Starting or running a small business is exciting, but it can come with financial challenges – especially in the early years.
Sometimes, despite your best efforts, your business expenses might exceed its income. If you’re a sole trader or part of a partnership, these losses are known as non-commercial business losses (NCLs).
A non-commercial business loss (NCL) occurs when you experience a financial loss from a business activity that is not your primary source of income. This applies to sole traders or individuals in partnerships.
While it might seem logical to offset these losses against your other income, such as a salary or investment returns, the tax rules around NCLs are specific and can sometimes be tricky to navigate.
To help you stay on the right track and avoid costly errors, let’s explore what NCLs are, common mistakes to watch for, and how to handle them correctly.
What You Need to Know About NCLs
You cannot offset a non-commercial business loss against assessable income from other activities in the year the loss is made. Instead, the loss must be deferred to a future income year. It can then be treated as a deduction in the next income year when you continue the same business activity.
There are often cases where individuals incorrectly claim and offset NCLs, leading to compliance issues. Here’s what you need to keep in mind.
Common Errors in NCL Reporting
The most frequent mistakes we see include:
- Claiming losses from hobbies or activities that do not qualify as legitimate businesses.
- Misapplying the rules when taxable income for NCL purposes exceeds $250,000, excluding business losses.
- Failing to pass any of the four eligibility tests for offsetting losses.
- Not seeking the Commissioner’s discretion or improperly applying guidelines such as PCG 2022/1.
How to Get it Right
To correctly manage NCLs:
- Understand the income requirement and the four eligibility tests.
- Know how to defer and offset losses.
- Seek professional advice if you’re unsure.
If you’re managing an NCL, consulting a tax professional can help ensure compliance and avoid costly mistakes. Why not start a conversation with us to find out how we can help?
