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Non Commercial Losses

In our last blog we touched on the question of “Am I in business?” and the ramifications of hobby v business from the tax office’s viewpoint. This week we take the next step and assume that you are in a small business and take a look at non-commercial losses. Before going into too much detail, I need to clarify that these non-commercial loss laws do not apply to those merely engaging in a hobby (see last week’s blog) or those losses that may be generated from investment losses, such as shares and property transactions.

If you are in business and making a loss, either as a one-off or on a regular basis, you must be able to satisfy the ATO business tests in order to claim that loss in the year of the loss, otherwise your loss may well be disallowed in the event of an ATO review or audit. Broadly, there are four main tests and as long as you can satisfy one of them then you will have met the ATO requirements.

The tests are that you must have generated at least $25,000.00 per annum in real income, or have produced a profit in at least three of the previous five years, be utilising real property worth at least $500,000.00 or have other assets of at least $100,000.00 that are being used by the business to generate income. If you do not meet at least one of these requirements then any loss your business may make will not be allowed and will need to be carried forward into the future until such time as you do meet these ATO requirements.

The detail behind each of these tests and the ability, or otherwise, to satisfy them requires a lot of forward planning in order for you to be in the most tax effective scenario possible and that can only be done by keeping an open line of communication between yourself and your small business accountant.