Private ruling: Non Commercial Losses
Date of advice: 3 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Do you satisfy the real property test under section 35-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Does Division 35 of the ITAA 1997 apply to defer your losses? | A2: No.

Relevant facts and circumstances: You satisfy the $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. During the X year you, in joint tenancy arrangement with your relative, purchased farming land in order to commence business. You operate the business as a sole trader. The purchase price of the land was $X with additional amounts spent during the year on capital improvements. During the X financial year, you and you relative have jointly purchased a nearby property for a total cost of $X to enable the business to be expanded. The property included a residence which will be used by the as their home. The value of the real property which is to be used on a continuing basis in carrying on the primary production activity will exceed the $500,000 threshold. The valuation excludes the value of the private residence including reasonable adjacent land.

Relevant legislative provisions: Division 35 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: For the 2009-10 and later financial 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 • the Commissioner exercises his discretion 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 you as a tenant. As explained in Taxation Ruling TR 2001/14 for the purpose of applying the Real property test in section 35-40 of the ITAA 1997 where a person carries on a business activity as a partner, the values of assets owned or leased by another partner of the partnership that are not partnership assets but are used in carrying on the activity in that year must be ignored (paragraph 35-25(d)). Where one party provides property for the partnership business and it can be concluded that the property is a partnership asset and that it is used in carrying on the partnership business activity, paragraph 35-25(d) of the ITAA 1997 does not exclude the value of the asset from being used by the partner who does not have legal title to the property in determining, for their purposes, whether the Real Property test in section 35-40 of the ITAA 1997 is met. Although the above example relates to a partnership it does highlight the fact that legal title to the property does not exclude the value of the asset being used in the real property test. Section 35-40 of the ITAA 1997 does not require that the asset used in your business be owned by you. Consequently, you pass the real property test for the relevant financial year. In this case, you satisfy the income requirement and pass the real property test. Therefore, Division 35 of the ITAA 1997 does not apply and you can utilise your loss in the relevant financial year.