What is a non-commercial loss?

Definition of a non-commercial loss

A non-commercial business loss happens when you run a side business or activity that costs more money than it makes. In most cases, this loss can't be used to reduce your taxable income from other sources (like your salary or wages) for that year unless specific conditions are met. If you can't deduct the losses, you can defer it until make a profit.

If you are a sole trader, consider the following rules to work out of your loss can be offset or needs to be deferred. For a partnership, the non-commercial loss rules apply to individually to each partner.

What are the rules

You need to be running a legitimate business and you need to meet certain income requirements.

Check if you are running a business

The activity needs to be a legitimate business, not just a hobby. See our webpage to understand if you are in business.

Additionally, you must have:

• decided to start the activity with the purpose of making a profit
• acquired enough tools, resources, or assets to run the business properly
• actually started operating the business in a commercial way (not just preparing for it).

Income requirement

To claim the loss in the current year, your total taxable income (including salary, reportable benefits, super contributions, and investment losses) must be under $250,000.

For more information see Income requirement.

Four tests to claim the loss

If your income is under $250,000, you need to pass one of four tests:

• Assessable income test - assessable income from your business activity during the financial year must be at least $20,000 (or a reasonable estimate for part year trading).
• Profit test - your business made a profit in 3 out of the past 5 years.
• Real property test - you use real property valued at least $500,000 in your business activity on a continuing basis.
• Other assets test - the value of your assets you use in the business are worth at least $100,000 (not including real property or some vehicles).

If you don't meet one or more of these tests, the loss usually needs to be deferred (saved for later).

For more information see the four tests.

Excepted business activity

If your business involves primary production (for example, farming) or professional arts, and your income from other sources is under $40,000, you might qualify to use the loss immediately. We call these excepted business activities.

Commissioner’s discretion

If you don’t meet the income requirement or pass any of the four tests, you can apply for the Commissioner’s discretion.

This may be granted if the nature of your business means it needs more time to become profitable (lead time), or there are special circumstances (for example., natural disasters) outside your control.

If a special circumstance like a flood, bushfire, or government-imposed lockdown caused your loss for the income years between 2019–2023 financial year, special rules may apply to let you offset the loss in specific years without extra approvals.

For more information you can consider Practical Compliance Guideline PCG 2022/1 Non-commercial business losses – Commissioner's discretion regarding flood, bushfire or COVID-19.

What happens if you don’t meet these rules

If you don't meet the non-commercial loss rules, you can't use the loss to reduce other income in the same year. Instead, the loss is carried forward and can only offset income from the same activity in future years.

If you run more than one business

If you are running similar business activities you can group them together when considering the non-commercial loss rules (for example, 2 farming activities).

Different businesses are assessed separately (for example, farming and carpentry). The rules apply individually to each activity.

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.