Non-commercial losses relate to whether an individual is able to offset their taxable income by the amount of the loss incurred in running their business or to determine if the loss has to be carried forward to offset future profits for the business.
There are four main tests when it comes to determining whether you are eligible to apply the loss to your other income. Only one of the four test s must be satisfied by the taxpayer in order to apply the loss. The four tests are:
- The Income Test: The activity produces assessable income of at least $20,000.
- The Profits Test: This test requires that the business activity has a profit in 3 out of the past 5 years, where it shows that business income is greater than its expenses.
- The Real Property Test: Use real property or interest in a real property worth at least $500,000 on a continuing basis. Real property includes; land, interest in land such as leases and buildings, which are all measured at either reduced cost base or market value.
- The Other Assets Test: To pass the other assets test, the value of the assets used in the business on a continuing basis must be at least valued at $100,000.
There are four different ways to value the assets. For depreciable items it is valued according to the written down value. For trading stock, the items can be valued at the end of the year by cost, market selling price or replacement price. Assets excluded from this test are; real property assets, interest in real property and motor vehicles.
As from 1 July 2009, taxpayers have further restrictions to the deductibility of business losses incurred by sole traders, whereby they need to have an adjusted income of less than $250,000.
Adjusted income includes taxable income, reportable fringe benefit, reportable superannuation contributions and total investment losses. Only after the taxpayer has shown they do not exceed the $250,000 income threshold may they apply the other four tests to determine if they are eligible for deductibility of their business losses against their other taxable income.
For more information, please contact Zulkarnain Kashem on (03) 9798 66 22 or email at Zulkarnain@zimsenpartners.com.au.
This article was produced by Zimsen Partners. It is intended to provide general information only in summary format on accounting, business advisory and taxation issues. It does not constitute accounting advice, and should not be relied on as such.