Non-commercial losses: partnerships
Non-commercial losses: partnerships
If you have a net loss from a business activity you carry on as an individual, either as a sole trader or as a partner in a partnership, the non-commercial loss rules will apply. These rules determine whether you can use your business loss to offset income from other sources.
If you are undertaking a business activity with others, with a view to making a profit, you are likely to be involved in a general law partnership. If you are in this type of partnership, you may be able to claim your loss from the business activity against other income.
If you are merely receiving joint income with another person, you may be considered to be a member of a partnership for tax law purposes, but that does not mean you are carrying on a business.
The non-commercial loss rules apply to individuals carrying on a business activity, either as a sole trader or as a partner in a partnership with other individuals or entities.
If you are a partner in a partnership, you (as an individual) may offset your share of a partnership loss against other income, subject to the non-commercial loss rules.
How the non-commercial losses income requirement and the four tests are applied to an individual partner is outlined below.
For more information, see Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) outlines the different kinds of partnerships.
For the 2009-10 and later income years, you first need to meet the non-commercial losses income requirement.
The income requirement applies to you as an individual, and considers various sources of income you may have received in the income year.
You meet the income requirement if your income for non-commercial loss purposes is less than $250,000.
Income for non-commercial loss purposes is the sum of your:
- taxable income (ignoring any business losses)
- total reportable fringe benefits
- reportable superannuation contributions
- total net investment losses - including financial investment losses and rental property losses.
If you meet the income requirement, you can use the four tests to work out if you can offset your loss from a partnership against your other income.
If you are a member of a partnership and all the other partners are individuals, the assessable income of the whole partnership must be at least $20,000 before the individual members can deduct losses.
If an individual member earns assessable income from the business activity outside of the partnership, that assessable income can be taken into account by that member only.
If you have partnership members that are companies or trusts, you must exclude their share of the assessable income.
John is in business in partnership with Ross and a company. The partnership earned $22,000 last year from the business activity - $4,000 of that income went to the company, and $9,000 to each individual in the partnership. Therefore, the partnership income would not be sufficient to allow John to pass the income test.
However, John has an interest in the business activity outside the partnership. He received $4,000 in assessable income from this non-partnership interest, so that the total assessable income he can count for the purposes of this test is $22,000 ($4,000 + $9,000 + $9,000). He also meets the income requirement. Therefore, he is able to deduct a loss.
Ross cannot take into account the non-partnership assessable income earned by John for the purpose of this test. Ross does not satisfy the assessable income test.
If you are a member of a partnership and all the other partners are individuals, the value of the real property used in the whole partnership business must be at least $500,000 before the individual members can deduct losses.
If you have partnership members that are companies or trusts, you must exclude the value of any real property attributable to them.
You must also exclude the value of any of the property that is owned by individual partners in their own right. However, you can include the value of any property you own outside the partnership and that the business uses on a continuing basis.
John, Bill and George are equal partners in a real estate business. The business has five offices.
The partnership owns four of the offices, which have a property value of $450,000. Bill and George have no property interests in the business except as partners, so neither Bill nor George pass the real property test as the property value is less than $500,000.
However, John meets the income requirement and owns the fifth office in his own right. It is valued at $70,000. Adding the value of his individual real property assets to the value of the real property assets held in partnership allows him to pass the real property test and claim a loss - that is, $450,000 + $70,000 is greater than the $500,000 required by the real property test.
If you are a member of a partnership and all the other partners are individuals, the value of the other assets of the whole partnership must be at least $100,000 before the individual members can deduct losses.
If you have partnership members that are companies or trusts, you must exclude the value of any other assets attributable to them.
You must also exclude the value of any other assets that are owned by individual partners in their own right. However, you can include the value of any other assets you own outside the partnership that are used in the business activity on a continuing basis.
Jessica and Bill meet the income requirement. They are in partnership with Steelco Pty Ltd. They are equal partners in a manufacturing enterprise that has plant, equipment and trading stock valued at $210,000.
Steelco owns $70,000 of these assets and, as Steelco is a company, this amount must be ignored for the purposes of the other assets test. That leaves $140,000 in assets owned by individuals in the partnership (Jessica and Bill).
This amount is greater than the $100,000 required by the other assets test, so both Jessica and Bill are entitled to deduct losses.
If you are carrying on a business activity in a partnership, you will be able to claim a loss if your income from the activity has been greater than your tax deductions for the activity for at least three out of the past five years (including the current year) and you meet the income requirement.
In calculating your income and deductions, you must consider both your income from the partnership and any income you may have earned in your own right from that activity.
Members of a partnership may be affected differently.
Anne and Emma operate a business activity as a partnership. This year, Anne and Emma both meet the income requirement. They each receive $5,000 in income from the partnership and have received the same amount for the past four years.
Anne does not have any tax deductions for her part in the business, so she has made a profit every year - therefore, she does not need to pass any of the tests.
Emma took out a loan to finance her investment in the partnership and is paying $8,000 a year in interest. Therefore, she has made a net loss of $3,000 every year for the past four years and does not pass the profits test.
Last Modified: Friday, 19 October 2012