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If you are in a sole trader or partnership business, the risk is too high as this business has unlimited liabilities. Thus, ATO recognises this and passed a rule where if your business makes any loss you may be able to offset the loss against your other income such as wages and salaries. On the contrary, you need to be qualified in the income threshold, which is where your income should not exceed $250,000.

Your income includes taxable income, reportable fringe benefits amount and reportable superannuation amount and total net investment losses. If you meet the income criteria you then need to pass any of the four tests to qualify for claiming non-commercial losses. The four tests are as follows:

  •  Assessable income test: To pass this test, you must at least have $20,000 assessable income from your business. Your assessable income includes ordinary income which is your gross earnings, and statutory income like capital gains. You can claim your losses in the current year after passing this test.
  • Profit test: If your business makes profits for three years including the present year in a five-year time frame then you are qualified for claiming the non-commercial losses. You can claim losses for two later years if you make profits in three consecutive years. 
  • Real property test: To pass this test, your business must use real property which has the market value of at least $500,000 and you are using it on an ongoing basis. Real property includes land, buildings or maybe even lease of these properties. You can claim your losses in the current year if you pass this test.
  • Other assets test: If your business uses other assets like plant and equipment or motor vehicle valued at least $100,000 in an ongoing basis then you will qualify for this test. You can claim your losses in the current year if you pass this test.
  • If you are qualified in the income threshold but you fail all the four tests, you can apply for a Commissioner's discretion in certain situations: 
  • There were some special circumstances which were beyond your control, other than that you could have passed the test;
  • You have recently started your business and because of the way you do business you need time to pass any of these tests and generate profits.

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