Loss Relief: Sole Trader, Company, and Trust
How business losses are treated across the three main structures in Australia: the Division 35 non-commercial loss rules for sole traders, company loss carry-forward under the Continuity of Ownership and Similar Business Tests, trust loss integrity rules, and capital loss rules for all entities.
Loss treatment is one of the most consequential structural differences in Australian tax. Sole traders can offset business losses against salary and other income in the same year if they pass one of four tests under Division 35 of ITAA 1997 and have adjusted income below $250,000. Companies carry forward losses indefinitely but those losses are trapped in the company, requiring the Continuity of Ownership Test or the Same/Similar Business Test for access after ownership changes. Trust losses cannot be distributed to beneficiaries at all and are carried forward within the trust under separate integrity rules.
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Sole trader: Division 35 non-commercial loss rules
When an individual's business activity makes a tax loss for the year (as a sole trader or partner), Division 35 of ITAA 1997 applies. The default is that the loss is deferred (quarantined) unless two gates are passed: an income requirement, and then at least one of four tests.
The $250,000 income requirement
If the individual's adjusted income from other sources (including taxable income, reportable fringe benefits, reportable super contributions, and certain investment losses) is $250,000 or more, the four tests cannot be accessed. The loss is automatically deferred unless the Commissioner's discretion or the primary production and professional arts exception applies.
Primary production and professional arts exception
If the business is a primary production business or a professional arts business, the non-commercial loss rules are disapplied entirely when the taxpayer's income from other sources is less than $40,000 for the year.
Carry-forward of quarantined non-commercial losses
If a loss is deferred under Division 35, it is carried forward indefinitely as a deferred non-commercial business loss. In a later year, it can be deducted against income from the same business activity when it becomes profitable, or against other income if the taxpayer meets the income requirement and one of the four tests (or an exception or discretion applies) in that later year. If the business activity is permanently ceased and not revived, any remaining deferred loss is effectively wasted.
Worked example: sole trader with $30,000 loss and $120,000 salary
Liam in Geelong is a sole trader in year one. Business loss: $30,000. Salary and wage income: $120,000. Adjusted income from other sources is $120,000, below $250,000, so the four tests can be accessed.
Company losses: carry-forward and integrity rules
Companies can carry forward tax losses indefinitely under Division 36 of ITAA 1997, but must use them as soon as they can be fully absorbed by income. To use a prior-year loss, the company must pass either the Continuity of Ownership Test (COT) under Divisions 165 and 166, or the business tests.
Continuity of Ownership Test (COT)
More than 50% of voting rights, dividend rights, and capital rights must be held by the same persons during the ownership test period (from the start of the loss year to the end of the income year in which the loss is claimed). Special tracing rules in Division 166 can deem continuity for widely held companies and certain interposed entities.
Same Business Test and Similar Business Test
If COT fails, the Same Business Test requires the company to carry on the same business as before the ownership change and not derive assessable income from new kinds of business. The Similar Business Test (for losses incurred in income years starting on or after 1 July 2015) is more flexible, considering whether the business has evolved organically based on assets used, activities, identity, customer base, and whether the present business appears a natural evolution of the former one.
Worked example: company losses after ownership change
Fatima's company in Wollongong has $50,000 in carried-forward losses. A substantial ownership change during 2025-26 causes COT to fail. The company makes a taxable profit (before losses) of $60,000. If the company continues the same business (same product, market, processes), the SBT is satisfied and the $50,000 loss reduces taxable income to $10,000. If the business has evolved but remains similar (expanded product line, digitalised the same core offering), the Similar Business Test may allow the loss. If the company pivots to a completely different business (cafe to software, construction to crypto), both tests likely fail and the $50,000 loss is stranded.
Trust losses
Trust losses cannot be distributed to beneficiaries. They carry forward within the trust to offset future trust income only, subject to the trust loss rules in Schedule 2F of ITAA 1936 and Division 267 of ITAA 1997.
Capital losses (all structures)
Capital losses for individuals, companies, and trusts can only be offset against capital gains under Part 3-1 of ITAA 1997, never against salary, wages, business profits, or other income. If capital losses exceed capital gains for the year, the net capital loss is carried forward indefinitely to offset future capital gains. There is no carry-back. The ordering rule is: first apply current-year capital losses against current-year capital gains, then apply prior-year carried-forward net capital losses to any remaining net capital gain.
How loss treatment affects structure choice
The structural difference in loss treatment is critical when choosing between sole trader, company, and trust, especially in the early years of a loss-making venture where the founder has other income that could be sheltered. Sole traders (if adjusted income is below $250,000 and one test is met) can offset business losses against salary and wage income in the same year, attractive for employed founders running a side business at a loss. Company losses are trapped in the company and cannot reduce the shareholder's personal salary or other income. Trust losses are similarly trapped at the trust level and cannot be taken by beneficiaries.
Statute references
- ITAA 1997 Division 35 (Non-commercial business losses)
- ITAA 1997 Division 36 (General tax loss rules)
- ITAA 1997 Divisions 165-166 (Company loss integrity)
- ITAA 1997 s 165-210 (Similar Business Test)
- ITAA 1997 Division 267 (Trust losses)
- ITAA 1936 Schedule 2F (Trust loss rules)
- ITAA 1997 Part 3-1 (Capital gains and losses)
Frequently asked questions
Can I offset my business loss against my salary as a sole trader?+
What happens to company losses if I sell more than 50% of the shares?+
Can trust beneficiaries claim the trust's tax losses?+
Can capital losses be offset against salary or business income?+
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