset.

You can claim a deduction for the decline in value (depreciation) of assets you use for work-related self-education purposes. For example:

- computers
- professional libraries
- desks and chairs
- filing cabinets and bookshelves
- calculators
- technical instruments and tools
- other equipment (such as desk lamps).

#### $300 or less

You can claim the cost of a depreciating asset you purchase in the year you buy it if:

- the asset cost $300 or less
- you mainly use it for work-related self-education (or in the course of earning other non-business assessable income) in the income year you buy it.

You need to apportion your claim if you also use the asset for private purposes.

#### More than $300

If the depreciating asset you are using for work-related self-education cost more than $300, you can claim a deduction for its decline in value over its effective life.

You must reduce your claim if you either:

- bought the asset part-way through the income year
- use the asset partly for private purposes.

To work out your claim for the decline in value of a depreciating asset, use our online Depreciation and capital allowances tool.


Sometimes taxpayers own shares or units that they may have acquired at different times. This can happen as people decide to increase their investment in a particular company or unit trust. A common question people ask when they dispose of only part of their investment is how to identify the particular shares or units they have disposed of.

This can be very important because shares or units bought at different times may have different amounts included in their cost base. In calculating the capital gain or capital loss when disposing of only part of an investment, you need to be able to identify which shares or units you have disposed of. Also, when you dispose of any shares or units you acquired before 20 September 1985, any capital gain or capital loss you make is generally disregarded.

If you have the relevant records (for example, share certificates), you may be able to identify which particular shares or units you have disposed of. In other cases, the Commissioner will accept your selection of the identity of shares disposed of.

Alternatively, you may wish to use a ‘first in, first out’ basis where you treat the first shares or units you bought as being the first you disposed of.

In limited circumstances, we will also accept an average cost method to determine the cost of the shares disposed of. You can only use this average cost method when:

- the shares are in the same company
- the shares are acquired on the same day
- the shares have identical rights and obligations, and
- you are not required to use market value for cost base purposes.

Start of exampleExample 22: Identifying when shares or units were acquired

Boris bought 1,000 shares in WOA Ltd on 1 July 1997. He bought another 3,000 shares in the company on 1 July 2002.

In December 2002, WOA Ltd issued Boris with a CHESS statement for his 4,000 shares. When he sold 1,500 of the shares on 1 January 2021, he was not sure whether they were the shares he bought in 2002 or whether they included the shares bought in 1997.

Because Boris could not identify when he bought the particular shares he sold, he decided to use the ‘first in, first out’ method and nominated the 1,000 shares bought in 1997 plus 500 of the shares bought in 2002.


There is already a process available for a person to seek a remittance of their HELP debt, for units in which they were enrolled, but could not complete, under the ‘special circumstances’ provisions [[Appendix G](https://www.education.gov.au/higher-education-publications/higher-education-administrative-information-providers-october-2021/48-appendices/guide-special-circumstances-decision-making)]. The person’s provider is then responsible for assessing whether their application meets these provisions. If the person wishes to escalate their complaint, they can use the internal and external review mechanisms of the special circumstances provisions. Failing this, the person’s option of last resort is to contact the Department of Finance and request their debt be waived, as a debt to the Commonwealth. The waiver of debt power is discretionary. This means there is no automatic entitlement to a waiver of debt.

A waiver of debt is a special concession granted to a person that extinguishes a debt owed to the Commonwealth. This means that the debt is completely forgiven and can no longer be recovered by the Commonwealth.

The waiver of debt mechanism is generally an avenue of last resort and is used only where there is no other viable avenue to provide redress. In general, this assistance may be granted where it is considered the Commonwealth has a moral responsibility to provide assistance, rather than a legal responsibility.

The waiver of debt power is found in section 63 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). It allows the Finance Minister to waive amounts owing to the Commonwealth. The waiver of debt power has been delegated to officials within the Department of Finance.

Debts are usually waived where the decision-maker considers recovery of the debt would be inequitable or cause ongoing financial hardship and that other options are not appropriate. In this context, ongoing financial hardship is likely to be taken to exist when payment of the debt would leave a person unable to provide food, accommodation, clothing, medical treatment, education or other necessities for the person or their family, or other people for whom they are responsible.

However, even if the person demonstrates financial hardship, the decision-maker may still consider their debt should not be waived.

Any individual, company or other organisation can apply for waiver of a debt owed to the Commonwealth, either for themselves or for an authorised third party. Claims are made in writing and face-to-face meetings are generally not conducted. All relevant evidence in support of an application, e.g. correspondence between the applicant and the relevant Commonwealth agency, medical certificates etc, must be included. If an application for a waiver of debt is on the grounds of financial hardship, the additional Statement of Financial Details must be included.


