Understanding Non-Commercial Losses

February 28, 2024

Jessie Lakin

What are non-commercial losses?

A non-commercial business loss is a loss you incur, either as a sole trader or in partnership, from a business activity that isn’t related to your primary source of income. Think hobbies, side businesses, or personal ventures. In Australia, the ATO has specific rules and criteria to determine if an activity qualifies as non-commercial.

The criteria:

To claim non-commercial losses, you need to meet a few key criteria. First, the business activity needs to have business-like characteristics and have a genuine intention to make a profit in the long term. This means you’re not just pursuing the activity for fun, but you have a real goal of turning it into a profitable venture. Second, the business activity needs to have a significant commercial purpose or character.

The benefits:

Now, you may be wondering “Why should I care about non-commercial losses?” Well, here’s the exciting part: if you’re claiming a loss from a non-commercial activity, you may be able to offset it against other assessable income. This can help reduce your overall tax liability. However, there are certain tests (commerciality tests) you must satisfy in order for the loss to become deductible.

The tests:

Losses for non-commercial activities carried on by individuals are only deductible against other income if:

• The taxpayer passes at least one of four commerciality tests, and they have an adjusted taxable income of less than $250,000.
• The Assessable Income Test -> income (sales/revenue) needs to be >$20,000
• The Profits Test –> earn a profit 3 out of the last 5 financial years
• The Real Property Test -> If the value of real (business) property is >$500,000
• The Other Assets Test -> If the value of all other assets (excluding real property and cars) is >$100,000 
• If unable to meet one of the four above tests, there are two exceptions.
  • Loss is from primary production or professional arts business and total assessable income from other sources <$40,000 (excluding capital gains)
  • The Commissioner exercises a discretion

What happens if you don’t satisfy any of these tests?

If none of the four non-commercial loss tests are met or you can’t satisfy the two exceptions, then you may be wondering what happens to the losses. Well, the losses are quarantined.

If a business activity makes a profit in a following year, the deferred loss can be utilised against the profit.