If a business that makes a loss, you can carry forward that loss and may be able to claim a deduction for it in a future year. The rules differ for different business structures. If you’re a sole trader or a partner in a partnership, you may be able to claim business losses by offsetting them against other income – for example, income you earn from salary or wages.
Claiming tax losses
You incur a tax loss when the total deductions you can claim for an income year (excluding tax losses from earlier income years) are more than your total assessable income and net exempt income. (Net exempt income is income that is exempt from tax but taken into account when carrying forward losses.)
There are some deductions you cannot use to create or increase a tax loss, including donations or gifts and personal super contributions.
Offsetting current year losses against other income
If you operate as a sole trader or an individual partner in a partnership, you may be able to claim business losses by offsetting them against your income from other sources, such as wages. However, you will need to meet the requirements of the non-commercial business loss rules
If you’re a sole trader or an individual partner in a partnership and you make a net loss from your business activity, you may be able to claim that loss by offsetting it against your other income (such as salary or investment income) for that year.
You may be able to offset the loss against your other income if one of the following applies:
Your business is a primary production business or a professional arts business and you make less than $40,000 (excluding any net capital gains) in an income year from other sources
Your income for non-commercial business loss purposes is less than $250,000, and either:
• your assessable business income is at least $20,000 in the income year
• your business has produced a profit in three out of the past five years (including the current year)
• your business uses, or has an interest in, real property worth at least $500,000, and that property is used on a continuing basis in a business activity (this excludes your private residence and adjacent land)
• your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.
• You have been granted a Commissioner’s discretion allowing you to offset the loss.
If you do not meet any of these requirements, you cannot offset your business loss against any of your other assessable income for that income year. However, you can defer the loss or carry it forward to future years. If your business makes a profit in a following year, you can offset the deferred loss against this profit.
Deductions that do not give rise to a loss
Certain deductions that would otherwise be allowable cannot be claimed as deductions where they would give rise to a tax loss. They are:
• payments of pensions, gratuities or retirement allowances to employees, former employees, or their dependents
• gifts or contributions made to deductible gift recipients
• payments made under conservation covenants
• personal superannuation contributions.
Tax loss or capital loss?
A tax loss is different from a capital loss.
A capital loss occurs when you dispose of a capital asset for less than its tax value. A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains – it cannot be offset against income.
Australian and foreign residents
Australian residents now calculate an overall tax loss on the basis of their worldwide income and deductions. Foreign residents calculate a tax loss on the basis of their Australian income and deductions incurred in earning that income.
