Q & A – WHAT IS A NON – COMMERCIAL LOSS?

Q: What is a Non – Commercial Loss?

A: A non-commercial loss is any loss you incur, either as a sole trader or in partnership, in a business that is secondary to your main source of income.

Can I offset my loss against my main source of income?

To assess whether you can offset your business loss from your other income, or you have a non-commercial loss that you defer, you first have to look at your other income to ensure it is below $250,000.

Your other income is the income you receive, other than from your loss making business and includes:

• Taxable income
• Reportable fringe benefits
• Reportable superannuation contributions
• Total net investment loss

If this is less than $250,000 you can offset your losses in the current year if you pass any of the four tests below:

Assessable Income Test

To pass the assessable income test, assessable income from your business activity during the income year must be at least $20,000. If you were in business for less than a year, or you stopped carrying on your business activity during the year, you can make a reasonable estimate of what your assessable income would have been for that full year.

Profits Test

Your business will pass the profits tests if it has made a tax profit in three out of the past five years (including the current year). If a business makes a tax profit for three years running then it will pass the profits test for the next two years regardless of whether it makes a loss, since three out of five consecutive years will be profit years.

Real Property Test

You will pass the real property test if real property of at least $500,000 in value is used in your business on a continuing basis. Real property includes land, structures fixed to the land and interests in that property, such as a lease of that property.

To assess whether your real property assets are at least $500,000 in value, you may value them at either their reduced cost base or market value.

If you use the real property in more than one business activity then you must divide the value between the different activities. This is the same concept if you use private portion on the real property

Other Assets Test

You must have used other assets whose value is at least $100,000 in carrying on the business.

Examples of other assets include;

• Depreciable assets measured at WDV
• Trading stock measured at cost, market or replacement
• Leased assets measured using future lease payments
• Trademarks, patents or copyrights measure at reduced cost base of the asset

Assets which are excluded from the Other Assets Test include;

• Real Property Assets taken into account for the real property test earlier
• Cars, Motorcycles and similar vehicles
• Assets under construction

What if I fail the four tests?

If you don’t pass any of the four test mentioned above, you can’t deduct your business activity loss in the current year. Instead, you must defer your loss for use in a later year.

There is no time limit on how long you can defer your losses. Your loss can be deferred indefinitely until one of the following applies:

• There is a profit from your business activity, in which case the deferred loss can be offset to the extent of the profit from the business activity
• You meet the requirements mentioned earlier
• The Commissioner exercises his discretion to offset the loss.

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