What non-commercial business losses are
A non-commercial business loss (NCL) is a loss you make from a business activity, as either a sole trader or as an individual in a partnership, where that activity isn't related to your primary source of income.
You can't offset an NCL against assessable income you earn from other activities in the year the loss is made. You must:
- defer it to a later income year
- treat it as a deduction you incur (in relation to that business activity) in the next income year in which you carry on that business activity.
Our focus
We are seeing individuals claim and offset losses from non-commercial business activities, against their other income when they must be deferred.
Common errors
The most common NCL errors we see are caused by:
- offsetting losses from hobby or other non-business like activities
- problems applying the rules for offsetting losses when your taxable income for non-commercial loss purposes (excluding your business losses) is greater than $250,000
- issues with the rules for offsetting losses when failing to pass any of the 4 eligibility tests
- failing to apply for the Commissioner's discretion to allow the claim or not applying PCG 2022/1 in good faith.
Example: Susan the IT consultant
Susan works as a for an IT company, and also earns income from her own IT consulting business and investments in shares and managed funds.
In the 2020–21 income year Susan also started her own IT consulting business. Despite hiring staff and her business doing well, it has not yet made a profit for income tax purposes in any of the last 3 years.
In the 2023–24 income year the deductions from Susan's IT consulting business exceeded the income from that business by $46,000. Susan's taxable income for non-commercial loss purposes in 2024 (excluding the tax loss from her business) was $251,000.
Susan doesn't use an agent and lodges her own individual tax return. She incorrectly reports on her 2024 return the business activity losses of $46,000, can be offset against her other assessable income claiming non-commercial loss code 1 (indicating the business met the income requirement).
However, as Susan incorrectly calculated her taxable income for non-commercial loss purposes, she was required to defer the loss of $46,000 until her business made a profit or the Commissioner exercised the discretion in her favour. On review, the error was identified, and her 2024 assessment was amended to reflect that she was required to defer this loss. Susan was required to repay the tax shortfall, and may be subject to penalties and interest.
End of exampleHow to get it right
If you're an individual who has or is planning to offset or defer an NCL loss, we want to make sure you're aware of:
- the income requirement
- the 4 tests for offsetting business losses
- how to defer your loss
- how to offset your loss
- lossesExternal Link
You can also contact your tax professional to obtain advice specific to your business needs.