Private ruling: Carry forward losses and the non-commercial loss provisions
Published: July 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Are carry forward losses taken into account when calculating your taxable income for the purposes of the income requirement under the non-commercial loss provisions? Answer: Yes. 2. Do you satisfy the income requirement under section 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) in the 2012-13 financial year? Answer: Yes.

Relevant facts and circumstances: Your ordinary previous year losses bought forward into the 2012-13 financial year total more than $1 million. Your net assessable income, including reportable fringe benefits, reportable superannuation contributions or net investment losses, before applying prior year losses, was less than $1 million in the 2012-13 financial year. Your sole trader business activity produced over $20,000 in assessable income and an overall loss in the 2012-13 financial year. Your business activity is a primary production activity.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 4-15 | Income Tax Assessment Act 1997 - Section 8-5 | Income Tax Assessment Act 1997 - Section 12-5 | Income Tax Assessment Act 1997 - Section 35-10 | Income Tax Assessment Act 1997 - Section 35-30 | Income Tax Assessment Act 1997 - Section 36-15

Reasons for decision: Summary: The concept of taxable income is defined in section 4-15 of the Income Tax Assessment Act 1997 (ITAA 1997) as the difference between your assessable income and allowable deductions. If the deductions equal or exceed the assessable income, you don't have a taxable income. Section 8-5 of the ITAA 1997 provides that a taxpayer can deduct an amount from their assessable income if there is a provision of ITAA 1997 which allows such an amount to be deducted. Section 12-5 of the ITAA 1997 provides a list of provisions about specific types of deductions, including Division 36 for tax losses from earlier income years. Section 36-15 of the ITAA 1997 states that if your total assessable income for the later income year exceeds your total deductions (other than tax losses), you deduct the tax loss from that excess. This means that a tax loss from a prior year is an available deduction in calculating your taxable income in the current year. In your case, your net assessable income, before applying prior year losses, was less than $1 million in the 2012-13 financial year. After applying your prior year losses, your taxable income in the 2012-13 financial year is reduced to nil. | Detailed Reasoning - Non-commercial loss provisions: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: • the exception in subsection 35-10(4) of the ITAA 1997 applies; or • you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or • if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your business activity is a primary production activity however your income from other sources was more than $40,000. Therefore, the exception contained in subsection 35-10(2) of the ITAA 1997 does not apply. Subsection 35-10(2E) of the ITAA 1997 states that you satisfy the income requirement for an income year where the total of your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses for that year are less than $250,000. As stated above, after applying your prior year losses, your taxable income in the 2012-13 financial year is reduced to nil. Therefore, you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997. Your business activity also produced more than $20,000 in assessable income; satisfying the assessable income test in section 35-30 of the ITAA 1997. As a result, the loss deferral rule in section 35-10 of the ITAA 1997 will not apply to your business losses in the 2012-13 financial year. Taxation Ruling TR 2001/14 states (at paragraph 60): Where Division 35 does not apply and the excess deductions for the business activity for the income year (whether in combination with other deductions, or alone) are greater than the individual's other assessable income and any net exempt income, they will have a 'tax loss' under section 36-10. Deductibility of that tax loss in a later year will then be subject to Division 36 and not Division 35. In your case, as discussed above, your taxable income in the 2012-13 financial year is nil and the loss deferral rule in Division 35 of the ITAA 1997 will not apply to your sole trader business loss in that year. Therefore, this loss will be added to your remaining carry forward losses and subject to Division 36 of the ITAA 1997 in later income years.