The four tests
- Assessable income test (s 35-30) — the activity generated at least $20,000 of assessable income in the year.
- Profits test (s 35-35) — the activity produced a tax profit in at least 3 of the past 5 income years (including the current year).
- Real property test (s 35-40) — real property of at least $500,000 is used in the activity on a continuing basis.
- Other assets test (s 35-45) — other assets (plant, vehicles, livestock — excluding cars) of at least $100,000 are used on a continuing basis.
Common mistakes
- Assuming any "business" loss offsets salary income. Quarantining is the default for new or sub-scale activities under $250,000.
- Misclassifying hobby income as business. Hobby income isn't assessable — but it also isn't deductible. Get this wrong both ways and you lose either side.
- Forgetting the high-income lockout. Over $250,000 of combined income, no test is enough — the loss is quarantined regardless of scale (subject to s 35-55 discretion).
- Not asking for s 35-55 discretion. Lead-time activities (vineyards, software with R&D burn) often qualify but you have to apply for the private ruling.
Cross-references
See also Income Tax Calculator for the PAYG salary side of the equation, and the Entity Extraction Calculator if you're considering whether a different structure would change the loss treatment.