How to Use the Assessable Income Test to Offset Business Losses and Maximize Your Tax Refund

If you’re a sole trader or part of a partnership business in Australia, it’s common to experience losses in your early years. Many business owners support their ventures with income from other jobs during this period.

To help reduce the tax burden, the Australian Taxation Office (ATO) allows certain businesses to offset non-commercial losses against other income—but only if you meet specific eligibility criteria, including the Assessable Income Test.

In this guide, we’ll cover what you need to know about the assessable income test, the difference between a hobby and a business, and how to qualify for non-commercial loss deductions. We’ll also link to helpful resources for small business owners navigating Australian tax law.

What Is the Assessable Income Test?

The Assessable Income Test is one of four tests used by the ATO to determine if a non-commercial loss can be offset against other income sources like wages or investment income.

To pass this test, your business must earn at least $20,000 in assessable income in the financial year. Assessable income includes:

• Sales revenue

• Capital gains

• Fuel tax credits

• Income from the sale of depreciating assets

Tip: Not sure how to categorize assessable income? See our guide on Income Streams for Sole Traders.

Difference Between the Assessable Income Test and Income Requirement Test

To even attempt the assessable income test, your adjusted taxable income must be less than $250,000. Adjusted taxable income includes:

Hobby or Business? Why It Matters

The ATO draws a clear line between a business and a hobby. You can’t offset losses from hobbies, side gigs without structure, or passive investments.

Here’s how to tell if you’re operating a business:

• You have a clear intention to make a profit

• Activities are organized and operated in a business-like way

• You regularly repeat similar business activities

• Your activity resembles that of other professional businesses in the same field

Example: Taking occasional photos for friends is a hobby. Running a photography service with invoices, a website, and consistent marketing is a business.

Need help defining your business activities? Check out our guide: Are You Running a Business or a Hobby?

The 4 Non-Commercial Loss Tests

Even if you meet the income requirement and run a genuine business, you must also pass one of the following four tests:

1. Assessable Income Test
Make $20,000+ in assessable business income in the financial year.

2. Profit Test
Make a profit in 3 out of the last 5 years.

3. Real Property Test
Use real property worth at least $500,000 in your business. This includes land or buildings but not rental homes or private dwellings.

4. Other Assets Test
Use other business assets valued at $100,000+, such as:

• Plant & equipment

• Trademarks and patents

• Trading stock

• Leased business equipment

Learn more: What Assets Qualify for the Non-Commercial Loss Tests

What If You Don’t Qualify? Ask for the Commissioner’s Discretion

If your business doesn’t meet any of the four tests, you may still apply to the ATO Commissioner for a discretionary ruling.

To be considered, you must show:

• Special circumstances outside your control prevented you from meeting the test, or

• The nature of your business means it will take time to become profitable (e.g., large-scale agriculture or tech startups)

Exemptions for Primary Producers and Artists

Some businesses are exempt from the non-commercial loss rules entirely if your other income is less than $40,000. This applies to:

Primary Production Businesses:

• Tree farming or felling

• Fishing or pearling

• Plant or animal cultivation

Professional Arts Businesses:

• Performing artists

• Authors (literary, musical, or dramatic)

• Production crew or associates

Read more: Tax Rules for Creative Professionals

Key Takeaways

• The ATO may allow you to claim a tax deduction for your business loss—but only if you pass strict eligibility tests.

• The assessable income test requires your business to earn $20,000+ annually from eligible income.

• You must also meet the $250,000 adjusted income threshold and prove your activity is a real business, not a hobby.

• If you don’t pass the four standard tests, you can apply for the Commissioner’s discretion.

• Some professions, like farmers or artists, may be automatically exempt if their non-business income is low.

Need Help with a Non-Commercial Loss Claim?

At Box Advisory Services, we help Australian small business owners understand and maximize their tax entitlements. If you think you qualify—or aren’t sure—book your free consultation today.

Book a Free Consultation Now

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Or learn more about:

• Understanding Tax Deductions for Sole Traders

• How to Set Up Your Business for Long-Term Tax Success