Private ruling: non-commercial losses
Published: February 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will you satisfy the income requirement contained in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You operate a primary production business. You have not conducted any commercial activities besides primary production. In previous financial years, when the primary production activities have been profitable, you deposited funds into a Farm Management Deposit (FMD). Your primary production business made a loss. The primary production loss was offset by the withdrawal from a FMD. The FMD proceeds were applied to reduce the business debt accumulated as a result of primary production losses and business expenses incurred in the same primary production business activity. Your adjusted taxable income, excluding the FMD and primary production losses, is less than $250,000. All eligibility rules in relation to the FMD have been satisfied. You have real property valued at more than $500,000 and plant and equipment greater than $100,000.

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

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: · you satisfy the income requirement and you pass one of the four tests; · the exceptions apply; or · the Commissioner exercises his discretion. The income requirement, set out in subsection 35-10(2E) of the ITAA 1997, prevents you from accessing the four tests where your adjusted taxable income exceeds $250,000 (that is, your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses but excluding your business losses). However not all of your assessable income is included in calculating your adjusted taxable income. Any assessable income attributed to the business activity incurring the loss is not included in your adjusted taxable income. This is because it forms part of the business losses, which are disregarded (the business losses are calculated by deducting the expenses attributed to the business activity from the assessable income 'from' that business activity). As your FMD is properly attributable to your primary production activity (the income is from the primary production activity), the repayment will be excluded from your adjusted taxable income for the purposes of Division 35 of the ITAA 1997. As you satisfy the income requirement and meet at least one of the four non-commercial loss tests, you are not required to defer your loss. Therefore, the special circumstances discretion does not need to be considered.