The following videos demonstrate handling non commercial losses under different scenarios:

Scenario 1: Deferred losses full offset of prior year loss using income test

Scenario 2: Non commercial losses in current year and prior year 

Scenario 3: Deferred losses full offset of prior year loss with remaining profit

Scenario 4: Current year deferred loss

Non-commercial losses refer to losses incurred from business activities that do not meet certain criteria to be considered commercially viable for tax purposes. These losses arise when the total deductions claimed for a business activity exceed the income it produces. Under Australian tax law, such losses may not be immediately deductible against other types of income.

The rules for non-commercial losses are designed to prevent individuals from offsetting losses from unprofitable business activities against their other income, such as salary or investment income, unless certain conditions are met. These conditions are known as the non-commercial loss rules.

To claim a deduction for a non-commercial loss against other income, taxpayers must pass one of the following tests:

  1. Assessable income test: The business activity must produce assessable income of at least $20,000 in the income year.
  2. Profits test: The business activity must have produced a tax profit in three out of the past five years, including the current year.
  3. Real property test: The business activity must use real property or an interest in real property worth at least $500,000 on a continuing basis.
  4. Other assets test: The business activity must use other assets worth at least $100,000 on a continuing basis.

If none of these tests are met, the losses must be deferred, meaning they cannot be used to reduce taxable income from other sources in the current year. Instead, they are carried forward to offset future profits from the same business activity.

There are exceptions to these rules, such as for primary producers and professional artists, where losses can be claimed even if the tests are not met. Additionally, the Commissioner of Taxation has the discretion to allow the deduction of non-commercial losses in certain circumstances, such as where there has been an unusual event or downturn that has affected the business.

Learn more about from the ATO