35‑10 Deferral of deductions from non‑co35‑10 Deferral of deductions from non‑commercial business activities

35‑10 Deferral of deductions from non‑commercial business activities

(1) The rule in subsection (2) applies for an income year to each *business activity you carried on in that year if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), unless: (a) you satisfy subsection (2E) for that year, and one of the tests set out in any of the following provisions is satisfied for the business activity for that year: (i) section 35‑30 (assessable income test); (ii) section 35‑35 (profits test); (iii) section 35‑40 (real property test); (iv) section 35‑45 (other assets test); or (b) the Commissioner has exercised the discretion set out in section 35‑55 for the business activity for that year; or (c) the exception in subsection (4) applies for that year.

Note: This section covers individuals carrying on a business activity as partners, but not individuals merely in receipt of income jointly. Compare the definition of partnership in subsection 995‑1(1).

Rules (2) If the amounts attributable to the *business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess: (a) were not incurred in that income year; and (b) were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on.

Note 1: There are modifications of this rule if you have exempt income (see section 35‑15) or you become bankrupt (see section 35‑20).

Note 2: This rule does not apply if your excess is solely due to deductions under Division 41 (see section 35‑10 of the Income Tax (Transitional Provisions) Act 1997).

Note: Example: Jennifer has a salaried job, and she also carries on a business activity consisting of selling lingerie.

Note: Jennifer starts that activity on 1 July 2002, and for the 2002‑03 income year, the activity produces assessable income of $8,000 and deductions of $10,000. The activity does not pass any of the tests and the discretion is not exercised so the $2,000 excess is carried over to the next income year in which the activity is carried on.

Note: For the 2003‑04 income year, the activity produces assessable income of $9,000 and deductions of $10,000 (excluding the $2,000 excess from 2002‑03). Again, no tests passed and no exercise of discretion.

Note: $3,000 is carried over to the next income year (comprising the $1,000 excess for the current year, plus the previous year’s $2,000 excess) when the activity is carried on.