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 – see bleow), 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.

Losses from non-commercial activities carried on by Individuals (who have adjustable taxable income of less than $250,000) are only deductible against other income in that income year if the taxpayer satisfies at least one of four tests. Alternatively, the Tax Office may exercise a discretion to allow the deduction. This can be done where the activity is affected by a situation outside the taxpayer's control or where an activity has been started and it is to be expected that it will meet one of the tests or generate taxable income within a period that is commercially viable.

The four tests, which are applied annually, are:

-Test 1: Assessable income test - assessable income from a business activity is $20,000 or more.

-Test 2: Profits test - the business activity has produced a tax profit in at least three out of the last five income years, including the current year.

-Test 3: Real property test - the value of real property assets (excluding any private dwelling) used in carrying on a business is $500,000 or more.

-Test 4: Other assets test - the value of other assets (excluding cars, motorcycles and similar vehicles) used in carrying on a business is $100,000 or more.

Losses that are quarantined are not lost, they are merely deferred until the next income year when the business activity is conducted and the individual satisfies at least one of the four tests or the Tax Office has favourably exercised its discretion.

Future claims for non-commercial losses carried forward will need to be offset first against any exempt income before they can be claimed. Similarly, losses are forfeited where the individual is declared bankrupt and the losses are not retrieved until such time as all tax debts have been paid.

Note: If your adjustable taxable income is more than $250,000, the above rules do not apply. The loss is automatically quarantined unless the Commissioner exercises his discretion to allow the loss. This involves putting your case forward to the Commissioner (in an approved format) illustrating the business will make a profit in a reasonable time period in line with that particular industry. The issue is that you must apply to the Commissioner for him to exercise his discretion.

Exceptions
If the activity is a primary production or professional arts business, the taxpayer will be able to claim the losses from that business provided the taxpayer's assessable income (excluding any net capital gains) from other sources is under $40,000. For primary production partnerships, this rule applies separately for each individual partner.


Please note the information contained on this website is general in nature and should not be relied upon as tax advice. If you have a question please contact Sean Urquhart on 02 8264 0755.