My side business made a loss — can I take it off my salary?

The side business spent more than it earned last year. Maybe it is the online store, maybe it is consulting done on weekends, maybe it is a small trade run after hours — either way the year ends in a negative number, the tax software puts it on the return, taxable income drops, and the estimated refund climbs by a satisfying amount. That is the moment worth stopping at, because for a large number of people that figure is not right, and the ATO already knows where to look for it.

The rule in question has a name that gives nothing away: non-commercial losses. It sits on the ATO's published list of compliance focus areas for small business, described in terms that leave little room for interpretation — individuals incorrectly claiming and offsetting losses from non-commercial business activities against other income sources. The rules themselves are not vague at all. They are a series of gates, and the loss only reaches your salary if it gets through all of them in order.

Gate one: it has to be a business, and it has to have started

A loss is only claimable if the activity is a genuine business rather than a hobby. The ATO puts three things on that list: you decided to start the activity with the purpose of making a profit, you acquired enough tools, resources or assets to run it properly, and you actually started operating in a commercial way rather than just preparing to.

The gap between preparing and operating does real work here. The ATO's own illustration is a grower whose first year goes on building a shed, repairing fences and clearing land, and whose second year goes on planting a commercial crop: the business commences in the second year, and the first year of spending is not a business loss available to be claimed. This is also the first item on the ATO's list of common errors — offsetting losses from hobby or other non-business-like activities. If the activity was never a business, nothing further in this article applies, because there is no deductible loss to argue about.

Gate two: the $250,000 line, and the way it is calculated

To offset the loss in the year you make it, four things added together have to come to less than $250,000: your taxable income, your reportable fringe benefits, your reportable superannuation contributions, and your total net investment losses. Reportable super contributions include salary sacrifice and personal deductible contributions. Total net investment losses pick up negatively geared property and geared share portfolios — which is why a landlord with a side business can be closer to this line than the payslip suggests.

The trap is in how taxable income is defined for this one purpose. The business loss is added back: if it has already been counted in working out your taxable income, you put it back in before testing the total against $250,000. An assessable First home super saver released amount is subtracted. In other words the test applies to your income before the loss brings it down, which is the opposite of the order the return itself presents.

The ATO publishes a worked example of exactly this error. An IT consultant with a salary, her own consulting business and an investment portfolio had taxable income for non-commercial loss purposes of $251,000 and claimed a $46,000 business loss against her other income. On review the assessment was amended, the loss had to be deferred, the shortfall was repayable, and the ATO records that she may be subject to penalties and interest. The distance between allowed and not allowed there was $1,000 of income.

Gate three: passing one of the four tests

Under the $250,000 line, the activity still has to pass at least one of four tests before the loss can be offset in the current year. Pass any one of them and that is enough.

The assessable income test asks for at least $20,000 of assessable income from the activity for the year — gross earnings excluding GST, not profit. If you traded for part of the year only, you can make a reasonable estimate of what the full year would have produced, based on things like orders received, forward contracts, the size of the activity and the seasonal pattern of the industry; an estimate that was reasonable when made stays reasonable even if it turns out to be wrong.

The profits test asks for a tax profit in three of the past five years, including the current one. The real property test asks for real property of at least $500,000 in value used in the activity on a continuing basis, and specifically excludes a dwelling and adjacent land used mainly for private purposes — the home you live in does not carry a side business over the line. The other assets test asks for at least $100,000 of other assets used on a continuing basis, counting plant and equipment, trading stock, leased assets and rights such as trademarks, patents and copyrights, but excluding real property and excluding cars, motorcycles and similar vehicles.

For most people running a small operation alongside a job, the assessable income test is the one that decides it, and $20,000 of gross income is a much lower bar than it first sounds — but it is turnover, not the profit or the deposit in the account.

The two ways around the tests

There are excepted activities. If the loss-making activity is primary production or a professional arts business, and your assessable income from other sources is less than $40,000 excluding any net capital gain, the loss can be offset without going through the four tests.

Otherwise there is the Commissioner's discretion, which is available whether the problem is the income requirement or the four tests, and which the ATO grants in limited circumstances only: either special circumstances outside your control prevented the activity passing a test, or the inherent nature of the business means there is a lead time before it could reasonably be expected to make a profit or pass one. Failing to apply for the discretion, or applying without good faith regard to the relevant guidance, is another of the errors the ATO says it sees.

Deferred is not the same as lost — until the activity stops

When the loss cannot be offset this year, it is deferred rather than disallowed. It is carried forward with no time limit and treated as a deduction for that same activity in the next year you carry it on. It comes back into play in any later year where the activity makes a profit, where you do meet the income requirement and pass a test, or where the Commissioner exercises the discretion. If you have net exempt income, the deferred amount is reduced by it first.

The exception is the one to keep in view. If the business activity ceases, any deferred loss is effectively forfeited unless the same or a similar activity restarts — so a side business that is quietly wound up can take several years of accumulated deferred losses with it. Grouping matters here too: similar business activities can be grouped when applying these rules, while genuinely different activities are tested separately, which can leave you able to claim a loss on one and required to defer a loss on the other in the same year.

The short version, current as at August 2026: the loss from a side business does not automatically come off your salary. It has to be a real business that has commenced, your income for these purposes has to be under $250,000 with the loss added back, and the activity has to pass one of the four tests or fall inside an exception. Miss any of those and the correct treatment is to defer, which is not a lost deduction but is a slower one.

This is general information rather than advice about your circumstances — whether an activity is a business, which test it comes closest to passing, and whether a discretion application is worth making all turn on facts that differ case to case. Our income tax calculator will show you what your salary alone attracts in tax, which is the figure a wrongly claimed loss appears to reduce; getting the treatment right is part of our work for sole traders and side businesses and on individual tax returns.