Private ruling: Carry Forward Losses
Published: October 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the Commissioner allow you to off-set the primary production loss carried forward from the 2010-11 income year against the employment income in the 2011-12 income year under Division 36 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You are conducting a primary production activity in partnership. The partnership has been in business for over 20 years. The crops produced are sold to merchants in the relevant industries. You expect to generate a profit in the 2011-12 income year. The region you are conducting the business was affected by unavoidable circumstances since the 2002 year. You have provided the relevant documents in relation to your primary production activity. In a telephone conversation with the ATO your Tax Agent advised that you received a favourable decision from the Administrative Appeals Tribunal for the 2009-10 and 2010-11 income years. You state that even if the activity will not be affected by unavoidable circumstances in the 2011-12 income year, the profit generated in that year will not be sufficient to off-set the losses from the 2010-11 income year. Therefore, you seek to deduct these losses against your other income received in the 2011-12 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 35-10(2). | Income Tax Assessment Act 1997 subsection 35-10(2E). | Income Tax Assessment Act 1997 section 36-10(1). | Income Tax Assessment Act 1997 section 36-10(2) | Income Tax Assessment Act 1997 section 36-10(4). | Income Tax Assessment Act 1997 section 36-15(2). | Income Tax Assessment Act 1997 section 36-10(5). | Income Tax Assessment Act 1997 section 36-10(7).

Reasons for decision: Summary: Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual (including an individual in a general law partnership) from a business activity will not be taken into account in an income year unless: · you satisfy subsection (2E) (Income requirement) and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met; · the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies; or · the Commissioner exercises the discretion in section 35-55 of the ITAA 1997 for the business activity for that year. Generally, a 'loss' in this context is, for the income year in question, the excess of a taxpayer's allowable deductions attributable to the business activity over that taxpayer's assessable income from the business activity. 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 (and subsection (2E) is met), the discretion is exercised, or the exception applies. In your circumstances, you have received the Commissioner's discretion in section 35-55 of the ITAA 1997 for the 2010-11 income year. Therefore, you are entitled to claim the primary production losses incurred in the 2010-11 income year in the same year. | Detailed Reasoning - Calculating the tax loss for the 2010-11 income year: Section 36-10 of the ITAA 1997 sets out the method for calculating a tax loss for an income year as follows: Subsection 36-10(1) - Add up the amounts you can deduct for an income year (except tax losses for earlier income years). Subsection 36-10(2) - Subtract your total assessable income. Subsection 36-10(4) - If you derived exempt income, also subtract your net exempt income (worked out under section 36-20) Section 36-10(4) - Any amount remaining is your tax loss for the income year, which is called a loss year. Subsection 36-15(1) of the ITAA 1997 states that your tax loss for a loss year is deducted in a later income year if you are not a corporate tax entity at any time during the later income year. If you have no exempt income and if your total assessable income for the later income year exceeds your total deductions (other than tax losses), you can deduct the tax loss from that excess (subsection 36-15(2) of the ITAA 1997). In terms of subsection 36-15(3) of the ITAA 1997, if you have net exempt income for the later income year and your total assessable income (if any) for the later income year exceeds your total deductions (except tax losses), you deduct the tax loss as follows: (a) first, from your net exempt income, and (b) secondly, from the part of your total assessable income that exceeds those deductions. However, under subsection 36-15(4) of the ITAA 1997 if you have net exempt income for the later income year and those deductions exceed your total assessable income, then: (a) subtract that excess from your net exempt income, and (b) deduct the tax loss from any net exempt income that remains. Subsections, 36-15(5), 36-15(6) and 36-15(7) of the ITAA 1997 with regards to claiming the prior year loss states that: Subsection 36-15(5) of the ITAA 1997 - if you have 2 or more tax losses, you deduct them in the order in which you incurred them. Subsection 36-15(6) - A tax loss can be deducted only to the extent that it has not already been deducted. Subsection 36-15(7) - if you cannot deduct all or part of your tax loss in an income year, you can carry forward to the next income year the undeducted amount. You then apply this Subdivision to work out if you can deduct the tax loss in that income year. In your circumstances, the loss calculated under the method in section 36-10 of the ITAA 1997 is carried forward to the 2011-12 income year. Although you do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 for the 2011-12 income year, you do not require the Commissioner's discretion for that year to offset the carried forward loss from the 2010-11 income year calculated in terms of section 36-10 of the ITAA 1997. If you do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and do not receive a tax profit from your primary production activity for the 2011-12 income year, the 2011-12 year's loss would be deferred to a future income year unless the Commissioner exercises the discretion in Division 35 of the ITAA 1997. However, this does not affect the carried forward loss from the 2010-11 income year to be off-set against the other income in the 2011-12 income year. In summary, the Commissioner will allow you to off-set the business loss carried forward from the 2010-11 income year against other income in the 2011-12 income year under Division 36 of the Income Tax Assessment Act 1997 (ITAA 1997).

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