Private ruling: Non-commercial losses income requirement
Published: August 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Did you satisfy the income requirement under subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) for non-commercial loss purposes in the 2012-13 financial year? | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - Subsection 35-10(2E) | Income Tax Assessment Act 1997 - Section 995-1

Reasons for decision: Summary: The income requirement in subsection 35-10(2E) of the ITAA 1997 is met when, in a given income year the sum of the individual's taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses is less than $250,000. When calculating whether an individual has met the income requirement, they must disregard any excess deductions that are subject to Division 35. In your case, you sold shares in the company as you are no longer required to hold shares in the company in order to supply the company with your produce. The total of the assessable capital gain and dividends are in excess of $250,000. Assessable income is defined in section 995-1 of the ITAA 1997 to include statutory income as well as ordinary income (paragraph 61 of Taxation Ruling TR 2001/14). The assessable income from your business activities will include both ordinary income and statutory income received in connection with the business. It is accepted that purchasing shares in the company is a direct consequence of carrying on the business. This is because you were required to hold a minimum number of shares, and to continue to purchase shares in the company, in order to supply products to the company. The number of shares held in the company was a direct result of the quantity of products supplied to the company. It follows that any capital gain made on the disposal of the shares is also a direct consequence of carrying on the business. For the purposes of calculating whether you have met the income requirement, the capital gain and dividends will be offset against any excess deductions from your business activity first. As a result, your income in the 2012-13 financial year for non-commercial loss purposes is less than $250,000, satisfying the income requirement under subsection 35-10(2E) of the ITAA 1997.

Relevant facts: You have been carrying on a farming business in a partnership for more than 30 years. | Your primary production income has been over $20,000. | In the past you were required to hold shares in an industry co-operative and to acquire additional shares based on the quantity of produce supplied. | You are no longer required to hold the shares in order to supply your produce. | You sold some of your shares to help meet business expenses, as unfavourable conditions meant the business had run at a loss. | The total capital gain and dividends is in excess of $250,000 for each partner.