From Tools on Site to Tax on Paper: A Construction Worker’s Story

John is a construction worker who decided to take control of his skills and opportunities. While still working as an employee, he registered an ABN as a sole trader and began taking on contract work.

In his first year, John issued around 8–10 invoices, earning $21,000 in turnover. The largest job was worth $6,000, while the rest came from smaller projects. He bought his own materials, used his own equipment, and was responsible for delivering results.

When the financial year ended, John’s business showed a loss of $1,200. His overall income (wages plus business) was well below the $250,000 threshold. Naturally, he asked: Can this loss be applied against my wages to reduce my tax bill?

The ATO’s Non-Commercial Loss Rules

The ATO has special rules for non-commercial losses. Their purpose is to stop people from using hobby losses to reduce their taxable income, while still allowing genuine businesses to offset losses if they meet certain conditions.

Step 1: Income Requirement – Your adjusted taxable income must be under $250,000.

Step 2: The Four Tests – If your income is under $250,000, you can offset the loss if you pass at least one test:

1. Assessable Income Test: Business income of at least $20,000.

2. Profits Test: Profit in 3 of the last 5 years.

3. Real Property Test: Real property worth $500,000 used in the business.

4. Other Assets Test: Other business assets worth $100,000 used in the business.

If you don’t pass a test, losses are deferred to future years unless the Commissioner grants discretion.

View 1 – Eligible to Offset (Supportive View)

On the surface, John appears to satisfy the rules:

• His total income is well below $250,000.

• His business turnover was $21,000, which meets the Assessable Income Test.

• His activity shows genuine business traits: multiple invoices, own materials, and responsibility for outcomes.

Under this interpretation, John’s $1,200 loss can be applied against his wages in the same year. The non-commercial loss rules would recognise his activity as a legitimate business, not a hobby.

View 2 – Ineligible to Offset (Cautious View)

Was John really “in business”? The ATO looks at factors like repetition, commercial purpose, systems, and business-like behaviour. A handful of invoices in a short first year may be seen as insufficient to prove an ongoing business.

• Assessable income test risk: While turnover exceeded $20,000, the business did not run the full year. The ATO requires a “reasonable estimate” of what income would have been if the business had operated all year. If adjusted, John might not meet the threshold.

• Audit risk: If John’s records don’t clearly show commercial intent, or if expenses are mixed with private costs, the ATO could argue the activity was more like casual contracting or a side arrangement, not a true business.

  
  

Under this interpretation, the $1,200 loss should be deferred and not used to reduce John’s wages this year.

The Lesson

John’s case shows why the non-commercial loss rules can be tricky. Two experienced accountants, looking at the same facts, can reach different conclusions:

• One sees a genuine small business that passes the tests.

• The other sees risks around whether John is truly “in business” and whether the assessable income threshold is validly met.

Both views highlight the importance of:

• Clear evidence of business activity (contracts, invoices, bank accounts).

• Careful calculation of assessable income (excluding GST, prorating for part-year).

• Understanding the ATO’s qualitative tests, not just the numbers.