Sole traders and partnerships that are operating a business at a loss will only be able to offset that loss against other income when they pass the income requirement and one of the four non-commercial loss tests.
To meet the income requirement the taxpayer’s income must be less than $250,000. The income is calculated as the taxable income (ignoring any business losses), total reportable fringe benefits amounts, reportable superannuation contributions, and total net investment losses. The four non-commercial loss tests are:
- The profit test: Requires a business profit in three of the last five years including the current year.
- The assessable income test: Requires a minimum $20,000 revenue or sales pa from the business.
- The real property test: Requires real property used in the business of more than $500,000.
- The other asset test: Requires depreciable assets (excluding cars) of $100,000 used in the business.
As an exception, the non-commercial loss rules do not apply to primary production or professional arts businesses if the taxpayer’s other income is less than $40,000. In addition, taxpayers that don’t pass any of the four tests can apply to the ATO and request the Commissioner’s discretion.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.