Non-commercial losses: assessable income test
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 assessable income test
For the 2009-10 and later income years, you first need to meet the non-commercial losses income requirement before you can use the assessable income test.
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 - including financial investment losses and rental property losses.
If you meet the income requirement, you can use the assessable income test.
To pass the assessable income test, assessable income from your business activity must be at least $20,000 in the income year.
Assessable income includes:
- ordinary income - for example, the gross earnings of a business activity
- statutory income - for example, capital gains.
If you pass the assessable income test, you can claim your losses in the current year.
Any income normally brought to account as assessable income for the sale of depreciating assets in the normal course of business activity will be included in assessable income for this test. This also applies for capital gains and diesel fuel rebates.
Carrying on a business for less than a year
If you have not carried on your business activity for a full year (because you started or ceased business part way through that year) you can make a reasonable estimate of what you would have made over a full year.
If either your actual or estimated income for the year is $20,000 or more, you pass the assessable income test.
Making a reasonable estimate
There is no set formula. However, you should consider relevant factors such as:
- orders you have received
- forward contracts you have entered into
- the size of your business activity
- the amount you have invested in the business activity
- the type of business activity you are engaged in, and the typical income patterns for that industry
- how your actual income would translate into an annual income on a pro-rata basis
- cyclical or seasonal patterns in your business area, and the effect they would have on your annual income.
Sarah started her piano-tuning business on 1 December. She earned $14,000 in assessable income for the income year (ending 30 June).
Sarah consistently earned $2,000 in assessable income each month. Therefore, she could reasonably estimate that, had she been in business for a full year, she would have earned $24,000.
Based on this reasonable estimate, Sarah's business activity passes the assessable income test and losses can be deducted.
Gary started his manufacturing business on 27 March. By 30 June he has made $4,000 in assessable income.
Gary has unfilled orders valued at $17,000, for the next six months, and the real prospect of further orders.
Based on his unfilled orders, Gary estimates that his assessable income would exceed $20,000 in a full income year.
The estimate is a reasonable one and his business activity passes the income test.
An estimate that is a reasonable one when it was made will continue to be regarded as reasonable, even if it later proves to be wrong. However, if after you receive your income tax assessment you realise it is based on an unreasonable estimate and that your business activity did not meet the assessable income test or any of the other tests (and your loss should have been deferred) you should request an amendment. You must generally make the request within two years of the date of issue of the original assessment.
We may review your estimate. If the review reveals that your estimate is not reasonable, your income tax liability may be reassessed. We may impose penalties.