## Who needs to know?

This information will help you understand how money taken out of your business, or using business assets for private purposes, must be recorded and reported for tax purposes.

It applies if you are an individual who is:

- a director, shareholder or employee of a company that operates a small business (your business)
- a trustee, beneficiary or employee of a trust that operates a small business (your business)
- a director of a corporate trustee for a trust that operates a small business (your business)
- or has been an associate of a shareholder (individual or entity) of a private company (an associate can include a relative, partner, spouse, or another entity controlled by a shareholder).

## How do you use money or assets from a company or trust

The most common ways you may take or use money or assets from a company or trust are as:

- salary and wages – see [employment income](https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/income-you-must-declare/employment-income)
- [fringe benefits](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax/types-of-fringe-benefits), such as an employee using the business's car
- directors' fees
- dividends paid by the company to you as a shareholder (a distribution of the company’s profits) – see [paying dividends and other distributions](https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/imputation/paying-dividends-and-other-distributions)
- trust distributions by the trust to you as a beneficiary – see [trust income](https://www.ato.gov.au/businesses-and-organisations/trusts/trust-income-losses-and-capital-gains/trust-income)
- loans from the trust or company – see [loans by private companies](https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/private-company-benefits-division-7a-dividends/in-detail/division-7a-loans)
- [allowances or reimbursements](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/payg-withholding/payments-you-need-to-withhold-from/payments-to-employees/allowances-and-reimbursements) of expenses you receive from the trust or company.

There are reporting and record-keeping requirements for each of these types of transactions.

## How to record and report the use of your business money or assets

You must maintain appropriate [records](https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/record-keeping-for-business) that explain transactions where you have:

- taken money or assets from your business
- used the business's assets for private purposes.

The ATO view on minimum record-keeping standards is provided in [Taxation Ruling TR 96/7](https://www.ato.gov.au/law/view/document?docid=TXR/TR967/nat/ato/00001).

There may also be reporting requirements for these transactions.

### Salary, wages or directors’ fees

You can be an employee, director and shareholder of the company that operates your business. You can also be an employee, trustee and a beneficiary of the trust that operates your business.

You must include any salary, wages or directors' fees you receive from your business as assessable income in your individual tax return.

The company or trust that operates your business can generally claim a deduction for any salaries, wages or directors' fees paid if it complies with the pay as you go (PAYG) withholding and reporting obligations for each payment.

Your business must:

- register for [PAYG withholding](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/payg-withholding) and withhold an amount from salary, wages and directors’ fees
- report PAYG withholding information in its [business activity statements (BAS)](https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/business-activity-statements-bas)
- report the payment information to the ATO using [Single Touch Payroll (STP)](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/single-touch-payroll), unless covered by a deferral or exemption
- pay the amount withheld to the ATO and make compulsory employee [superannuation contributions](https://www.ato.gov.au/businesses-and-organisations/super-for-employers) to a complying super fund by the relevant cut-off dates.

#### Example 1: taking money as salary or wages

Daphne is the sole director of a private company that sells speciality gift hampers to customers. She and her partner Jo are equal shareholders in the company. Before this income year, Daphne ran the business as a sole trader.

As a sole trader, Daphne paid $1,500 a month out of her business account and into her personal account for personal expenses. Regardless of the amounts that were transferred to her personal account, all the income Daphne earned as a sole trader is included as business income in the business and professional items schedule on her individual tax return.

Daphne decided to change business structures and set up a private company to run her business. Daphne is an employee, shareholder and director of the private company.

Daphne's tax agent explains to her that there are different tax consequences now that the business is run through a company, which is a separate legal entity.

As an employee of the company, Daphne is paid $1,500 a month as a salary. Daphne now reports the $1,500 a month she receives from her employment as salary in her individual tax return.

The tax agent helps Daphne set up PAYG withholding and STP reporting, as well as meet her company's superannuation guarantee obligations.

The company lodges a separate annual tax return. It reports the business income and claims a deduction for the salary paid to Daphne in the company tax return.

End of example### Fringe benefits and allowances

[Fringe benefits tax (FBT)](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax) may apply when an employer, (for example a company or trust), provides certain benefits to its employees, directors, employees' families or other associates. These benefits can include a payment or reimbursement of private expenses or being allowed to use the business assets for private purposes, such as the business's car.

Your company or trust:

- may be entitled to claim a deduction for the cost of providing fringe benefits
- can generally claim GST credits for items provided as fringe benefits
- must lodge an FBT return and pay any FBT that applies to the fringe benefits provided to the employees or their associates
- must keep [all records](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax/fbt-registration-lodgment-payment-and-reporting/record-keeping-for-fbt) relating to the fringe benefits it provides, including how the taxable value of benefits was calculated.

