Non-commercial loss rules
Work through the following non-commercial loss rules to 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.
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'.
In addition, you normally need to have commenced the business activity. Broadly, business is considered 'commenced' if you have made the decision to start the business and both:
- acquired the minimum level of assets to start running your business
- started your business activities.
Example: commencing business operations
Bob wants to grow pumpkins as a business.
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 business activities, you may group them together when considering the non-commercial loss rules. For example, you could group activities if you decided to plant and sell corn in addition to pumpkins.
If you are running multiple business activities that are not similar (for example, if Bob decided to build and sell cubby houses in addition to farming pumpkins), you must apply the non-commercial loss rules separately to each activity. 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. Income requirement
For you to be eligible to offset your losses in the current year, the total of your taxable income, reportable fringe benefits, reportable super contributions and total net investment losses must be less than $250,000. Find out more about the income requirement.
If you don't meet the income requirement you must defer the loss. You can apply for the Commissioner's discretion in limited circumstances
5. Four tests
If you meet the income requirement, you then need to check if you pass any of the four tests. If you pass, you can offset the loss in the year in question.
If you don't pass any of the four tests, you must defer the loss. You can apply for the Commissioner's discretion in limited circumstances.
6. Commissioner's discretion
If you either don't meet the income requirement or you don't pass any of the four tests, you can apply for the Commissioner's discretion to allow you to claim and offset the loss against your other income in the current year.
The Commissioner will only exercise the discretion in limited circumstances if either of the following apply:
- There are special circumstances outside your control that have prevented you passing one of the four tests.
- Due to 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.