The Federal Government announced in the 2009-10 Federal Budget that it would tighten the  non-commercial loss rules for individuals with an adjusted taxable income of $250,000 or more. 

On 21 October 2009 the Government introduced a Bill containing the proposed changes along with some clarifying amendments to the general operation of the non-commercial loss rules.

The measures are intended to ensure that losses arising from unprofitable business activities can not be used to reduce salary, wage and other income of high income earners.  Those losses will instead be quarantined to the business activity.

Key points

The key points to note from the Bill are:
  • Commerciality tests are no longer available to high income earners:  Under existing rules an individual can deduct a business activity loss from their other income if they pass any one of four commerciality tests.  Those tests are based on the business activity generating a threshold level of income, having past year profits or using a threshold level of real property or other assets.

    Individuals with an adjusted taxable income of $250,000 or more will no longer have access to the four commerciality tests.  Instead they must now apply to the Commissioner for relief from the loss quarantine rules.  This change will apply to the 2009-10 and later income years.
Example

Jack’s adjusted taxable income is $270,000. Jack also owns a vineyard that is valued at $750,000. The vineyard has never made a profit and has a loss this year for tax purposes of $50,000.

Jack is no longer eligible to apply the four commerciality tests. 

The existing non-commercial loss rules do not change for individuals with an adjusted taxable income of less than $250,000.
  • Approved form for applications to the Commissioner:  Applications will now be required to be made in an approved form. 
  • Losses caused by the investment allowance: The non-commercial loss rules will be amended to ensure a deduction is still available for the investment allowance in circumstances where the loss is solely attributed to the investment allowance.
  • Grandfathering of existing Commissioner’s discretions: Taxpayers who have already obtained the Commissioner’s discretion not to apply the non-commercial loss rules can continue to rely on the discretion for the period granted.  This will include discretions about ‘managed investment schemes’.   
Suggested action

Individuals with a business activity loss should consider if they need to lodge an application for relief from the non-commercial loss rules. 

Moore Stephens is able to assist you with an application to the Commissioner in the approved form. 
For further information, please contact your Moore Stephens relationship partner.