There are various exemptions from FBT that may apply, for example, the small business car parking exemption.

There are also rules that address when [FBT and Division 7A](https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/private-company-benefits-division-7a-dividends/in-detail/division-7a-fringe-benefits-tax) could both apply to a payment, loan or debt forgiven.

An FBT liability for your business may be reduced if you (as an employee) make a contribution towards the cost of the fringe benefit.

You don’t need to report the value of fringe benefits that you (or your associate) receive in your tax return, unless they are included as reportable fringe benefits on your payment summary or income statement.

#### Example 2: FBT on the provision of private company assets to employees who are shareholders

Sameera is the sole director and shareholder of a small tourism company that runs tours and owns 3 coastal holiday houses.

Sameera is also one of 3 employees of the private company.

Each employee of the company is given the opportunity to stay in one of the holiday houses for up to 4 weeks each year during the off-peak season.

This year, Sameera and her family take up this offer and stay at their favourite holiday house for 2 weeks at no cost.

This is an employee’s private use of one the company’s business assets. The company is providing Sameera, in her capacity as an employee, with a fringe benefit.

The company reports the fringe benefit in its FBT return and pays FBT on the benefit.

End of example## Distribution of income and profits

### Dividends

If your business is run through a company, the company can distribute its profits to its shareholders, which can include you.

This distribution of profits is known as a [dividend](https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/imputation/paying-dividends-and-other-distributions).

If the company has franking credits, it may be allowed to frank the dividend by allocating a franking credit to the distribution. A franking credit represents income tax paid by the company on its profit and can be used by the shareholder to offset their income tax liability.

A company must issue a distribution statement at the end of each income year to each shareholder who receives a dividend. It must show the amount of the franking credit on the dividends paid and the extent to which they were franked. The company may also need to lodge a franking account tax return in certain circumstances.

Any dividends that you receive and franking credits on them must be reported in your tax return as assessable income.

The company cannot claim a deduction for dividends paid as these are not a business expense, but rather a distribution of company profit.

### Trust distributions

If your business is operated through a [trust](https://www.ato.gov.au/businesses-and-organisations/trusts/trusts-trustees-and-beneficiaries), depending on the terms of the trust deed, the beneficiaries of the trust may be presently entitled to a share of the trust income for the income year.

By the end of an income year, the trustee should advise and document in the trustee resolution:

- details of the beneficiaries
- their share of the net income of the trust.

If the trustee resolution is not made according to the terms of the trust deed, it may be ineffective and, instead, other beneficiaries (called default beneficiaries) or the trustee may be assessed on the relevant share of the trust's net (taxable) income. Where a trustee is assessed, it may be at the highest marginal tax rate.

Details of the trust distribution should be included in the statement of distribution which is part of the trust tax return lodged for each income year.

The trust can't claim a deduction for distributions paid as it is not a business expense, but rather a distribution of trust income.

If the beneficiary of a trust is a company, and the trust doesn't pay the amount the company is presently entitled to, [Division 7A](https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/private-company-benefits-division-7a-dividends/in-detail/division-7a-and-trusts) of the *Income Tax Assessment Act 1936* may apply.

#### Closely held trusts

If you have a trust within your family group, in some circumstances you may need to include a [trustee beneficiary statement](https://www.ato.gov.au/businesses-and-organisations/trusts/trusts-registration-and-reporting-obligations/closely-held-trusts/trustee-beneficiary-reporting-rules) as part of the trust return lodged.

For further guidance, see [closely held trusts](https://www.ato.gov.au/businesses-and-organisations/trusts/trusts-registration-and-reporting-obligations/closely-held-trusts/rules-for-closely-held-trusts).

## Lending money or assets

### Companies lend money or assets to shareholders and their associates

When a private company lends money or assets to its shareholders or their associates, the shareholder or associate may be taken to have received a [Division 7A deemed dividend](https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/private-company-benefits-division-7a-dividends) if certain conditions are not met.

If this happens, the shareholder or associate will need to report an unfranked dividend in their individual tax return. The company also needs to report the unfranked dividend paid and the loan balance in its company tax return.

To avoid a Division 7A deemed dividend, before the company tax return is due or lodged (whichever comes first), loans must either:

- be repaid in full, or
- put on complying terms.

To put a loan on complying terms, the loan must be made subject to a written agreement that:

- states the names of the parties to the agreement, being the private company and the shareholder or shareholder's associate (the loan recipient)
- is signed and dated by the private company and loan recipient
- has an interest rate for each year of the loan that at least equals the benchmark interest rate
- doesn't exceed the maximum term of 7 years, or 25 years in certain circumstances when the loan is secured by a registered mortgage over real property.

The company must include any interest earned from the loan in its company tax return and complete the Division 7A company tax return labels.

