Sole trader business losses: prepare the non-commercial loss checks
A loss in your accounts doesn't automatically reduce tax on your wages or other income. For a sole trader, the non-commercial loss rules can affect when a loss is used. Gather the activity, income and asset facts first, then have the current-year outcome checked rather than carrying the accounting loss straight into a tax claim.
What you’ll get from this guide: An activity-by-activity fact pack with the accounting result, prior deferred losses and eligibility evidence kept separate.
- Keep current accounting results separate from prior deferred tax losses.
- Collect evidence for the activity and income requirement before using a test.
- Record the adviser-confirmed result and the loss carried forward.
This guide helps a sole trader prepare for an accountant's loss review. Begin with one business activity and one income year. Keep unrelated activities separate so the agent can check the facts for each one.
Establish the activity and its start date
Collect evidence of trading, customers, contracts and operating assets. Separate preparations to start from the activity itself. The ATO's offset-or-defer guidance begins with whether the activity is a business and has commenced. It also distinguishes similar activities that may be grouped from unrelated activities that require separate consideration.
Fictional sole-trader activity; amounts have not been converted into a permitted tax loss.
| Review item | Figure or record | Decision still needed |
|---|---|---|
| Activity income | $24,000 | Assessable-income reconciliation |
| Recorded expenses | $30,000 | Tax adjustments and activity allocation |
| Accounting result | −$6,000 | Current-year tax loss calculation |
| Earlier deferred losses | $4,000 on prior schedule | Availability and continuity check |
| Other income and reportable amounts | Evidence to obtain | Current income requirement |
| Tests and exceptions | Activity records, asset evidence | Agent-confirmed outcome |
The current $6,000 accounting loss and prior $4,000 deferred amount are not combined into a claimed deduction by this worksheet.
Reconcile the loss before testing its use
Attach the profit and loss report, underlying expenses and year-end adjustments. Ask the agent to identify the tax result separately from the $6,000 accounting loss. Keep the prior $4,000 schedule with the return and advice that established it.
Do not rewrite the old schedule to make it equal the current bookkeeping result. The review needs to show what arose this year, what came from earlier years and what was used or remains deferred.
Collect the eligibility facts
The current ATO guidance sets out an income requirement involving taxable income, reportable fringe benefits, reportable super contributions and total net investment losses. It gives a less-than-$250,000 requirement, with separate rules for specified excepted activities and limited discretion. Record all components rather than checking salary alone.
The four-tests guidance covers assessable income, profits history, real property and other assets. Its stated thresholds are at least $20,000 assessable income, tax profits in three of five years including the current year, at least $500,000 relevant real property, or at least $100,000 relevant other assets. These are not interchangeable balance-sheet totals: inclusions, exclusions, use and valuation rules matter.
Gather the records needed for the test being considered. For profits history, retain the tax results and treatment of earlier losses. For assets, retain ownership or lease evidence, valuation basis and business use. Ask the agent which records count for the particular activity.
Save the outcome alongside the evidence
Copy the non-commercial loss review pack
Copy the template, save a text file for offline use, or print this page with its examples and sources. Fill in your own copy and check it before relying on it.
Income year Business activity Commencement evidence Accounting result Tax adjustments Other-income evidence Test/exception considered Asset evidence Prior deferred loss Adviser outcome Closing deferred loss
Have the agent document the current tax loss, whether it can be offset, any discretion question, and the closing deferred balance. Use the record-keeping guide to keep that explanation with the relevant return. A saved eligibility conclusion without its year and supporting facts is difficult to rely on next year.
Key takeaways
- Keep current accounting results separate from prior deferred tax losses.
- Collect evidence for the activity and income requirement before using a test.
- Record the adviser-confirmed result and the loss carried forward.
Where to get help
Ask a registered tax agent to apply the ATO non-commercial loss rules to the actual activity.
Related tasks
Continue through the tax records and business money guides.
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General information only. This guide doesn't take your personal or business circumstances into account and isn't financial, legal or tax advice. Rates and thresholds change — check the official sources linked in this guide and get qualified advice where your circumstances require it.