Private ruling: Non-commercial losses
Published: June 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. | Q2: If not, will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2012-13 financial year? | A2: Not required.

Relevant facts and circumstances: You operate a business. You have made a loss from your business activity in the 2012-13 financial year. The primary production loss was offset by a withdrawal from your government deposit. Your adjusted taxable income for non-commercial loss purposes, excluding the withdrawal and losses, is less than $250,000. You pass at least one of the four non-commercial loss tests.

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

Reasons for decision: Detailed Reasoning - Question 1 & 2: 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 withdrawal is properly attributable to your business activity (the income is from the business 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.