Can I Defer Losses As A Sole Trader?

Running your own business as a sole trader can be challenging. There are many administrative and financial decisions you make that can impact upon your business affairs. This is especially so in relation to tax. Sometimes you may incur losses in your business ventures. Nevertheless, using these losses to your advantage can be helpful in managing your finances. If you cannot offset your losses, deferring losses as a sole trader is possible. However, each situation is different, and this is assessed on a case by case basis. There are a number of requirements you must satisfy if you wish to defer losses as a sole trader. In this article, we outlined a step by step guide for you to check these requirements.

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Should you offset or defer your losses?

This step by step process will help determine if you satisfy the legal requirements for offsetting or deferring losses. Ultimately, the main question you will face is whether you qualify for non-commercial losses and can offset the loss. If you do not qualify for non-commercial losses, then deferring losses can roll them over until such a time as they may be offset. There are a number of questions you must ask to determine if you should offset or defer your losses. We have outlined the important components of this process for you below.

1. Are you actually a business?

It might seem obvious, but you must meet the criteria of being a business. You must have obtained an ABN as a sole trader and registered your business name. If you have satisfied these requirements, then you are on your way to the next step. You do not necessarily have to have registered a business name, as you can trade under your legal name as a sole trader. However, for the purposes of the next point, trading under a specific business name unrelated to your own name can make it easier to determine the nature of your business activities.

2. Similar business activities

If you are conducting more than one business activity and they are similar, they may be grouped together when considering the loss rules. If you are running multiple business activities that are not similar, you must apply the rules separately to each individual activity.

3. Excepted activity

If your business is in primary production or the professional arts, and income from other sources subject to assessment is less than $40,000, you may defer your losses from your other income. The Australian Taxation Office outlines these excepted business activities on its website.

4. Less than $250,000 income requirement

To be eligible to offset your loss, you must then determine if you meet the $250,000 income requirement. You meet this requirement where the sum of the four elements for calculating your income is less than $250,000. This is determined through assessment of the following measures:

  • Taxable income
  • Reportable fringe benefits
  • Reportable super contributions
  • Total net investment losses

5. Four tests

If you meet the income requirement above and pass any one or more of the following four tests, you can offset your business losses against your other income in the relevant year. The four tests are:

  • Assessable income test
  • Profits test
  • Real property test
  • Other assets test

6. Commissioner’s discretion

If you do not currently meet the income requirement or any of the four tests outlined above, you may apply for the Commissioner’s discretion to allow the claim. If a claim is lodged and not allowed, the losses must be deferred to the following year. The Commissioner will only exercise the discretion in very limited circumstances if the following criteria is satisfied:

  • There are special circumstances outside your control that have prevented you passing one of the four tests, or
  • Because of the nature of the business, there is a lead time period before your business can pass one of the four tests or make a profit

How long can I defer my losses?

So you have established you cannot currently offset your losses. Accordingly, deferring is now the main viable option. You can technically defer your losses indefinitely whilst ever you have a similar framework. However, this will cease when any one of the following applies:

  • There is a profit from your business activity, in which case the deferred loss can be offset to the extent of the profit from the business activity
  • You meet the requirements set out for non-commercial losses as above
  • The Commissioner exercises their discretion to offset the loss


Each situation is different. Although you can ostensibly defer losses as a sole trader, your own unique circumstances will impact on this. If you are unsure about your situation, it is recommended you consult with a business or taxation lawyer for advice.

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