Quick Summary

• A non-commercial loss is a business loss that may not automatically reduce your other income for tax purposes

• Sole traders usually can only offset losses if they meet income requirements and pass one of the Four Tests

• The Four Tests include: assessable income test, profits test, real property test and other assets test

• If you don’t meet the tests, the loss can usually be carried forward to offset future profits

What is a Non-Commercial Loss?

A non-commercial loss happens when your business expenses are higher than the income it earns.

Even though it’s a real business loss, the ATO calls it a “non-commercial loss” for tax purposes. This doesn’t mean your business isn’t commercial – it just means that the loss can’t automatically reduce your other income, like your salary or wages, unless your business meets certain ATO conditions. These rules help ensure that only genuine businesses, with a real intention and ability to make a profit, can use losses to reduce other taxable income.

If your business doesn’t meet these conditions, the loss isn’t gone forever. You can defer it, which means saving it to offset future profits from the same business.

So, how do you know if your loss can be claimed now or used later? Let’s walk through the key requirements set by the ATO.

Step 1 – Are You Actually Running a Business?

The ATO wants to make sure your activity is a real business, not just a hobby. You’ll usually meet this test if:

• You made the decision to start your business

• You bought tools, equipment, or stock

• You’ve started trading or offering services

• You behave like a business

If your activity is more of a hobby than a business, you do not need to report the income to the ATO, and any losses cannot be offset against other income.

For more information on business vs hobbies, visit the ATO website and the Australian Business website.

Step 2 – Meeting the Income Requirement

Before you can offset a business loss, the ATO requires your total income to be below $250,000 for the financial year.

• This total includes more than just your salary. It combines your:

• Taxable income

• Reportable fringe benefits (for example, certain benefits from an employer)

• Reportable super contributions

• Total net investment losses

If this combined amount is $250,000 or more, you generally won’t be able to offset the loss – even if your business passes one of the Four Tests below. Instead, the loss will usually need to be deferred.

Once you meet the income requirement, the next step is to see whether your business passes one of the Four Tests.

Step 3 – Check the Four Tests

To use a business loss against other income, you only need to pass one of these four ATO tests:

1. Assessable Income Test – $20,000+

Your business earns at least $20,000 in a year. This shows your business is more than a side hustle. 

What counts as assessable income?

• Ordinary income – the money your business earns from selling goods or services (excluding GST)

• Statutory income – other amounts the ATO counts as income, like capital gains

If you were in business for less than a year, or you stopped carrying on your business during the year, you can make a reasonable estimate of what your assessable income would have been for the full year.

2. Profits Test – Profitable 3 out of 5 Years

Your business passes this test if it has made a taxable profit in at least 3 of the past 5 years (including the current year). A few lean years don’t automatically disqualify you – the test looks at whether your business is generally profitable over time.

Important points:

• When calculating profit, ignore any loss you have deferred from earlier years

• Profits made under a previous owner can count, because the test focuses on the business activity itself, not who owns it. Just as long as the business hasn’t fundamentally changed due to ownership transfer or sale

3. Real Property Test – $500,000+ in Property

Your business passes this test if it uses real property worth $500,000 or more for business purposes on an ongoing basis. This shows your business has a significant commercial presence. Examples include farms, warehouses, or commercial premises but not your home.

To check if your real property assets reach the $500,000 threshold, you can use either:

• Reduced cost base – the amount you paid for the property

• Market value – the current value of the property

4. Other Assets Test – $100,000+ in Business Assets

Your business passes this test if it owns ‘other’ business assets worth $100,000 or more. This shows your business has enough investment to be considered commercially serious.

What counts:

• Equipment or tools used in the business (plant or equipment)

• Stock or inventory for sale

• Assets leased from another business

• Intellectual property, such as trademarks, patents, copyrights, or similar rights

What does NOT count:

• Real property or property interests (these are considered in the Real Property Test)

• Cars, motorcycles, or similar vehicles

For more detailed information about How the Four Tests applied to sole traders, visit the ATO website.

What If You Don’t Pass Any Test?

Don’t worry, your loss isn’t gone forever. You can usually defer it to offset future profits from the same business.

There’s a special exception: If your loss-making business is in primary production (such as farming) or professional arts, the ATO treats these as “excepted business activities.”

You may be able to offset your loss against other income immediately if your assessable income from other sources is less than $40,000 (excluding any net capital gain).

How ANNA Money Can Help

Experiencing business losses in your early years doesn’t have to be stressful. ANNA Money helps sole traders keep accurate, up-to-date records of income and expenses, making it easier to manage your tax obligations.

With ANNA Money, you can:

• Track all income and expenses automatically

• Keep receipts and invoices organised for ATO compliance

• Monitor cash flow to plan for tax obligations

• Get expert guidance on tricky tax questions

By staying organised from day one, you can make smarter decisions for your business and stay on top of your tax, even if you experience a loss in your first year.

Remember: losses are part of the journey for small businesses. Knowing the rules helps you plan better, avoid tax mistakes, and grow your business with confidence.

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