Non-commercial losses: similar business activities
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.
If you are carrying on more than one business activity and they are similar, they can be grouped together when you need to establish whether you can deduct a loss.
To decide whether business activities are similar, you could consider:
- the assets they use
- the nature of their operations
- their location
- their funding basis
- the goods and/or services provided
- the economics of the market for those goods and services
- any links between the activities of the two businesses
- the time spent on these activities
- the nature of expenses involved in each business activity
- applicable laws or regulations
- any relevant professional associations.
For example, the following activities may be similar:
- grazing sheep and grazing cattle
- growing grapes and growing olives
- manufacturing shirts and manufacturing jeans.
In contrast, the following business activities may not be similar:
- manufacturing goods and farming
- repairing cars and making furniture.
Paragraphs 49 to 54 of Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses provide more details on when business activities are considered to be 'of a similar kind'. Refer also to Example 2, paragraphs 124 to 130 of that ruling.
End of attention
If you are not sure if your activity qualifies as a business, see Am I in business?
You may also want to read Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production?
If you are carrying on two business activities that are not similar, they must independently pass a test for deducting a loss. This may mean, for example, that you can claim a tax deduction for a loss on one business activity but not for another.
Ron meets the income requirement. He runs a four-wheel-drive driving school on his 40-hectare property (with a real property value of $550,000). The property is used only for business purposes.
On the same property, he grows dahlias for sale and exhibition. Thirty-seven hectares are devoted to the driving school and the remaining three to the dahlia business.
Although Ron grows flowers he does not qualify for the exception for primary producers, as his assessable income from other sources not related to the activity is more than $40,000 - that is, he needs to consider whether his business activities pass one of the four tests.
The two business activities are not similar, so the value of the real property and other assets must be apportioned between them.
Ron must apportion the value of the real property between each business activity according to its use. The value of the real property used in the driving school is $508,750, and in the dahlia business is $41,250.
The loss from Ron's driving school can be deducted because this business activity passes the real property test. Therefore, any loss from the driving school can be offset against any other assessable income he has.
The dahlia business does not pass the real property test. Ron will have to see if it passes one of the other tests and, if it does not, investigate whether he should ask the Commissioner of Taxation to exercise the discretion and allow him to deduct this loss.