Made a loss in your business? The non-commercial loss rules and when you can offset it against your wages

Is it a business at all?

The rules only apply to a business. If the activity is a hobby, there is no loss to claim and no income to declare, and the question ends there. The ATO looks at intention to profit, repetition, size and scale, and whether you run it in a businesslike way with records and a plan. See hobby vs business for the full test. Assuming it is a business, the non-commercial loss rules decide when the loss can be used, not whether.

The income requirement: under $250,000

Add up your taxable income for the year ignoring the business loss, plus any reportable fringe benefits, reportable super contributions and total net investment losses. If that total is $250,000 or more, the loss is deferred regardless of the tests below, unless the ATO exercises its discretion. If it is under $250,000, move on to the tests. For most people with a job and a side business, this is easily met.

The four tests: pass any one

• Assessable income test. The business earned at least $20,000 of assessable income in the year: sales, fees and other business income before expenses. If you started or stopped part way through the year, you can use a reasonable estimate of what a full year would have produced.
• Profits test. The business made a tax profit in at least three of the last five years, counting the current year.
• Real property test. Land and buildings used in the business on a continuing basis are worth at least $500,000. Your home, and land used mainly privately, are excluded, so this is mostly for farms and premises-based businesses.
• Other assets test. Other assets used in the business are worth at least $100,000: equipment, trading stock, leased assets, trade marks and the like. Cars, motorcycles and similar vehicles are excluded, which rules out the ute.

For a sole trader with a job, the assessable income test is the one that matters. A side business that turned over $20,000 and still lost money can offset the loss against wages. One that turned over $12,000 cannot, yet.

Exceptions and the Commissioner’s discretion

Two groups get a pass on the tests. If you run a primary production business or a professional arts business (author, composer, performing artist, production associate) and your other assessable income for the year is under $40,000, you can offset the loss regardless.

The ATO can also exercise a discretion to let you claim the loss where special circumstances outside your control, such as drought, flood, bushfire or serious illness, stopped you passing a test you would otherwise have passed, or where the activity has a commercially recognised lead time before it can be expected to pass a test (an orchard, a vineyard, some manufacturing). You apply for this through a private ruling, with evidence, before you claim.

What happens to a deferred loss

A deferred loss is carried forward indefinitely. In a later year it is deducted against the first profit from the same or a similar business activity, or claimed in full in a year when you pass a test and meet the income requirement. If you stop the business, it waits until you carry on a similar one. It does not expire, and it does not reduce this year’s wages tax, which is the whole point of the rule.

You report the deferred amount each year in the business section of the return, so keep the running total and the working behind it. A loss you forget to carry is a loss you have given away.

Grouping similar activities

You can treat business activities of a similar kind as one activity for these rules. A photographer who also shoots video, or a personal trainer who also sells nutrition plans, can add the income together to pass the $20,000 test. Two activities that are not similar, say freelance design and a market stall, are tested separately, and one can pass while the other is deferred.

Reporting it and getting the numbers right

In the business and professional items section of your tax return, for each business activity you state the type of activity, whether it passed a test and which one, the net loss, and any deferred loss from earlier years. The loss itself has to be calculated properly: all the business income, all the deductible expenses, nothing private. FlowFi categorises the year from your bank statements, so the assessable income for the $20,000 test and the deductions that make up the loss come from real transactions, and the accountant export has both in one file.