Private ruling: Assessable income test
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Has your business activity passed the assessable income test in the relevant financial year? | A1: Yes.

Relevant facts and circumstances: In the 200X financial year, you purchased a 50% share of business which had operated since 200Y. You purchased the remaining 50% in 20XX. The business produced assessable income in excess of $150,000 in the 200X and 20XX financial years and produced an overall profit in both years. In the relevant financial year, due to increased competition in the area, the assessable income from the business dropped to around $X. During the subsequent financial year, you tried to sell the business and in month 20YY you sold the plant and equipment and the lease was taken over by a different business. As the business had been winding down, no new clients commenced in the subsequent financial year, and the assessable income produced in the subsequent financial year was less than $Y.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - section 35-10 | Income Tax Assessment Act 1997 - section 35-30

Reasons for decision: Summary: Where a business activity is not in operation for the whole of an income year, paragraph 35-30(b) of the Income Tax Assessment Act 1997 (ITAA 1997) applies, so that the assessable income test is then based on a reasonable estimate of what the assessable income from the business activity would have been if the activity was carried on for the whole of that year. The requirement in paragraph 35-30(b) is that a reasonable estimate be made of what the assessable income would have been had the business been carried on for a full year. Paragraph 62 of Taxation Ruling TR 2001/14 discusses how a reasonable estimate is made. | Detailed Reasoning - Making a 'reasonable estimate' of assessable income for the purposes of the Assessable income test: 62. To make a 'reasonable estimate' under paragraph 35-30(b) of assessable income that would have been derived from the business activity if it had been carried on throughout the income year in question (i.e., an estimate of a notional annual amount) an individual can consider all relevant factors, including, but not limited to: (a) the cyclical nature of the particular business activity which may result in variations in the pattern of receipts; (b) any orders received and/or forward contracts entered into; (c) the amount that could have been derived for a full income year based on a pro rata calculation of the assessable income already derived for the part of the year. The amount derived for the part of the year must be typical of the income derived in a full year; (d) the type of business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry; and (e) current size and investment in the activity. In your case, your business activity commenced in the 200X financial year and produced assessable income well in excess of $Y in each year of operation to the relevant financial year. You began to wind down your business activity in the subsequent financial year which ceased completely in month 20YY. A reasonable estimate of the assessable income you would have received had you continued to operate the business over the full year, based on previous figures, is over $Y. Therefore, your business is considered to have passed the assessable income test in the subsequent financial year.