Ordinary Loss Rules Explained for Australian Investors 2025

Ordinary loss isn’t just an accounting term—it’s a concept that can make a real difference to your bottom line at tax time. As the ATO sharpens its focus on accurate loss reporting and the 2025 policy updates roll in, it’s crucial for Australian investors, business owners, and even everyday taxpayers to understand how ordinary losses work, and how they differ from capital losses. Here’s what you need to know to make the most of your losses (and avoid costly mistakes) this financial year.

What Is an Ordinary Loss?

An ordinary loss refers to a loss incurred in the normal course of business or investment activities that isn’t related to the sale of a capital asset. Unlike capital losses, which arise from selling investments like shares or property at a loss, ordinary losses can come from:

• Operating expenses exceeding income in a business

• Unrecoverable bad debts

• Losses from theft or damage of inventory

• Employee fraud or embezzlement

For example, if you run a small café and your costs (ingredients, wages, rent) outstrip your takings for the year, you’ve made an ordinary loss. Similarly, if an invoice remains unpaid and you can’t recover it, that bad debt may be claimed as an ordinary loss.

2025 Policy Updates: What’s Changed?

Ordinary loss rules haven’t seen a major overhaul in 2025, but there are several key points worth noting as you prepare your tax return:

• ATO Scrutiny on Loss Claims: The Australian Taxation Office has increased audits on business and investment loss claims, especially for sole traders and small businesses. Make sure your records are robust and losses are genuine.

• Loss Carry-Back Extension: The temporary loss carry-back provisions, introduced during the pandemic, continue through the 2024–25 income year. Eligible businesses can use current year losses to offset previously taxed profits (from 2018–19 onwards), potentially triggering a refund.

• Non-Commercial Loss Rules: The threshold for offsetting business losses against other income streams remains at $250,000 of adjusted taxable income, with further restrictions for hobby or part-time ventures.

Suppose you operate a freelance graphic design business and made a $12,000 loss in 2025. If your other income is under the threshold and you meet the activity tests, you may offset that ordinary loss against your salary income, reducing your overall tax bill.

Ordinary Loss vs. Capital Loss: Why the Distinction Matters

Ordinary losses and capital losses are taxed and carried forward differently. Here’s a quick comparison:

• Ordinary Losses: Can be used to offset ordinary income (like salary, business revenue, or interest). If you can’t use them in the current year, they’re carried forward to future years.

• Capital Losses: Can only be used to offset capital gains. If you sell shares at a loss, that loss can’t reduce your salary income—it can only reduce future capital gains.

For investors, this means that losses on rental property operating expenses (repairs, maintenance, interest) are ordinary losses, while losses from selling the property at a lower price are capital losses. Knowing which bucket your loss falls into affects your tax planning and how quickly you can benefit from the deduction.

Maximising the Benefit of Ordinary Losses in 2025

With tax rules tightening, here’s how Australians can make ordinary losses work in their favour this year:

• Keep Detailed Records: The ATO wants clear evidence of losses, including invoices, bank statements, and correspondence regarding bad debts.

• Check Eligibility for Carry-Back: If your business made profits in recent years but a loss in 2025, you may be able to reclaim past tax paid via the loss carry-back rules.

• Understand Non-Commercial Loss Limits: If your side hustle isn’t your main source of income, ensure you pass the activity tests before offsetting losses.

• Time Expenses Strategically: Bringing forward deductible expenses into a loss year may maximise your ability to claim an offset or refund.

Consider the example of a small construction business owner in Sydney. After a tough year due to rising material costs and delayed projects, they report a $30,000 ordinary loss. With proper records and eligibility, that loss can offset profits from prior years under the carry-back rules, delivering a timely cash flow boost.

The Bottom Line

Ordinary loss rules are a lifeline for many Australian taxpayers in 2025—if you know how to use them. By staying on top of record-keeping, understanding the latest policy changes, and distinguishing between ordinary and capital losses, you can keep more money in your pocket and navigate tax season with confidence.