• P9 Business loss activity details

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Did you have a loss from a business activity you carried on either as a sole trader or in partnership?

    No

    If you are a small business entity using the simplified depreciation rules, go to P10 Small business entity depreciating assets. Otherwise, go to Other business and professional items.

    Yes

    Read on.

    Important

    You must read all the information in this question and complete Activity 1 and (if necessary) Activity 2 and 3, before you complete item 16 on your tax return (supplementary section). Foreign business losses shown at M item 20 are to be included here. If your activity is carried on partly in Australia and partly overseas you need to combine the results of both to see if you have an overall loss from the activity before completing this item.

    You need to know

    Under the rules for non-commercial business losses, you can use a 2010-11 loss from a business activity you conduct either as a sole trader or in partnership to calculate your 2010-11 taxable income only if it meets one of these conditions:

    • the loss is solely due to a deduction claimed under the small business and general business tax break (Division 41 deduction)
    • an exception (see below) applies
    • you meet the income requirement and one of the four tests is satisfied
    • you meet the income requirement and none of the four tests is satisfied, but the Commissioner has exercised his discretion, or ruled that it will be exercised, to allow you to claim the loss
    • you do not meet the income requirement but the Commissioner has exercised his discretion, or ruled that it will be exercised, to allow you to claim the loss.

    You cannot claim losses arising from activities you conduct that are a private recreational pursuit or hobby, or if there is no likelihood of profit.

    The rules for non-commercial business losses apply to both foreign and Australian business activities.

    Important

    Keep records of each of the net losses deferred for your separate business activities.

    The exceptions

    If you operated a primary production business or a professional arts business and your assessable income for 2010-11 (except any net capital gain) from other sources that did not relate to that activity is less than $40,000, you may claim your business loss this year.

    A professional arts business is a business you carry on as an author of a literary, dramatic, musical or artistic work, as a performing artist, or as a production associate.

    If a tax loss for your business activity has been created solely because of deductions you claimed at F Small business and general business tax break at Reconciliation items item P8, you do not need to defer your loss. You need to use a specific Type of loss code.

    Note

    Your assessable income excludes any goods and services tax (GST) on a taxable supply you make. You must be registered or required to be registered for GST to make a taxable supply.

    The income requirement

    You must meet the income requirement to continue to have access to the four tests to offset your loss from a business activity against other assessable income.

    If you do not meet the income requirement, you may request that the Commissioner of Taxation exercise his discretion to allow your loss. See Applying for the Commissioner's discretion.

    We will work out whether or not you meet the income requirement based on information you provide at item P9 and at other labels on your tax return.

    You will meet the income requirement and have access to the four tests if the total of the following amounts is less than $250,000:

    • Taxable income, which is the amount shown on page 4 of your tax return. Any business losses you are claiming at item P9 will be ignored when working out this amount. If you had a loss, we will use zero for this calculation.
    • Total reportable fringe benefits, which are shown on your payment summary and are totalled at W item IT1 on your tax return.
    • Reportable superannuation contributions, which are your reportable employer superannuation contributions (shown on your payment summary and are totalled at T item IT2 on your tax return) plus any deductible personal superannuation contributions shown at item D12 on your tax return (Supplementary Section.
    • Net investment losses, which are the total of your financial investment losses (shown at X item IT5 on your tax return) and rental properties losses (shown at Y item IT6 on your tax return).

    If you do not meet the income requirement, you will have to defer your loss unless the Commissioner has exercised his discretion or ruled that it will be exercised, or you satisfy another exception.

    The four tests

    You will not have to defer your loss from your business activity if you meet the income requirement and the activity satisfies at least one of the following four tests:

    • There is at least $20,000 of assessable income from the business activity for this income year.
    • The business activity has produced a profit for tax purposes in three out of the past five years (including the current year).
    • The value of real property assets (excluding any private dwelling) used on a continuing basis in carrying on the business activity is at least $500,000.
    • The value of certain other assets (except cars, motorcycles and similar vehicles) used on a continuing basis in carrying on the business activity is at least $100,000.

    Note

    Special rules apply for these four tests if you are undertaking a business activity in partnership. See Partnerships or phone 13 28 66.

    The Commissioner's discretion

    Where you meet the income requirement for the most recent income year ending before you request that the discretion be exercised, the Commissioner can exercise his discretion to allow a loss from a business activity to be claimed in the year it arises, even though none of the four tests are satisfied, provided that either:

    • the business activity has been affected by special circumstances outside the control of the operators of the business, for example, natural disasters where the activity would have satisfied one of the four tests but for these special circumstances, or
    • the business activity, because of its nature, has a lead time and, for this reason, does not or will not satisfy any of the four tests, but there is an objective expectation that within a period that is commercially viable for the industry either  
      • it will satisfy one of the four tests, or
      • produce assessable income for an income year greater than the deduction attributable to that income for that year. 'Commercial viability' is measured against independent industry standards.
       

