Non-commercial losses: overview Print E-mail

Go to fullsize imageIf you have a net loss from a business activity you carry on as an individual, either as a sole trader or in partnership, the non-commercial loss rules will apply. These rules determine whether you can use your business loss to offset income from other sources.

 

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Changes to the operation of the non-commercial loss rules apply for the 2009-10 and later income years.

The key changes include:

  • The introduction of an income requirement to further restrict the circumstances where a business loss can offset other income. You will meet the income requirement where your income for non-commercial loss purposes is less than $250,000.
  • A new exception for business losses solely caused by deductions claimed for the small business and general business tax break.
  • A new Commissioner’s discretion for individuals who do not meet the income requirement but whose business activity is subject to a lead time.
  • Ensuring existing Commissioner’s discretions continue to apply.

The new rules became law on 14 December 2009, and are contained in Taxation Laws Amendment (Budget Measures No 2) Act 2009.

 

For income years prior to 2009-10, you can only offset your loss against assessable income from other sources if:

  • one of the exceptions for primary production or professional arts businesses apply
  • your business activity passes one of four tests (profits test, assessable income test, other assets test, real property test), or
  • the Commissioner of Taxation (the Commissioner) exercises a discretion to allow the loss to be offset against other income.

For the 2009-10 and later income years, you can only offset your loss against assessable income from other sources if:

  • one of the exceptions for primary production or professional arts businesses apply
  • you meet the income requirement and one of the four tests is satisfied (profits test, assessable income test, other assets test, real property test)
  • the Commissioner has exercised his discretion to allow you to claim the loss, or
  • the loss is solely due to a deduction claimed under the small business and general business tax break.

In every year that your business activity makes a net loss, you must consider whether:

  • you can deduct the loss in the current year
  • you must defer the loss.

This includes years where the business has made a profit before deferred losses from previous years are taken into account.

 

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