Non-commercial losses
See how you may be able to offset your business loss against other income if you're a sole trader or in a partnership.
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What is a non-commercial loss?
A non-commercial business loss is a loss you incur, either as a sole trader or in partnership, from a business activity that is not related to your primary source of income. This type of business activity could be a hobby or lifestyle benefit.
Even if it has business-like characteristics, if it is unlikely to ever make a profit and doesn't have a significant commercial purpose or character, you can't offset this non-commercial business loss against your other income. In this case, you can defer the loss until you make a profit from the business activity. This applies whether your business loss is from an Australian or a foreign source.
Example: identifying a non-commercial loss
Bob is a sole trader who has a business operating machinery. His primary business income comes from helping others plough and prepare their land for growing crops.
Bob acquired a 5-acre block of land situated close to his residence with the intention that, in his spare time, he would upgrade the property from its present run-down condition and develop it into a small pumpkin farm to harvest and sell pumpkins.
The money he spent on developing the small pumpkin farm exceeded the income made from the pumpkins, as the pumpkins are not ready for sale yet. Bob has made a non-commercial loss but will need to work out if he can offset or defer the loss.
End of exampleOffset or defer the loss
If you're an individual in business, as either a sole trader or in a partnership, and your business activity makes a loss, 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 – if you do not pass the non-commercial loss rules below.
Sole traders
If you are a sole trader, consider the non-commercial loss rules to work out if your loss can be offset or needs to be deferred.
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'. See 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 example2. Similar business activities
If you are carrying on more than one business activity and they are similar, you may group them together when considering the non-commercial loss rules. For example, if Bob 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'), 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.
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. 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 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.
Partnerships
If you are a partner in a partnership, the income requirement and tests are slightly different – see Partnerships.
If you have been impacted by flood, bushfire or COVID-19
If you have made a non-commercial loss from a business activity because it was affected by bushfire, flood or a government-imposed lockdown, business closure or restrictions due to COVID-19, you can consider Practical Compliance Guideline (PCG) 2022/1 Non-commercial business losses – Commissioner's discretion regarding flood, bushfire or COVID-19.
The PCG provides a safe harbour for sole traders and partners in a partnership who meet the requirements in the PCG.
If the safe harbour applies, you can offset the loss (but not a past year's deferred loss) against other income in the relevant year. You also won't need to seek a private ruling on whether the Commissioner would exercise his discretion to allow that loss to be offset.
The PCG applies for losses made in following income years:
- 2019–20
- 2020–21
- 2021–22
- 2022–23.
More information
Learn more about how to offset your losses or defer your losses.
Remember, a loss from using temporary full expensing will mean the non-commercial loss will need to be deferred, as it's not a special circumstance that would support discretion being exercised.
For more information, see:
- TR 2001/14 Income tax: Division 35 – non-commercial business losses
- TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion
See how you may be able to offset your business loss against other income if you're a sole trader or in a partnership.