    Where you exceed the income requirement for the most recent income year ending before you request that the discretion be exercised, the Commissioner can exercise his discretion to allow a loss from a business activity in more limited circumstances. The Commissioner can exercise his discretion in this instance if:

    • the business activity has been affected by special circumstances outside the control of the operators of the business, for example, natural disasters where the activity would have satisfied one of the four tests but for these special circumstances, or
    • the business activity, because of its nature, has a lead time and, for this reason, does not or will not produce assessable income greater than the deduction attributable to that income, but there is an objective expectation that it will do so within a period that is commercially viable for the industry concerned. 'Commercial viability' is measured against independent industry standards.

    Applying for the Commissioner's discretion

    You must apply in writing for advice on whether the Commissioner will exercise his discretion. To do this, complete the Private ruling form (non-commercial losses). For more details about these rules, phone 13 28 66 for assistance.

    Deferring your loss

    If you are unable to claim your loss this year because of these rules, you must defer the loss.

    This deferred loss is not disallowed. Instead, you take it into account for the next income year in which you carry on this business activity or one of a similar kind.

    The deferred loss is a deduction when calculating any net profit or loss from the activity in that future year.

    Whether any overall loss can be taken into account in your calculation of taxable income for that future year will depend on the application of the deferral rules for non-commercial business losses in that year.

    If you are unable to claim your loss against other income this year because of these rules, you must defer your loss by showing the amount at item 16 on your tax return (supplementary section). The amount shown at item 16 cannot be used to reduce your 2010-11 taxable income.

    Make sure you complete Activity 1, Activity 2 and Activity 3 on page 4 of your schedule before you complete item 16 on your tax return (supplementary section).

    What you may need

    If you are a partner in a partnership, you will need the following details for each business activity that you, as a partner, were involved in:

    • the amount of assessable income earned by the partnership for the activity
    • the share of the partnerships' assessable income, real property and certain other assets, attributable to partners who are not individuals
    • your share of income or loss from the partnership of the activity.

    Activity 1

    Description of activity

    Completing this item

    Describe the business activity from which you made the largest loss and print this at D item P9 on page 4 of your schedule. If your business activity is the result of an investment in a tax-effective arrangement, print the name of the project at D.

    Partnership or sole trader

    Completing this item

    At F item P9 print either P in the box at Partnership (loss from a business activity carried on in partnership with others) or S in the box at Sole trader (loss from a business activity carried on as a sole trader).

    Type of loss

    Select the most appropriate code from the following list and write it at G item P9 on page 4 of your schedule.

    1. Your assessable income from the business activity for this income year was at least $20,000 and you met the income requirement.
    2. The business activity produced a profit for tax purposes in three out of the past five years (including the current year) and you met the income requirement.
    3. The value of real property assets or interests in real property (excluding any private dwelling) used on a continuing basis in carrying on the business activity was at least $500,000 and you met the income requirement.
    4. The value of certain other assets (except cars, motor cycles or similar vehicles) used on a continuing basis in carrying on the business activity was at least $100,000 and you met the income requirement.
    5. We have advised you in writing that the Commissioner will exercise his discretion to allow you to claim a loss for that business activity for this income year. This is where the Commissioner has issued a product ruling or a private binding ruling allowing losses to be claimed from an activity you participated in.
    6. The loss was from a business activity you operated that was a professional arts business and your assessable income (excluding any net capital gain) from sources not related to that activity was less than $40,000. (A professional arts business is a business you carry on as an author of a literary, dramatic, musical or artistic work, as a performing artist, or as a production associate.)
    7. The loss is from a business activity you operated that is a primary production business and your assessable income (excluding any net capital gain) from sources not related to that activity was less than $40,000.
    8. The above loss codes don't apply and the loss was not solely due to Division 41 deductions (see loss code 9). You must defer your loss and complete item 16 on your tax return (supplementary section).
    9. The current year loss for this business activity is solely due to deductions related to that activity claimed under the small business and general business tax break rules (Division 41 deductions). You cannot use this exception to claim a loss caused by a deduction claimed for the small business and general business tax break for the 2008-09 year.

    Using loss code 5

    Some business activities may be covered by a product ruling or private ruling that does not relate to the current income year. Use loss code 5 only if you have advice in writing that the Commissioner's discretion will be exercised for 2010-11. If you have applied for a private binding ruling about the exercise of the Commissioner's discretion for 2010-11 but have not yet received the ruling, use loss code 8 unless another code applies.

    Using loss code 8

    If you wrote code 8 at G, M or S item P9 you must defer your loss. You must also complete item 16 on your tax return (supplementary section).

