What happens if a sole trader makes a loss?
Understand how business losses work for sole traders and when they can be offset or must be deferred.
Summary
When a sole trader business makes a loss, the non-commercial loss rules decide whether the loss can be used against other income in the same year, or whether it must be deferred to a future year.
What this means
A business loss is when your allowable business deductions are more than your business income for the year. If you are a sole trader or an individual partner in a partnership, the loss may be able to be offset against other assessable income – such as salary and wages – if certain conditions are met.
To offset a non-commercial business loss against other income, an individual generally needs to satisfy the income requirement and one of the four statutory tests, unless an exception applies or the Commissioner exercises discretion. The income requirement is not satisfied when the relevant income amount for these rules is $250,000 or more. If the loss cannot be offset in the current year, it is generally deferred for use in a later year when the rules allow it. A hobby is not a business and cannot generate a deductible business loss.
Typical actions
- Confirm your activity is actually a business, not a hobby.
- Keep detailed records of business income and expenses.
- Check the $250,000 income requirement and whether one of the four non-commercial loss tests is satisfied.
- Check whether an exception or the Commissioner's discretion may apply.
- If a loss is deferred, keep records so it can be considered in a later year.
- Speak with a registered tax agent if your business often makes losses.
Official ATO sources
Last checked: 24 August 2026
Non-commercial losses
Main ATO hub for non-commercial loss rules.
What is a non-commercial loss
Explains what a non-commercial loss is.
Offset or defer the loss – individuals or sole traders
How individuals and sole traders decide whether to offset or defer a loss.
Business losses
Overview of how business losses are treated across structures.
Related questions
- How is sole trader income taxed?
- What deductions can sole traders claim?
- What tax obligations do sole traders have?
- How does a sole trader lodge a tax return?
Important notice: Tax Clarity is an independent information tool. This page provides general information based on official sources. It does not provide tax, legal, financial, or accounting advice. Tax rules can change, and how they apply depends on your circumstances. For advice about your situation, speak with a registered tax agent or qualified professional.
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