Non-Commercial Losses: Can You Offset Your Side Hustle Loss Against Your Salary?
- Ben De Rosa
- Mar 6
- 5 min read
Non-commercial loss rules: Australian side hustle tax
It seems like it should be simple. You lost money on your side business, so the ATO should help cover some of that by reducing the tax on your regular income. The logic is sound.
The problem is the ATO has a specific set of rules that exist to stop exactly that from happening for most people. They're called the non-commercial loss rules, and they're designed to prevent the tax office from effectively funding hobbies, passion projects, and loss-making ventures that don't operate like a real business.
If you're running a side hustle, here's how the rules actually work.
Our Client's Experience:
"I started a small candle-making business last year. I spent $5,000 on wax and jars but only sold $500 worth of candles. I thought I could claim the $4,500 loss against my nurse's salary to get a big refund. Ben told me about non-commercial losses and saved me from a massive headache. Thanks for keeping it real."
— Side Hustle Sarah, Joondalup
First Question: Are You Actually Running a Business?
Before the non-commercial loss rules even come into play, you need to pass a more basic test. Are you operating a business, or are you a hobbyist?
The ATO looks at what it calls the badges of trade:
Is there a genuine intention to make a profit?
Is there repetition and regularity, selling regularly rather than once in a while?
Is it organised like a business with a separate bank account, website, and proper records?
Is the scale significant?
If you're making candles for fun, giving most of them to friends, and covering costs at a market stall a few times a year, you're a hobbyist. For hobbies, the rule is simple: you don't declare the income, but you can't claim the expenses either. The ATO stays out of it entirely.
To access any deduction at all, you need to be in business, with an ABN, proper records, and a genuine intention to make money.
Hurdle One: The $250,000 Income Requirement
Assuming you're operating a legitimate business, the non-commercial loss rules kick in as a gatekeeper between your business losses and your salary.
To even look at the other tests, your adjusted taxable income needs to be under $250,000. That figure includes your salary, rental income, reportable fringe benefits, reportable super contributions, and total net investment losses.
If the combined number is $250,000 or more, you're blocked from offsetting business losses against other income regardless of how legitimate the business is. The losses get deferred to future years and can only be used to offset future profits from that same business.
A nurse earning $90,000 passes this hurdle. A specialist surgeon on $300,000 does not.
Hurdle Two: The Four Tests
If you pass the income requirement, you then need to satisfy at least one of four tests to claim your loss in the current year.
Test 1: Assessable income test (the most common route). Your business must have generated at least $20,000 in revenue during the financial year. This is revenue, not profit. Sarah selling $500 of candles fails this test.
There's a useful strategy here though: grouping. If Sarah also runs a soap-making business that earned $19,500, she may be able to group both activities as "handmade crafts" and hit $20,000 in combined revenue. Similar business activities can often be treated as one for this test.
Test 2: Profits test. Your business needs to have made a taxable profit in three of the past five years, including the current year. A startup in its first year can't pass this one.
Test 3: Real property test. You need to use real property worth at least $500,000 in your business on a continuing basis. Private homes don't count unless there's a dedicated, commercial workspace.
Test 4: Other assets test. Your business assets, equipment, trading stock, and plant, need to have a value of at least $100,000. Vehicles are generally excluded.
Most new side hustles fail all four tests in year one. That's not the end of the world.
What Actually Happens When You Fail
You can only use it against future profits from that same business.
So when Sarah's candle business eventually turns a $10,000 profit in year three, she can apply the deferred losses against it. The benefit is delayed, not gone.
The Exception: Asking the Commissioner
There are two situations where you can apply to the ATO for an exemption from the tests.
Lead time industries: some businesses have a biological or commercial lead time before they can generate revenue. Macadamia trees take seven years to produce nuts. A vineyard often runs at a loss for several years before producing a commercial crop. If your industry has a recognised lead time, you can apply for discretion to claim losses during that growth phase.
Importantly, "I need time to build my brand" doesn't qualify. The lead time needs to be inherent to the nature of the business itself.
Special circumstances: if a flood, bushfire, drought, or other disaster prevented you from hitting the $20,000 revenue mark, you can apply to the ATO and argue you would have passed the test but for the event. You'll need independent evidence to support the application.
Farmers and Artists Get a Pass
If your business is primary production (farming) or professional arts (writing, painting, performing), and your other income is under $40,000, you're exempt from the four tests. You can claim losses against your other income immediately.
That exemption disappears once your salary or wages goes above $40,000, at which point you're back in the same regime as everyone else.
What About Running It Through a Company?
A common suggestion is to set up a Pty Ltd company to run the side business. Companies aren't subject to the non-commercial loss rules, so the company can carry forward losses without needing to hit $20,000 in revenue.
The catch is that the losses stay inside the company. A company loss can't be used to reduce your personal salary. If Sarah sets up Sarah's Candles Pty Ltd, the company sidesteps the tests, but Sarah still doesn't get a personal tax refund. The only way to offset a loss against your salary is as a sole trader or partner, which brings you right back to the non-commercial loss rules.
The most effective strategy is usually the straightforward one: focus on getting revenue over $20,000. Once you cross that line, the gate opens.
If you're running a side hustle and want to understand what you can claim and how to structure things correctly, Ben De Rosa can review your situation, work out which tests apply, and make sure your losses are in the best position when the business starts to grow.
Disclaimer: The information and strategies shared in this article are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalised advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional at Aevum Accounting.
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