Has their treatment changed? The Government announced it was cracking down on losses made by hobby farms and other lifestyle businesses in the May budget and the legislation was introduced into Parliament last week. It will stop high-income earners claiming non-commercial losses against other income, reducing their overall tax bill. Instead, the losses will be quarantined and will only be able to be used to offset future profits made by the farm or other business. The intention is to stop high-income earners from getting a tax break on what are effectively lifestyle activities.

How will the changes work? They will only affect taxpayers with an adjusted taxable income of more than $250,000. If your income is below that threshold, the current treatment will still apply. This means you will be able to claim the losses against other income if you meet one of four tests or ask the Tax Commissioner to exercise his discretion to determine that you're operating a genuine business activity.

Your adjusted taxable income is your taxable income for the year (disregarding the lifestyle business losses) plus any reportable fringe benefits, super contributions and net investment losses.

Will it apply to any business I have in addition to my main source of income, or does the Government have a hit list? There's no hit list, as the existing rules also target non-commercial business activities. But few people would choose to continue running a business at a loss unless it had lifestyle benefits.

There is an exemption from the rules for certain primary production or professional arts business activities if your assessable income from other sources is less than $40,000. This will still apply under the changed rules.

But what if I earn more than $250,000 and believe my business is genuine? You can still apply to the Tax Commissioner to exercise discretion. The Commissioner can allow the losses to be claimed against other income where you can objectively show the business is a commercial operation and will produce a profit within a commercially viable period. But the reasons it is making a loss now must be related to the nature of the business, not peculiar to your business or situation.

What does that mean? The legislation uses the example of a boat builder who earns more than $250,000 from other sources. He and his brother build yachts for a race held every four years. Because the yachts are paid for on completion, most businesses only make a profit in three of every four years. Measured over a four-year period, the business is likely to be profitable. Because of the nature of the business, the boat builder could get a discretion, allowing him to deduct his business losses against his other income.

How hard is it to apply for a discretion? The legislation provides for a standard application form and the evidence you'll need to support your claim. If you already have an exemption, it will be grandfathered under the new rules.

The Government has also carved out an exemption for businesses that took advantage of the small business tax breaks in the recent stimulus package. If the business reports a loss solely as the result of these tax breaks, that loss can be offset against other income.

You mentioned four tests if I earn less than $250,000. What are they? The first is an income test. If the activity generated assessable income of $20,000 or more, it is exempt from the non-commercial losses rules. You'll also be exempt if it produced a profit in three of the past five years, uses real property worth at least $500,000 to carry out the business, or uses other assets worth at least $100,000 on a continuing basis. If you earn less than $250,000 and don't meet these tests, you can apply for a discretion using the existing criteria.