Non-commercial losses

If you’re in business as an individual or partnership and your business makes a loss you much check the non-commercial loss rules to see if you can offset the loss against your income from other sources, such as wages.

To claim a loss from a business activity against other income, firstly the individual or partnership must be carrying on a business.  Refer Am I in business? (NAT 2598). 

Once it is established an individual is carrying on a business they may be able to claim a loss from a business activity against other income, if one of the tests are met:

  1. Assessable income test – the assessable income from your business activity exceeds $20,000 in that year. Where a business commences or ceases operation during the year, you can make a reasonable estimate of what the income would have been if you had been in business for the entire year.
  2. Profits test – the particular business activity generated a profit in at least three of the last five income years, including the current year.
  3. Real property test – the value of land and buildings used by the business exceeds $500,000 .
  4. Other assets test – the total value of other assets (excluding motor vehicles, land and buildings) used on a continuous basis in the business activity exceeds $100,000. Such assets may include trading stock, the written down value of depreciable assets, and the remaining capital component of assets under lease.

Commissioner’s discretion?

If the activity does not pass any of these tests, the Commissioner can exercise discretion to allow the loss to be offset against other income.  The Commissioner will only exercise discretion in two circumstances.

  • Your business activity would have passed one of the four tests except for special circumstances outside your control.

Special circumstances that may have affected a business, may include but are not limited to bushfires, floods, droughts and diseases that destroy livestock and crops.  Special circumstances may also include events such as an oil spill, a gas plant explosion  or a water authority failure.

The circumstances need to be special. This means that they have stopped the activity being able to satisfy one of the four tests. Changes in the national economy and market fluctuations are unlikely to be considered special circumstances

  • You have just started your business activity and, because of the nature of the business, there is a lead time before your business activity passes one of the tests or a profit can be expected.

Working out whether or not your losses will be consider as commercial can be a complex matter.  Please speak to your accountant for further advice.

Gillian Holzberger – Senior Accountant