What is a Non-Commercial Loss?
The tax provision for a non-commercial business loss was designed to address a sole trader’s, or a partner in a partnership’s, loss from a secondary business that isn’t the person’s main source of income.
Generally, these losses can’t be offset against other income unless the business makes a profit or meets certain conditions. If it can’t be claimed this year, it get’s carried forward until the business becomes profitable, whether the income is from Australia or overseas.
Offset Your Loss
To be eligible to offset your sole trading business loss, you must meet the income requirement as well as pass one of the four tests.
Income Requirement
Based on the current rule, your income from other sources (such as wages or investment earnings) must be less than $250,000. This includes your taxable income before any investment losses (eg negative gearing), reportable fringe benefits, and reportable superannuation contributions.
If your income exceeds this threshold, your business losses may be classified as non-commercial and, therefore, may not be immediately deductible. If the income is under the threshold, you’d then need to pass one of the four tests as explained below.
To learn about managing your sole trader income tax returns, check out our guide Tax Return for Sole Trader Income.
The Four Tests to Offset Losses
The ATO uses four specific tests to determine whether your business losses can be classified as commercial or non-commercial. If you pass any one of these tests, you may be able to offset your business losses against your other income.
1. The Assessable Income Test
This test looks at whether your business has generated at least $20,000 in assessable income during the financial year. If your business is generating substantial revenue, it shows that it is operating on a commercial basis.
2. The Profits Test
The profits test determines whether your business has made a profit in three of the last five years. If your business is profitable in this time frame, you can offset your losses.
3. The Real Property Test
This test examines whether your business uses real property (like land or buildings) with a value of $500,000 or more. If the property used in your business exceeds this value, you pass the test and may be able to offset your losses.
4. The Other Assets Test
If the value of other assets used in your business (excluding real property) is at least $100,000, you can pass this test. These assets might include items like equipment, machinery, or vehicles.
If your business meets one of these tests, the ATO will classify your losses as commercial, allowing you to claim them as deductions on your tax return.
Deferring Losses
If your business doesn’t meet any of the four tests or your income exceeds the threshold, you’ll need to defer your non-commercial losses. This means you can’t claim the loss as a deduction in the current financial year, but you can carry it forward to future years. Once your business meets one of the tests in the future, and if your income is below the $250,000 threshold for the year, you can apply the accumulated losses as deductions against that year’s taxable income.
It’s important to note that deferring a loss doesn’t mean it’s lost forever—it simply means you’ll have to wait until you meet the criteria to use it.
Exceptions to the Rules
While the ATO’s non-commercial loss rules apply to most businesses, there are some exceptions. If you’re a primary producer or a professional artist, for example, you may be able to claim losses regardless of whether your business meets the tests.
Additionally, if your business is affected by special circumstances, such as a natural disaster or other unforeseen events that impact its profitability, you may be eligible for an exception to the standard non-commercial loss rules. In such cases, you can apply to the ATO for consideration.
Why These Rules Matter
As a small business owner, it’s crucial to understand these rules so that you can manage your losses effectively. If you’re not sure whether your losses are commercial or non-commercial, it’s always a good idea to seek professional tax advice.
To learn more about how to claim business losses on your income, read more here Claiming Business Losses Against Income.
We’re here to help
Navigating the ATO’s rules can be tricky, especially if your business operates on a small scale or is still in the startup phase. At Chan & Naylor, we understand the complexities of tax regulations and the importance of making informed decisions about your business activities. Our team of experts is dedicated to providing personalised guidance tailored to your unique situation. Whether you’re unsure about your business loss deductions or need assistance with tax planning, we are here to help you every step of the way. Contact us today to ensure you’re maximising your tax benefits and making the most of your business endeavors.
About Chan & Naylor
Established in 1990, Chan & Naylor has been a trusted partner for thousands of businesses and investors across Australia. Choosing Chan & Naylor Pymble means you’re not just selecting a service provider; you’re gaining a partner aligned with your business goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business tax and investments. Contact us today so we can discuss how we can help you.
Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
