Media: Understanding non-commercial losses
http://tv.ato.gov.au/ato-tv/media?v=bi9or7odhsaggqExternal Link (Duration: 02:02)
Definition of a non-commercial loss
A non-commercial business loss is a loss you incur, either as a sole trader or in partnership, from a business activity that isn't related to your primary source of income.
The business activity needs to have business-like characteristics and a significant commercial purpose or character. The losses from a non-commercial business activity can't be offset against other assessable income in the year in which the loss is incurred unless an exception applies or there is a profit made.
If you can't deduct your business activity loss in the current year, you can defer the loss until you make a profit from the business activity. This applies whether your business loss is from an Australian or a foreign source.
Example: identifying a non-commercial loss
Bob is a sole trader who has a business operating machinery. His primary business income comes from helping others plough and prepare their land for growing crops.
Bob acquired a 5-acre block of land situated close to his residence with the intention that, in his spare time, he would upgrade the property from its present run-down condition and develop it into a small pumpkin farm to harvest and sell pumpkins.
The money he spent on developing the small pumpkin farm exceeded the income made from the pumpkins, as the pumpkins are not ready for sale yet. Bob has made a non-commercial loss but will need to work out if he can offset or defer the loss.
End of exampleRules for offsetting versus deferring the loss
There are different rules for whether a loss can be offset or deferred for:
If you have been impacted by flood, bushfire or COVID-19
If the non-commercial loss occurred because your business activity was affected by bushfire, flood, or government-imposed lockdown, business closure or restrictions due to COVID-19, you can consider Practical Compliance Guideline PCG 2022/1 Non-commercial business losses – Commissioner's discretion regarding flood, bushfire or COVID-19.
The PCG provides a safe harbour for sole traders and partners in a partnership who meet the requirements in the PCG.
If the safe harbour applies, you can offset the loss (but not a past year's deferred loss) against other income in the relevant year. You also won't need to seek a private ruling on whether the Commissioner would exercise his discretion to allow that loss to be offset.
The PCG applies for losses made in the 2019–20, 2020–21, 2021–22, 2022–23 and 2023-24 income years.
Learn more about how to offset your losses or defer your losses.
Remember, a loss from using temporary full expensing will mean the non-commercial loss will need to be deferred, as it's not a special circumstance that would support discretion being exercised. Temporary full expensing ended on 30 June 2023.
For more information, see:
- TR 2001/14 Income tax: Division 35 – non-commercial business losses
- TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion.