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Changes to Non-Commercial Loss Rules to Affect High Income Earners

In the 2009 Budget, the government announced changes to the non-commercial loss rules. These changes further restrict the deductibility of business losses incurred in relation to non-profitable business activities. The measure will ensure excess deductions from unprofitable business activities cannot be used to reduce salary, wage and other income of high income earners.

From 1 July 2009, taxpayers with income for non-commercial loss purposes of $250,000 or more will have excess deductions from non-commercial business activities quarantined to the business activity. Previously, a taxpayer need only satisfy one of four tests to be eligible to claim a deduction for the non-commercial losses. Now high income earners will not have access to the four tests and the non-commercial losses will be automatically quarantined.

The changes do not apply to taxpayers with income for non-commercial loss purposes of less than $250,000. Income for these purposes is the sum of an individual's taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses.

All taxpayers still have the ability to apply to the Commissioner of Taxation for relief from the application of these rules if there are exceptional circumstances or because the nature of the activities means that they are temporarily carrying on an unprofitable business but the activities they are undertaking are nonetheless independently assessed as commercially viable.

Amendments to the Non-Commercial Loss rules are being made to ensure that in the 2009-2010 year a loss that arises solely because of the Investment Allowance deduction will be excluded from the application of the Non-Commercial Loss provisions and can be offset against other income.

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