Non-Commercial Losses for Sole Traders: What You Need to Know

What Is a Non-Commercial Loss?

As a sole trader, your business income and expenses are often intertwined with your personal finances. Sometimes, your business may make a loss—when your business expenses exceed your income. However, not all business losses can be immediately deducted against your other personal income, like wages or investment income. This is where non-commercial losses come into play.

A non-commercial loss occurs when a business activity makes a loss, especially in its early years, but doesn’t produce enough income to meet the requirements that allows the loss to be deducted against other income.

In such cases, the loss is generally quarantined, meaning it can’t be deducted against other income sources (like salary or investment earnings) unless certain conditions are met. The loss may then be carried forward to offset future business profits.

How Are Non-Commercial Losses Treated in the Year They Are Incurred?

If your business activity incurs a loss during the year, tests need to be applied to determine whether they are non-commercial losses or not. If they are not non-commercial losses, you can offset that loss against your other income sources, such as wages or investment returns. These tests include:

  • Assessable income test: Your business must generate at least $20,000 of assessable income in the financial year.
  • Profits test: The business must have made a profit in at least three of the past five financial years (including the current year).
  • Real property test: The value of real property used in the business must be at least $500,000.
  • Other assets test: The value of other assets (excluding real estate) used in the business must be at least $100,000.

If your business passes any of these tests, the loss can usually be deducted against other income in the year it’s incurred. If your business doesn’t meet these conditions, the loss is classified as a non-commercial loss, meaning it cannot be used to reduce your taxable income for that year. Instead, it is quarantined and carried forward to future tax years.

You can find out more about non-commercial losses and the tests here.

Treatment of Non-Commercial Losses in Future Years

If your business activity incurs a non-commercial loss, it doesn’t mean the loss is wasted. Instead, it can be carried forward to offset future business profits from the same activity.

For example, if you’ve incurred a non-commercial loss in Year 1, but your business becomes profitable in Year 2, you can use the loss from Year 1 to reduce the profit in Year 2, thereby reducing your overall taxable income.

One thing to note is that the ATO will continue applying the same tests each year to determine whether you can claim the loss against your other income or whether it must be carried forward.

Exceptions for Certain Business Activities

There are also exceptions for special circumstances where you can apply for the Tax Commissioner’s discretion. Please check out this link here for more information.

Key Considerations

  • Activity assessment: Make sure your business activity qualifies as a commercial venture, not a hobby, which would not allow losses to be claimed at all.
  • Losses carry forward: Quarantined losses can be carried forward indefinitely, allowing you to offset future business profits.
  • Record keeping: Maintain detailed records of your losses and profits, as you’ll need to apply these when offsetting losses in future tax years.

Conclusion: Making the Most of Non-Commercial Losses

While non-commercial losses can feel like a setback, they don’t have to be. With proper planning and understanding of how the ATO handles these losses, you can carry them forward and use them to offset future profits. This ensures you can make the most of your business expenses, even when your business activity doesn’t immediately generate a profit.

It’s also a good incentive to scale that business of yours and grow!


We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.

This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.

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