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When Can I Claim A Business Loss? A Guide For SMEs

‘Business loss’: it’s a phrase no small- or medium-sized business owner wants to hear. Unfortunately, though, losses can be a very real possibility – so it’s vital that you know what to do if it ever happens to you. When it comes to tax time, you can potentially reduce your taxable income by the amount of the loss sustained.

However, there are strict rules and regulations that affect a business’ ability to claim a loss, so let’s take a look at exactly what they are and determine whether your business is eligible. Ensuring you’re well-informed now could help you avoid a lot of difficulty in the future.

Income requirement

In order to be eligible to claim a business loss, the first requirement you need to meet is the income requirement. This rule states that the income from the business for which you want to claim a loss must be less than $250,000.

This includes taxable income, re-portable fringe benefits, re-portable super contributions and total net investment loss. You also need to prove that the loss you want to claim is from a genuine business activity, not a hobby or investment.

Once you’ve confirmed that you meet the income requirement for a business loss, there are a few more things you’ll need to do.

Four tests

You must now pass one of four tests devised by the ATO to determine whether you can claim a business loss. The tests are as follows.

1. Assessable income test

To pass this test, your business’ assessable income from the past financial year must be at least $20,000.

Assessable income refers to both the gross earnings of a business activity and the statutory income that comes from things like capital gains.

2. Profits test

This test asks whether your business has made a profit in three out of the past five years (including the current year). If the answer is yes, you pass the profits test.

When determining your profits over the last five years, be sure to exclude any losses you have deferred from previous years.

3. Real property test

This test determines whether real property valued at a minimum $500,000 is used on a regular basis in your business. If so, your business passes this test.

Real property refers to land, structures fixed to the land, and interests in the property, such as a lease. It does not refer to fixtures owned by you as a tenant, or to a dwelling with adjacent land that is used primarily for private purposes. Assets used on a one-off or short-term basis are also excluded from this test.

For the purposes of this test, you can value your real property assets in one of two ways: at their reduced cost value, or at their market value.

4. Other assets test

To pass this test, you’ll need to confirm that the other assets you use in your business are valued collectively at less than $100,000.

To figure this out, use the same valuation methods you usually use for income tax purposes.

What happens if I fail any of these tests or requirements?

If you don’t meet the income requirement, but you do pass one of the above tests, you may be able to apply for special consideration. However, you can only do this under special circumstances – for example, if there was a natural disaster or other event outside your control that prevented your business from producing a profit.

If, on the other hand, you meet the income requirement but do not pass any of the four tests, you may also apply for a Commissioner’s discretion on the matter. However, this is only if your business would have passed one of the tests except for circumstances out of your control, or if the nature of your business means there’s a lead time before it could pass one test or make a profit.


For more information and guidance, visit the ATO page about non-commercial losses. And if you do end up needing to claim a business loss, try not to let it get you down too much. Simply accept it, move on, and strive to make the necessary changes that will see you in a better position next financial year.

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