You (the shareholder or shareholder's associate):

- must make the minimum yearly repayment for the loan each income year (use the [Division 7A calculator](https://www.ato.gov.au/calculators-and-tools/division-7a-calculator-and-decision-tool) to work this out)
- can't borrow money from the company to make the minimum yearly repayment
- can make repayments on the loan by offsetting against your entitlement to a dividend declared by the company - this dividend must be reported in your individual tax return as assessable income.

#### Example 3: loan received from the company and put on complying terms

Amir is the sole director of a private company that provides administration services to other businesses. He and his partner Aiesha are equal shareholders in the company.

Amir's and Aiesha's daughter is about to start high school and they have to pay $2,000 in school fees. Amir decides they should use money from the company to pay the fees.

Amir knows that he can't pay for a private expense using the company’s money without properly accounting for it. As the director, he decides that the company will lend them the $2,000.

He draws up a written loan agreement for the loan to be repaid over 2 years, with an interest rate equal to the benchmark interest rate. The loan agreement identifies the company, Amir and Aiesha as the parties, and the repayment terms. It is signed by all parties. The loan agreement is made on complying terms under Division 7A.

The company lends Amir and Aiesha the money, which they pay back to the company with interest each year according to the agreement over the next 2 years. When Amir prepares the company tax return, he declares:

- the interest as income of the company
- the loan balance, as at the end of the income year.

End of example### Trustees lend money or assets to beneficiaries and their associates

If you borrow money from a trust, you will need to keep a record of it. If the loan is on commercial terms, you will need to repay the principal and interest as per the loan agreement. The trust will need to report the interest as assessable income in its tax return.

There may be a situation where someone receives an amount of trust income instead of the beneficiary who is presently entitled to that amount in an arrangement to reduce tax. This can happen where the trustee, instead of paying the trust income to the presently entitled beneficiary, lends that money on interest-free terms to another person.

This is called a [reimbursement agreement](https://www.ato.gov.au/businesses-and-organisations/trusts/trust-income-losses-and-capital-gains/trust-taxation-reimbursement-agreement) and the anti-avoidance rule in section 100A of the *Income Tax Assessment Act 1936* may apply.

## Repayments of loans made to companies and trusts

If you have lent money to your company or trust, it can't claim a deduction for any repayments of principal it makes to you. However, it may be able to claim a deduction for interest it pays to you on the loan if it incurred the interest expense for an income-producing purpose. The company or trust should keep records of any loan agreements and documents explaining these payments being made to you.

You don't have to declare the principal repayments, but any interest you receive is assessable income to you and must be included in your individual tax return.

## When you take your business's money or assets in another way

If you take money out of your company or trust or use its assets for private purposes in a way not described, you or your company or trust may have unintended tax consequences. This may include triggering Division 7A.

To ensure your business transactions are transparent:

- You should consider setting up a separate bank account for your business to pay business expenses from, and avoid using it to pay for your private expenses.
- If you take money out of the business or use its assets, make sure you keep proper records that explain all relevant transactions, including all income, payments and loans to you and your associates from the business.
- If your private company lends money to its shareholders or their associates, make sure the loans comply with Division 7A.
- Ensure all transactions are correctly reported for tax purposes.

If you make an honest mistake when trying to comply with these obligations, you should tell us or your registered tax agent as soon as possible.

### Example 4: repaying a loan before the company's lodgment day

Jian is the sole director and shareholder of a private company, that he uses to run his plumbing business. Jian decides to have his home repainted, which he pays for using his company’s bank account.

Jian meets regularly with his bookkeeper, who notices the unusual transaction.

The bookkeeper advises Jian that the transaction will be treated as a Division 7A deemed dividend if he doesn’t pay the money back or make it a complying loan before the company tax return is due or lodged for the income year (the company lodgment day). Jian has enough money in his personal bank account, so he decides to repay the company the full amount.

As he repays the full amount before the company’s lodgment day, there are no Division 7A consequences for Jian.

He also takes his bookkeeper’s advice and makes sure he stops paying his private expenses from the company bank account.


## When overpayments happen

Overpayments can happen:

- when an employer mistakenly believes an employee is entitled to the pay, or
- because of a payroll error.

Employers can only take money out of an employee’s pay to fix up a mistake or overpayment in limited circumstances. For more information, visit [Deducting pay](https://www.fairwork.gov.au/pay-and-wages/deductions-and-related-issues/deducting-pay).

## Fixing an overpayment

When overpayments occur, the employer and employee should discuss and agree on a repayment arrangement.

If the employee agrees to repay the money, a written agreement should be made which sets out the:

- reason for the overpayment
- amount of money overpaid
- way repayments will be made (for example, cash, cheque or electronic transfer) and how often (this has to be reasonable).

