2018 has been a tough year on the land and this is a question we’re getting more and more.

If your farm business is structured as a personal or partnership arrangement, the business must pass certain tests before you can claim the losses as a deduction against other income. 

If you don’t pass even one of these tests your business losses are considered “non-commercial” and the Tax Act prevents you from claiming the non-commercial losses against income from other sources.

It is important to note that the rules that follow do not apply if the farming business is operated in a company or trust structure, as a loss incurred will be quarantined in the company or trust and offset against profits in future years.

As your partnership is in the business of primary production, you are able to avoid the rules that follow if your income earned from other sources, like your work in town, is less than $40,000 over the financial year (excluding capital gains).

There are four tests, which you must pass to determine if your business is a non-commercial entity: 

The Income Test - has your business derived an assessable income of $20,000 or more during the year?

The Profits Test - assessing your profitability, your business must have made profits in at least three of the past five years including the current year.

The Real Property Test - with a benchmark of $500,000, your business must own and use property worth at least that amount.

The Other Asset Test – the final hurdle looks at business assets excluding property, to pass this test, your business must own and use assets worth $100,000 or more.

Your business must pass the minimum standards of the above to be determined as a commercial entity. If your business doesn’t pass one of these tests then any losses incurred are considered as those impacting a non-commercial entity and you cannot offset those losses against any other income.

There’s an additional layer of technicality depending on your response to the Income Test question. If your business earns in excess of $250,000, you are also disqualified from the taxation write-off. 

The adjusted income test is an overriding test, meaning that you must first pass it before assessing responses to any of the other tests. 

If you would like more information on this topic or have a question please e-mail me at albury@crowehorwath.com.au.

Any information in this article has been prepared without taking into account your personal circumstances.

You should seek professional advice before acting on any material.

While reasonable care is taken in the preparation of this information to the extent allowed by legislation, Crowe Horwath (Aust) Pty Ltd ABN 84 006 466 351, accepts no liability whatsoever for reliance on it.