Private ruling: Real property test for non-commercial losses
Published: January 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Can you include the value of land used for your business in the Real Property test calculation in section 35-40 of the Income Tax Assessment Act 1997 (ITAA 1997) if an associated entity has legal title to the land and you do not pay for the use of the land? | A1: Yes

Relevant facts and circumstances: You are carrying on a primary production business as a sole trader. The property used is owned by an associated entity. The entity that owns the property leases out part of the property and you have sole use of part of the property to run your livestock. You do not pay any lease or rental expenses to the associated entity for the use of the land. Based on the average market value per acre of the land, the land value used is greater than $500,000. Your income for non-commercial loss purposes is less than $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 section 35-40 | Income Tax Assessment Act 1997 subsection 35-40(2)

Reasons for decision: Summary: The real property test in section 35-40 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to defer any loss incurred by the individual from the activity for that income year if real property of at least $500,000 in value is used in the business activity on a continuing basis. Real property includes: • land • interests in land such as leases • structures, such as buildings, fixed to the land. Real property, for the purposes of this test, does not include: • a dwelling and adjacent land that is used mainly for private purposes; or • fixtures owned by an individual as a tenant. In applying the real property test in section 35-40 of the ITAA 1997 the only land that is taken into account is the physical area that is used on a continuing basis in carrying out the activity. To value real property or interests in real property, the individual can choose the reduced cost base or the market value of the property or interest in real property if that value is more than the reduced cost base (subsection 35-40(2) of the ITAA 1997). The meaning of reduced cost base is the same as it is for capital gains tax purposes. A form of tenancy that may arise in a case where exclusive possession is granted but no rent is paid, is a tenancy at will: Halsbury's Laws of Australia , Volume 16, at 245 'Leases and Tenancies'. A tenancy at will can be created either expressly by contract or by implication of law from the conduct of the parties. If the relationship between an individual and another party, results in the creation of a tenancy at will where exclusive possession is granted to the individual, with or without payment that will be sufficient for the individual to have an 'interest' in that land. The individual will be able to take into account the market value or reduced cost base of that interest or the underlying property if they choose, for the purposes of the real property test. In your case, as the market value of the underlying property used on a continuing basis in your business is over $500,000, you will pass the real property test and the loss deferral rule in subsection 35-10(2) will not apply.