If you have a net loss from a business activity you carry on as an individual, either as a sole trader or 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.
Before you apply the profits test
For the 2009-10 and later income years, to be able to offset your losses using the profits test you first need to meet the non-commercial losses income requirement.
You meet the income requirement if the total of the following amounts is less than $250,000:
- taxable income (ignoring any business losses)
- total reportable fringe benefits
- reportable superannuation contributions
- total net investment losses.
If you meet the income requirement, you can use the profits test to claim your business losses.
Your business will pass the profits tests if it has made a profit in three out of the past five years (including the current year).
For the purposes of the profits test, a business activity has a profit when the activity's assessable income is greater than its tax deductions for the income year.
When you calculate the profit, you should exclude any loss from that activity that you have deferred from earlier years.
If a business activity makes a profit for three years running then it will pass the profits test for the next two years, since three out of five consecutive years will be profit years.
Example
Bernice starts a small business activity.
In the first year of operation she makes a small profit, so she doesn't need to consider the four tests.
In the following year she makes a loss. She does not pass any of the four tests. Bernice has to defer her loss.
In the third year she makes a small profit, but she does not pass the profits test because she has only made a profit in two of the past five years. She does not pass any of the other tests. She will be able to offset her deferred loss up to the amount of her business profit. The remainder is deferred to year four.
In the fourth year, Bernice makes another very small profit. Since she has now made a profit in three of the past five years, she passes the profits test. She will be able to offset her deferred loss from year two.
Sections within Profits test
Last Modified: Friday, 29 July 2011