Private ruling: Deduction for non commercial losses
Published: November 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the primary production activity you conducted in a partnership and same primary production activity you now conduct as a sole trader considered to be businesses of 'a similar kind' in relation to Division 35 of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: In the 2009-10 and 2010-11 financial years you were in a partnership that was operating a primary production business. This business incurred operating losses for these years. During the 2010-11 financial year your other income was in excess of $250,000. The opportunity to offset your primary production losses against your other income in the 2010-11 financial year as a non-commercial loss was stopped as you failed the income test set out in section 35-10(2E) of the ITAA 1997. In the 2011-12 financial year you have operated the primary production business as a sole trader and have made an operating loss. Your other income during this period is less than $250,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 35-10(3) | Income Tax Assessment Act 1997 Subsection 36

Reasons for decision: Summary: Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) prevents losses being offset against other assessable income in the year the loss is incurred. The loss is deferred. The deferred losses may be offset in later years against profits from the activity. The deferred losses may also be offset against other income if the income requirement and one of the other tests are satisfied, or the Commissioner exercises his discretion. Division 35 of the ITAA 1997 applies to individuals, either alone, or in partnership where a business is carried on. Taxation Ruling TR 2001/14 considers the operation of Division 35 of the ITAA 1997 and in paragraph 10 it states 'Division 35 applies only to an individual who is carrying on a 'business activity' in an income year, either on their own, or in a general law partnership (section 35-5). Division 35 does not apply to any other entity. The Division operates by identifying a specific 'business activity' for calculating whether a non-commercial loss has been made from that activity, which would, but for Division 35, be able to be offset against other income (in the calculation of the individual's taxable income). In your case, the particular business activity is primary production and was initially operated by the partnership and more recently by the sole trader with the business continued on after the change in ownership therefore, it is considered that there is one business activity involved. Consequently Division 35 of the ITAA 1997 will be applied to the business activity. Additionally, paragraph 60 of TR 2001/14 considers distinguishing a Division 35 of ITAA 1997 loss from a Division 36 of ITAA 1997 loss and states where Division 35 does not apply and the excess deductions for the business activity for the income year (whether in combination with other deductions, or alone) are greater than the individual's other assessable income and any net exempt income, they will have a 'tax loss' under section 36-10 of ITAA 1997. Deductibility of that tax loss in a later year will then be subject to Division 36 and not Division 35.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.