If you have a business in addition to your main employment, the non-commercial loss rules could apply to you, which may prevent you from deducting your business losses against your other income. Depending on your business activity, as long as you satisfy certain conditions your business will not be subject to the non-commercial loss rules. If your business does not satisfy these conditions, don't worry – you can also apply to the ATO for an exemption under certain circumstances.
A "non-commercial" business activity in this context is any business where the deductions exceed the assessable income in any particular year. However, the non-commercial loss rules will not apply (that is, you can offset losses from the business activity against other income) under the following circumstances:
- the assessable income from the business for the year is at least $20,000;
- the business made a profit (for tax purposes) in at least three of the past five income years, including the current year;
- the total value of real property (or interests in real property) used on a continuing basis to carry out the business is at least $500,000; or
- the total value of other assets (excluding cars, motorcycles or similar vehicles) used on a continuing basis in carrying on the business is at least $100,000.
These conditions only apply to those with an adjusted taxable income of less than $250,000.
Those with an adjusted taxable income of $250,000 or more are considered "high-income earners" and will have their deductions from the business quarantined to the business activity.
As such, they will only be allowed to deduct the loss when the business makes a profit. However, high-income earners and those that who do not satisfy the conditions described can still make a request to the ATO to allow them not to apply the rules.
The ATO may exercise the discretion to not apply the non-commercial loss rules if:
- the business was or will be affected by special circumstances outside of your control (eg natural disasters, unforeseen major accidents, government restrictions, illnesses affecting key personnel);
- if you are not a high-income earner, and the nature of the business means you will not satisfy the conditions, but the business is objectively expected to make a profit or pass one of the conditions within a commercially viable period for the industry; or
- if you are a high-income earner, the nature of the business is such that it has not and will not produce a tax profit for the year in question, and there is an objective expectation that it will make a tax profit within a commercially viable period for the industry.
The exercise of ATO discretion is based on an assessment of the facts in each case. This means any application you makes should be accompanied by supporting evidence of special circumstances, and/or evidence from independent sources, including industry bodies, professional associations and government agencies, as to what is a "commercially viable period" for the industry.
If you're a primary producer or a professional artist (eg authors, playwrights, artists, sculptors, composers, performing artists and production associates) and your income from other sources that do not relate to the business is less than $40,000 (excluding net capital gains), you can ignore all of this, as the non-commercial loss rules will not apply to you. You will be able to deduct any losses from the business against your other income, but you should beware of the $40,000 threshold which may change from year to year based on your personal circumstances.