Business Losses vs Non-Commercial Losses

If you’re in business, it’s important to know the difference between business losses and non-commercial losses.

When it comes to business losses, you generally make a business tax loss when the total deductions you can claim for an income year exceed the total of your assessable and net exempt income for the year.

If your business makes a tax loss, you may be able to carry forward the loss and claim a deduction for your business in a future year.

Your business structure can affect whether you offset and claim the loss in the current year or carry it forward and claim the deduction in a later year.

If you’re a sole trader or an individual partner in a partnership, you may be able to offset your business losses against other types of assessable income for the same income year. Or you may be able to defer the loss or carry it forward and offset it when you next make a profit.

If you’re operating a company, you may be able to carry forward a tax loss for as long as you want and choose the year you want to claim the deduction.

A non-commercial business loss is a loss incurred from a business activity that’s not related to your primary source of income, either as a sole trader or in a partnership. The activity may be one that’s likely to be largely unprofitable and may lack a significant, business-like purpose or character.

Generally, you can’t offset non-commercial losses. You need to defer these until you make a profit from the business activity. However, if you’ve been affected by flood, bushfire, or COVID-19 over the past few years, you may be able to offset your current year’s non-commercial loss (not past year’s deferred losses) without applying for a private ruling.

You can find out more in the ATO’s recent practical compliance guidelines, which apply for the 2019–20, 2020–21, 2021–22 and 2022–23 income years.

Remember, a registered tax or BAS agent can help you with your tax.

Source: ATO