Specific rules, called the ‘non-commercial loss’ rules apply when sole traders and individual partners in a partnership make a loss from their business activity. The non-commercial loss rules don’t apply to companies and trusts.

A sole trader or individual partner in a partnership makes a loss from their business activity when the deductions from that business activity exceed the income from it. These deductions may include losses that were deferred in previous income years, under the non-commercial rules.

If the non-commercial loss rules apply to the losses, the losses are treated differently and they cannot be deducted as part of a tax loss in the income year in which they were incurred. You cannot offset the loss from your business activity against your other income. Instead, the loss must be carried forward to a later income year – and must offset against business income in that later income year.

You must work out whether the non-commercial loss rules apply to you, each year you make a loss from your business activity.