As Chartered Accountants and Financial Planners, we are regularly asked about the tax treatment of non-commercial or non-business losses.

For individuals who run non-commercial businesses and are not operating through a trust, loss deferral rules apply. The same applies for partnerships where a partner (individual) is not acting in the capacity as a trustee.

If you’re an individual taxpayer conducting business at a loss, you’re no longer entitled to offset this loss, if it derives net taxable income from other sources greater than $250,000.

In this case, consider deferring income or accelerate deductions to come under the $250,000 threshold. If there’s business activity that’s yet to become profitable, consider conducting that activity within an entity structure or in an individual’s name deriving less than $250,000 income.

Deducting business losses
Business losses must still be carried forward, so if you expect to incur a loss for this financial year and wish to deduct this against other income, check in advance whether you satisfy the requirements.

You must be ‘carrying on a business’ as determined by the ATO – where there is repetition, a plan to make profits, and reasonable turnover.

If your activities are borderline investment in nature you need to ensure you are classed as a ‘trading activity’.

This is determined by:

  • Income Test – do you have a business turnover of $20,000 or more?
  • Profits Test – have you generated a profit in three or the last five years?
  • Assets Test –  do you have an interest in real property greater than $500,000 in value?
  • Other Assets – do you use other assets in the business totaling $100,000 or more?

For share traders who satisfy the business turnover element of the income test, enter into trades prior to year end to ensure you satisfy the $20,000 turnover requirement.

The above information refers to the 2015 tax year. For specific advice please Contact Us and we will be pleased to advise you on both the tax and financial planning points of view.