If a repayment arrangement can’t be agreed on, an employer should get legal advice. Find out [where to get legal advice](https://www.fairwork.gov.au/tools-and-resources/other-workplace-relations-help/legal-help).

**Example: How to pay back a mistaken overpayment **

Tony was overpaid $2,000 over 3 years because of a payroll error. His award doesn’t allow an employer to make a deduction when an employee is overpaid.

Tony and his employer, Alice, meet to discuss the overpayment. Tony agrees to repay the money and they come up with a solution.

Tony tells Alice that he’d prefer to pay the money back in $20 instalments each week. This arrangement is put in writing and they both sign the agreement.

**Tip: Have a conversation about the overpayment**

Employers and employees should talk to each other if an overpayment has been made. Then, come to an agreement about repayment and put this in writing.

If you need help preparing for a difficult conversation, take free and interactive training from our [Online learning centre](https://www.fairwork.gov.au/tools-and-resources/online-learning-centre).


## What you can claim

You can claim a tax deduction for most expenses you incur in carrying on your business if they are directly related to earning your assessable income.

Types of business expenses you may be able to claim deductions for include:

- day-to-day operating expenses
- purchases of products or services for your business
- certain [capital expenses](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-depreciating-assets-and-capital-expenses), such as the cost of [depreciating assets](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-depreciating-assets-and-capital-expenses#Depreciatingassetexpenses) like machinery and equipment used in your business.

The amount of your deduction and when you can claim it will depend on the type of expense (for example certain capital expenditures are deductible over time) and whether it has any private or domestic purpose for which you must reduce your deduction. Also, some expenses are not deductible (for example fines).

There are 3 golden rules for what we accept as a valid business deduction:

1. The expense must have been for your business, available as an allowable deduction and not for private use.
2. If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
3. You must have [records](https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/record-keeping-for-business) to prove it.

You can't claim the [GST component of your expenses as a deduction](https://www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst/claiming-gst-credits/effect-of-gst-credits-on-income-tax-deductions) if you can claim it as a GST credit on your business activity statement.

You can also claim deductions for expenses related to protecting staff from safety hazards involved in performing their duties. For example, infection from transmissible diseases. This may include hand sanitiser, sneeze or cough guards, face masks, gloves, other personal protective equipment, antibacterial wipes and other cleaning supplies that are used for business purposes.

Learn more by taking our online course [Claiming small business tax deductionsExternal Link](https://smallbusiness.taxsuperandyou.gov.au/claiming-small-business-tax-deductions).

If you need assistance with understanding some of the tax and super terms, see our [definitions](https://www.ato.gov.au/about-ato/using-our-website/definitions).

## What you can't claim

There are some expenses that are not deductible, such as:

- entertainment expenses, other than those you provide as a [fringe benefit](https://www.ato.gov.au/businesses-and-organisations/starting-registering-or-closing-a-business/registration-obligations-for-businesses/work-out-which-registrations-you-need/taxation-registrations/fringe-benefits-tax)
- traffic fines
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to earning [income that is not assessable](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/assessable-income/what-income-to-include#Businessassessableincome)
- payments for which you have not met your PAYG withholding or reporting obligations – [non-compliant payments](https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/payg-withholding/in-detail/removing-tax-deductibility-of-non-compliant-payments)
- the GST component of a purchase if you can [claim it as a GST credit](https://www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst/claiming-gst-credits/when-you-can-claim-a-gst-credit) on your business activity statement.

You generally cannot claim a deduction for the cost of capital assets that are dealt with under the [capital gains tax](https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax) rules, such as the land your business premises are on. Some exceptions apply for capital works, plant and certain expenditure of primary producers on improvements to land.

Your deductions may be limited for expenses incurred in relation to [personal services income](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/personal-services-income/what-to-do-when-the-psi-rules-apply/claiming-deductions-when-receiving-psi) (PSI) if the [PSI](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/assessable-income/what-income-to-include#ato-Personalservicesincome) rules apply to that income.

### How to apportion for expenses that have both business and private purposes

You cannot claim a deduction for an expense to the extent it is incurred for a private or domestic purpose.

How you apportion depends on how much of the expense relates to running your business and the type of expense.

