Non Commercial Loss Provisions

Posted on 18th July 2016 by Chris Grieve

Have you ever heard a family member, colleague or business partner say that they are carrying out business activity like an olive farm or a hobby and that they claim the losses as a tax deduction? From 1 July, 2009 the Australian Taxation Office brought in Non-Commercial Loss legislation that further restricts the circumstances where a business loss can offset other income; most specifically for individuals whose adjusted taxable income is $250,000 or more.

To be eligible, you must meet the income requirement of adjusted taxable income of $250,000 or less and pass one of the four tests. You can only claim losses from genuine business activities.

Income requirement of $250,000.00 Attributable Taxable Income is made of the following amounts:

  • taxable income (ignoring any business losses)
  • total reportable fringe benefits amount
  • reportable superannuation contributions
  • total net investment loss (ie: negatively geared investment properties)

Once you meet the income requirement you must then pass one of the four tests.

The four tests are:

  • The assessable income test – the business has assessable income of at least $20,000.
  • The profits test – the business had a profit for tax purposes in three out of the past five years (including the current year).
  • The real property test – the value of real property or of an interest in real property that is used in the business on a continuing basis was at least $500,000.
  • The other assets test – the value of assets (excluding real property, cars, motor cycles and similar vehicles) used on a continuing basis in carrying on the business was at least $100,000.

If none of the above apply, then losses are deferred and carried over each financial year until a financial year where one of these tests are passed, meaning that they are never lost.

There are exceptions to these tests where losses can be claimed:

Primary Production & Professional Arts – If you have a primary production or professional arts business and your assessable income from other sources not related to that business is less than $40,000, you can claim the loss in that income year.

Commissioners Discretion – An application can be sent to the Commissioner of Taxation where the following applies:

  • there are special circumstances outside your control that have prevented you passing one of the four tests, or
  • because of the nature of the business, there is a lead time before your business can pass one of the four tests or make a profit.

Where the business activity is carried out in a partnership arrangement, then you (as an individual) may offset your share of a partnership loss against your other income, subject to the non-commercial loss rules. The non-commercial losses income requirements are applied to the individual partners the same as for an individual.

From looking at the Non Commercial Loss Provisions and 4 Business Tests we can see that simply running a hobby business to make a loss, does not mean a reduction in a taxpayers taxable income. With income requirements on your adjusted taxable income and quarantining of losses, accessing these losses can be rather difficult and should be discussed in detail with one of accountants. If you would like further clarification with what has been discussed above, please contact our office.

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