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  • Non-commercial losses

    You can't claim a loss for a business that is 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 the loss against your other income. In this case, you can defer the loss until you make a profit from the business. This applies whether your business loss is from an Australian or a foreign source.

    If you're an individual in business, as either a sole trader or in a partnership, and your business activity makes a loss, you need to work out if you:

    • offset this against your other income, such as salary and wages
    • defer the loss, if you do not pass the non-commercial loss rules below.

    Offset or defer the loss

    Follow the steps below to work out if you need to offset or defer your loss.

    If you are a partner in a partnership, the income and tests are slightly different – see Partnerships.

    1. Are you in business?

    To claim a loss, or apply for the Commissioner's discretion to allow the loss to be claimed, your activity must be 'in business'. See Are you in business?

    In addition, it is normally required that you have commenced the business activity. Broadly, business is considered 'commenced' if all the following three indicators are met:

    • made a decision to commence the business activity
    • acquired the minimum commercial level of business assets to allow that business activity to be carried on
    • actually commenced business operations.

    Example: commencing business operations

    A machine operator acquired a five-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. In the first year, a shed was built, fences repaired and a part of the block cleared. In the second year, pumpkin seeds were planted.

    In the first year, the venture did not have the significant purpose or character of a business venture as the activities were of a preparatory nature.

    In the second year, with planting of the pumpkin seeds of commercial scale, the activities were sufficient to constitute commencement of business operations.

    End of example
    1. Similar business activities

    If you are carrying on more than one business activity and they are similar, they may be grouped together when considering the non-commercial loss rules. If you are running multiple business activities that are not similar, you must apply the non-commercial loss rules separately to each activity.

    1. Excepted activity

    If your loss making business is in primary production or in professional arts, 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. See Excepted business activities.

    1. Less than $250,000 income requirement

    You must satisfy the income requirement to be eligible to offset your losses in the current year. If you do not satisfy the income requirement you must defer the loss or you can apply for the Commissioner's discretion in limited circumstances.

    1. 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.

    1. 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 period 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, the loss must be deferred for that income year.

    Next steps  

    Find out about

    • TR 2001/14 Income tax: Division 35 – non-commercial business losses
    • TR 2007/6 Income tax: non-commercial business losses : Commissioner's discretion
    Last modified: 03 Feb 2022QC 33774