- If you have a home-based business and claim [occupancy expenses](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-home-based-business-expenses/home-based-business-expenses-sole-trader-or-partnership#ato-Occupancyexpenses) you will generally apportion these based on floor area and the time your home is [used in your business](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-home-based-business-expenses/sole-trader-or-partnership-home-based-business). For [running expenses](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-home-based-business-expenses/home-based-business-expenses-sole-trader-or-partnership#ato-Runningexpenses), there is a variety of methods you may use depending on your circumstances.
- There are [different methods you can use to calculate deductions for your motor vehicle expenses](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-motor-vehicle-expenses/motor-vehicle-expense-calculation-methods) depending on your business structure and the type of vehicle you are claiming them for.
- For other expenses, you will generally apportion based on the private and business use of the asset or service acquired. This must be done on a fair and reasonable basis that reflects any private use of the asset or purpose of the expense.
- You need to [keep records](https://www.ato.gov.au/businesses-and-organisations/preparing-lodging-and-paying/record-keeping-for-business) to show how you have apportioned your expense. For example, if you incur an expense to repair your laptop which you only use for your business, you can claim a deduction for the full cost of the repair. However, if you use the laptop 50% of the time for your business and 50% of the time for private use, you can only claim a deduction for 50% of the cost of the repair.

#### Example: Expenses that have both business and private purposes

Jax is a make-up artist who runs a business teaching make-up techniques and promoting make-up and products for profit through multiple online channels.

Jax purchases make-up for use in that business, but also uses some of the make-up they purchase for personal use. They estimate this to be about 50% with the remainder used in their teaching business. Jax is only able to claim a deduction for 50% of the cost of the make-up.

End of example## When you can claim your deduction

The type of expense – operating expense or capital expense – determines when you can claim your deduction. Generally, you can claim:

- operating expenses (such as office stationery and wages) in the year you incur them
- certain capital expenses (such as depreciating assets and capital works assets) [over a longer period](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules-capital-allowances/effective-life-of-an-asset) – however, you may be eligible to claim an immediate deduction for the business use portion of depreciating assets you acquire for your business if you are a small business entity and chose to apply the [simplified depreciation rules](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/depreciation-and-capital-expenses-and-allowances/simpler-depreciation-for-small-business).
- [other capital expenses](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-depreciating-assets-and-capital-expenses#ato-Othercapitalexpenses) (such as start-up expenses) may be immediately deductible or claimed over time.

For more information see [Deductions for depreciating assets and other capital expenses](https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-depreciating-assets-and-capital-expenses).

You generally incur an expense when you have a legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred, but you do need a record of the expense.

If you use an item in your business for only part of a year, you generally need to restrict your claim to the period it was used for the business.

### Claiming a deduction for a prepaid expense

There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.

Where the expense is $1,000 or more, you will usually need to apportion (or distribute) the expense across the whole supply or service period if you:

- won't receive the goods or services in full within 12 months
- are not eligible for an immediate deduction.

## How to claim your tax deduction

How to claim your business deductions depends on your business type:

- Sole trader – claim the deductions in your individual tax return in the 'Business and professional items' schedule, using myTax or a registered tax agent.
- Partnership – claim the deductions in your partnership tax return.
- Trust – claim the deductions in your trust tax return.
- Company – claim the deductions in your company tax return.


## Business

There is no single factor that determines if you are in business, but some of the factors you need to consider include:

- You intend to make a profit – or genuinely believe you will make a profit from the activity – even if you are unlikely to do so in the short term.
- You've made a decision to start a business and have done something about it to operate in a businesslike manner, such as:

- registered a business name
- obtained an ABN.
- You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organised and carried out in a businesslike manner. This may include:

- keeping business records and account books
- having a separate business bank account
- operating from business premises
- having licenses or qualifications
- having a registered business name.

### Benefits of running a business

If you run a business you can:

- apply for an ABN to use in your business transactions
- have the flexibility to manage your time and work your own hours
- register a .com.au website once you have an ABN

- access to government information, services and concessions for business

- establish a business identity when selling to customers and other businesses

- claim tax deductions for business expenses against your taxable income.

## Hobby

A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure.

### Benefits of having a hobby

Having a hobby allows you to:

- gain personal enjoyment and satisfaction from the activity

- gift or sell your work for the cost of materials

- do it in your own time or when people contact you

- have no reporting obligations of a business.

## Key differences between a business and a hobby

Activity
Hobby
Business

Declaring payments
You do not need to declare the amounts you make from your hobby to the Australian Taxation Office (ATO).
You will need to [declare your income](https://www.ato.gov.au/Business/Income-and-deductions-for-business/Assessable-income/) to the ATO in your annual return.

Claiming tax deductions
You cannot claim a deduction for any losses from your creative work if it is a hobby.

You can claim for [deductions](https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/) on your expenses and generally need an ABN to do this.

Keeping records
You do not need to keep records of your hobby for the ATO, however it’s good practice to keep records in case your circumstances change.
You must [keep records](https://business.gov.au/finance/payments-and-invoicing/record-keeping) for your business for tax and other obligations.

Licences and permits
Generally, you will not need to hold licences and permits for your hobby.
You may need [licences and permits](https://ablis.business.gov.au/) specific to your type of business.

