The non-commercial loss provisions are aimed at taxpayers running businesses which the ATO considers "non-commercial".
A typical example is a taxpayer with substantial income running a hobby farm which generates a loss and thereby reduces overall tax payable.
The provisions do not apply in the following circumstances:
a. Venture is one of primary production or a professional arts business, and your total income from other sources does not exceed $40,000 or
b. Venture is run via a trust or company structure.
If the non-commercial loss provisions do apply, you must disclose (in your tax return) the type of loss incurred and whether or not it can be offset against your other income by virtue of meeting certain criteria.
To be able to offset such business losses, the venture needs to:
a. Have at least $20,000 in assessable income for the year; or
b. Have produced a profit in at least 3 of the past 5 years; or
c. Use real property valued in excess of $500,000; or
d. Use other assets valued in excess of $100,000.
In certain circumstances, the Commissioner of Taxation may exercise a discretion to allow the loss, even if the above tests are not satisfied.
If the venture does not meet any of the criteria, you will generally have to defer claiming the loss until there is sufficient income from the venture to offset it.