    Electronic lodgments

    For some tax returns lodged electronically:

    • where there is a loss from a partnership from a passive investment, for example, from a rental property, you need to use code 0 at G item P9
    • where you have correctly shown the relevant loss code but an electronic edit prevents you from lodging your tax return electronically, phone the 13 28 66.

    Did you use loss code 5 at G item P9?

    No

    Go to Deferred non-commercial business losses from a prior year.

    Yes

    You must complete Reference for code 5 at C item P9 on page 4 of your schedule. Read on.

    Reference for code 5

    Completing this item

    If your business activity is covered by a product ruling that includes advice that the Commissioner will exercise his discretion to allow a loss from that business activity:

    • print PR at C in the Code section of Reference for code 5 item P9 on page 4 of your schedule
    • write the year of the product ruling at Y in the Year section
    • write the product ruling number at A in the Number section (do not include the year of the product ruling or the slash / at A).

    Alternatively, if your business activity is covered by a private ruling that includes advice that the Commissioner will exercise his discretion to allow a loss from that business activity:

    • print AN at C in the Code section of Reference for code 5 item P9 on page 4 of your schedule
    • leave Y blank in the Year section
    • write the authorisation number which was printed on the front page of your notice of private ruling at A in the Number section.

    Stop

    You must provide one of these numbers if you used loss code 5 at G Type of loss. Using an invalid ruling or authorisation number, one which does not apply to you or one which does not apply for the 2010-11 income year, may result in an understatement of your tax payable. Penalties and interest may apply.

    Deferred non-commercial business loss from a prior year

    Completing this item

    Write the amount of your deferred non-commercial business loss from a prior year for the business activity at H item P9 on page 4 of your schedule. Do not show cents.

    Net loss

    Completing this item

    Write your net loss from the business activity for 2010-11 at I item P9 on page 4 of your schedule. Do not show cents. For partners in a partnership this would be your share of the net loss from the business activity and includes any deferred non-commercial business losses from the prior year claimed at X or Y item 13 on your tax return (supplementary section).

    The example below will help you work out what to include at item P9.

    Activity 2 and Activity 3

    Fill out details for the second and third largest losses (if applicable) in the same way you have done for Activity 1.

    Note

    If you made a loss from more than three business activities, determine whether you need to defer the loss for each additional business activity. You will need the total amount of your deferred non-commercial business losses to complete item 16 on your tax return (supplementary section).

    Example

    The following example shows how to fill in items P8 and P9 on your schedule and how the amounts link to your tax return (supplementary section).

    In 2010 Kieren had to defer his non-commercial business loss of $6,000 from his beef cattle primary production business activity. He also had to defer his non-commercial business loss of $3,000 from his retail business activity. Because he operated the same activities in the 2011 income year he can claim the $6,000 business loss from the beef cattle primary production business activity as a deduction in relation to calculating any net profit or loss from that business activity for this income year, and the $3,000 business loss from the retail non-primary production business activity as a deduction in relation to calculating any net profit or loss from that business activity for this income year. Kieren would show the amount of $6,000 as a deduction at D item P8, and the amount of $3,000 as a deduction at E item P8 and $9,000 at Totals on his Business and professional items schedule for individuals 2011.

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    This year, Kieren made a loss of $4,000 from the beef cattle primary production business. After taking into account his deferred non-commercial primary production business loss of $6,000 from the prior year, he made a net loss of $10,000. He did not satisfy any of the non-commercial business loss criteria that allow a business loss to be used to reduce other income so he must defer the $10,000 net loss this year.

    Kieren would show the $6,000 deferred non-commercial business loss from the prior year at H item P9 and the net loss of $10,000 at I item P9 on his Business and professional items schedule for individuals 2011. As the loss is to be deferred he would show loss code 8 at G item P9 in the Type of loss box. See Type of loss for a description of the loss codes.

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    This year, Kieren made a loss of $5,000 from the computer repairs non-primary production business. After taking into account his deferred non-commercial non-primary production business loss of $3,000 from the prior year, he made a net loss of $8,000. He did not satisfy any of the non-commercial business loss criteria that allow a business loss to be used to reduce other income so he must defer the $8,000 net loss this year.

    Kieren would show the $3,000 deferred non-commercial business loss from the prior year at N item P9 and the net loss of $8,000 at O item P9 on his Business and professional items schedule for individuals 2011. As the loss is to be deferred, he would show loss code 8 at M item P9 in the Type of loss box. See Type of loss for a description of the loss codes.

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    Kieren would also need to complete G, I and J item 16 on his tax return (supplementary section), deferring his net losses of $10,000 from primary production and $8,000 from non-primary production, a total deferred net loss of $18,000. He would not be able to use this net loss to reduce his other income this year.

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    End of example
    Last modified: 04 Mar 2016QC 28003