Australian Business Number (ABN) eligibility
You are not eligible for an ABN for a hobby, however if you sell goods or services to businesses, they may ask you for an ABN when they pay you. You can use a [Statement by a supplier form](https://www.ato.gov.au/Forms/Statement-by-a-supplier-not-quoting-an-ABN/) to avoid the business withholding an amount from the payment to you for not having an ABN. The statement lets the business know that you are selling the goods or services as your hobby.
It is not compulsory for businesses to [register for an ABN](https://business.gov.au/registrations/register-for-an-australian-business-number-abn), however getting an ABN is free and makes running your business easier, particularly if you have to register for other taxes like GST.

Without an ABN, other businesses must withhold 47% from payments they make to you for tax purposes.

Selling goods
If you’re selling goods, you’ll need to comply with Australian Consumer Law (ACL). Your customers have automatic rights if they buy a product that breaks easily, doesn’t work or doesn’t perform as generally expected.
Read more about [fair trading](https://business.gov.au/legal/fair-trading).

Declaring paymentsHobbyYou do not need to declare the amounts you make from your hobby to the Australian Taxation Office (ATO).BusinessYou will need to declare your income to the ATO in your annual return.Claiming tax deductionsHobbyYou cannot claim a deduction for any losses from your creative work if it is a hobby.
BusinessYou can claim for deductions on your expenses and generally need an ABN to do this.
Keeping recordsHobbyYou do not need to keep records of your hobby for the ATO, however it’s good practice to keep records in case your circumstances change.BusinessYou must keep records for your business for tax and other obligations. Licences and permitsHobbyGenerally, you will not need to hold licences and permits for your hobby.BusinessYou may need licences and permits specific to your type of business.Australian Business Number (ABN) eligibilityHobbyYou are not eligible for an ABN for a hobby, however if you sell goods or services to businesses, they may ask you for an ABN when they pay you. You can use a Statement by a supplier form to avoid the business withholding an amount from the payment to you for not having an ABN. The statement lets the business know that you are selling the goods or services as your hobby.BusinessIt is not compulsory for businesses to register for an ABN, however getting an ABN is free and makes running your business easier, particularly if you have to register for other taxes like GST.

Without an ABN, other businesses must withhold 47% from payments they make to you for tax purposes.
Selling goodsHobby/BusinessIf you’re selling goods, you’ll need to comply with Australian Consumer Law (ACL). Your customers have automatic rights if they buy a product that breaks easily, doesn’t work or doesn’t perform as generally expected.
Read more about fair trading.

## What to do if you aren't sure

If you aren't sure whether your activity is a business or hobby, you can:

- learn more on the difference between a [hobby and a business](https://www.ato.gov.au/Business/Starting-your-own-business/Are-you-in-business-/) and whether the income you've earned from your activity is taxable on ATO website
- seek professional advice from an accountant, legal expert or [business adviser](https://business.gov.au/expertise-and-advice) who can help you decide whether you’re running a business or a hobby
- get a [private ruling](https://www.ato.gov.au/General/ATO-advice-and-guidance/ATO-advice-products-(rulings)/Private-rulings/) from the ATO. This will provide an answer that protects you from penalties and interest.


## What is PSI?

Personal Services Income (PSI) is income that is received by you, or another entity that is mainly a reward for your personal effort or skill. For example, income you earn as an independent contractor or income received by a company or trust that you provide your personal services through. The PSI rules are integrity rules that improve fairness, by preventing those not carrying on a personal services business, from:

- diverting their PSI that is an entity or person associated with them who will pay less tax on it, and
- stopping them, or the entity receiving it, from claiming deductions for some expenses they couldn't claim if they had received the PSI as an employee.

## Who can earn PSI?

You can receive PSI in almost any industry, trade or profession. Common examples include but are not limited to:

- financial professionals
- information technology consultants
- engineers
- construction workers
- medical practitioners.

As PSI is mainly a reward for an individual's personal efforts or skills, only individuals can earn PSI. Individuals can earn PSI either directly as a sole trader, or through another entity such as a company, partnership or trust. When an individual earns PSI indirectly through another entity, that entity is referred to as a 'personal services entity' (PSE).

### Example 1: sole trader earning PSI

Andre is a plumber who operates as a sole trader. He receives a contract to fix a blocked toilet and repair 3 leaking taps. He charges $25 for materials and $225 for his labour. The total of the invoice is $250. This income ($250) is PSI as it is mainly a reward for Andre’s personal efforts and skills.

End of example

### Example 2: individual earning PSI through another entity

Sandy is an information technology consultant who provides systems analysis services through her company, SP Consulting. SP Consulting enters into a contract with Richie's Computer Co to provide Sandy’s consultancy services. The contract and invoice for this work both indicate that more than 50% of the payment for these consultancy services are a reward for Sandy's labour. So the income is mainly a reward for Sandy's personal efforts or skills and is PSI.


