Changes to non-commercial loss rules

If 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.

Changes to the operation of the non-commercial loss rules apply for the 2009-10 and later income years. The new rules became law on 14 December 2009.

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.

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.