What Is a Tax Loss — and Can I Use a Business Loss in a Future Year?

A tax loss happens when your total deductions exceed your total assessable income for the year. Depending on your business structure, that loss can generally be carried forward and used to reduce your taxable income in a future, profitable year — though the specific rules for using it differ meaningfully between individuals, sole traders and companies.

If you're a sole trader, a business loss can generally offset other income you have in the same year — but specific “non-commercial loss” rules can restrict this, particularly for a business activity that hasn't yet met certain income or profit tests. Where those rules apply, the loss is deferred rather than lost — it's carried forward and used once the business meets the relevant test, or in the next year the same business activity is carried on.

Companies can generally carry forward tax losses indefinitely, to be used whenever the company chooses — but only if it passes one of two tests:

• The continuity of ownership test. Broadly, the same people held more than 50% of the voting power, dividend rights and capital rights throughout the period from the loss year to the year the loss is used.

• The business continuity test. If ownership has changed too much to pass the first test, the company can still use the loss if it's carrying on the same business — or, under a somewhat more flexible modern version, a similar business — to the one it carried on before the ownership change.

These tests exist specifically to prevent a company being bought purely to access its accumulated losses for tax purposes, without any genuine continuation of the underlying business.

A company makes a $40,000 tax loss in its first year of trading. In year three, once profitable, it makes $55,000 of taxable income. Provided the company has maintained continuity of ownership (or otherwise satisfies the business continuity test), it can offset the earlier $40,000 loss against that year's income, reducing taxable income to $15,000 — rather than paying tax on the full $55,000 as if the earlier loss had never happened.

Understanding that a loss isn't simply gone can change how a difficult early year is viewed — it's a genuine, usable asset against future tax, provided it's tracked and applied correctly. This is particularly relevant for new businesses, where an early loss year is common and shouldn't be seen purely as a setback with no lasting financial upside.

A tax loss needs to be properly recorded and carried forward in your tax records year after year — it isn't something that's automatically remembered or applied. For a company considering a change in ownership, checking the impact on carried-forward losses before the change happens is worth doing, since the wrong structure or timing can genuinely forfeit an otherwise valuable loss.

• Have I made a loss in a previous year that hasn't yet been used against later profits?

• If I'm a sole trader, do I understand whether the non-commercial loss rules might apply to me?

• If I operate through a company, has ownership changed since the loss was made — and would that affect my ability to use it?

• Is my carried-forward loss being tracked properly in my tax records each year?

• you've made a loss and want to understand how and when it can be used;

• you're a sole trader unsure whether the non-commercial loss rules apply to your situation;

• your company is considering a change in ownership or structure and you want to protect access to carried-forward losses; or

• you have losses from several years and want them properly reconciled and tracked.

→ Why Is My Taxable Profit Different From the Profit in My Accounts?

→ Sole Trader vs Company — Which Business Structure Is Right for Me?

→ When Should I Consider Changing From Sole Trader to a Company?

SKC Accounting | Knowledge Centre | Knowledge Guide 071

Last reviewed: August 2026

General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.