## Piece rates

A piece rate is where an employee gets paid by the piece. This means the employee gets a pay rate for the amount picked, packed, pruned or made.

When piece rates are paid, they apply instead of the hourly or weekly pay rate. An employee can be hired to work a mix of piece rates and hourly rate shifts.

An employee can be paid piece rates when:

- an award or registered agreement allows for piece rate payments
- the employee isn’t covered by an award or registered agreement and they get a pay rate based on how much work they do.

An award or registered agreement can have additional requirements or specific rules about piecework. Find out more information about piecework arrangements in your award by selecting from the list below.

Find enterprise agreements and other registered agreements on the Fair Work Commission website. Go to [Find an enterprise agreement – Fair Work Commission](https://www.fwc.gov.au/agreements-awards/enterprise-agreements/find-enterprise-agreement).

Award and agreement free employees can be paid piece rates. They must still receive at least the [national minimum wage](https://www.fairwork.gov.au/taxonomy/term/404). Go to [Award and agreement free wages and conditions](https://www.fairwork.gov.au/employment-conditions/awards/award-and-agreement-free-wages-and-conditions) for more information.

## Commission payments

A commission payment is an amount paid to an employee based on how much they sell.

Normally, the commission payment is calculated as a fee or percentage of the employee’s total sales. A commission payment can be called a ‘bonus’ or ‘incentive payment’.

A commission payment can:

- be paid as an extra incentive on top of an employee’s pay or
- make up an employee’s whole wage (commission only payments).

### When an employee can be paid commission as an incentive

An employee can be paid commission as an incentive at any time.

An award or registered agreement can set out rules about how this can be done.

### When a employee can be paid commission only

An employee can be paid on a commission only basis when an award, enterprise agreement or other [registered agreement](https://www.fairwork.gov.au/taxonomy/term/407) states an employee can be paid this way.

For rules about paying award and agreement free employees on a commission only basis see [Award and agreement free wages and conditions](https://www.fairwork.gov.au/awards-and-agreements/award-and-agreement-free-wages-and-conditions).

An award or registered agreement can set out specific rules about how the commission can be paid.


Have a study or training support loan like HECS or HELP? Then you’ve probably heard about the government’s recent changes. The 20% loan debt reduction and compulsory repayment changes are now law.

### So, what does this mean for you?

If you had a study loan on 1 June 2025, you’re eligible for a 20% reduction. The best part is you don't need to do anything for the reduction to be applied. The 20% reduction will be backdated to your study loan balance as at 1 June 2025. We’ll then adjust the indexation, so it applies to the new lower debt balance.

We’ll notify you when we’ve applied the reduction to your loan account. You can view it on your ATO Online account through myGov or in the ATO app.

**You don’t need to wait for the 20% reduction to lodge your tax return**, continue to lodge as normal.

### What happens if I’ve paid off my HECS, HELP debt or other study loan debt?

If you paid off your loan before 1 June 2025, you won’t be eligible for the 20% reduction.

Already lodged this tax time and paid off some or all of your loan? Don’t worry! You’ll still get the same reduction amount. The 20% reduction applies to what your debt balance was on 1 June 2025.

If your study loan is in credit after the reduction, you may receive a refund to your nominated bank account. It’s a good idea to double check and [update your bank account details this opens in a new window ](https://www.ato.gov.au/individuals-and-families/tax-file-number/update-your-tfn-registration-details/update-your-financial-institution-details) with us ahead of time. If you have a debt with us or another government agency, your refund may be used to pay those instead.

If your loan is paid off, remember to tell your employer so they stop withholding additional amounts. Just fill out a [Withholding declaration this opens in a new window ](https://www.ato.gov.au/forms-and-instructions/withholding-declaration) and give it to them.

### What else has changed?

**Compulsory repayments**

From the 2025-26 financial year, the compulsory repayment threshold changes. Next tax time, you won’t need to make a compulsory repayment unless your repayment income is more than $67,000.  We’ll also only calculate your repayment on income above the $67,000 threshold, instead of your total income.

This means most people will either have a smaller compulsory repayment or won’t need to make a repayment at all. You pay your compulsory repayment throughout the year in your pay. Your employer is also likely to withhold less money from your pay after the tax tables are updated, giving you more money in your pocket each payday!

**PAYG instalments**

If you pay PAYG instalments, you won’t see a change until the 2026-27 income year. You can vary your instalments at any time – but it’s a good idea to get advice from a registered tax agent first as under estimating could land you with a tax bill.

### When will I see the changes?

We’re updating our systems to deliver these changes, which may take some time. Most people should get their 20% reduction before the end of 2025.