Private ruling: Non-commercial losses
Date of advice: 13 August 2025
Published: 20 October 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the 'assessable income from the activity' under paragraph 35-10(2)(b) of the Income Tax Assessment Act 1997 ( ITAA 1997 ) for the income year ended 30 June 20XX include capital gains from the sale of the Property in that year, to which the excess referred to in subsection 35-10(2) may apply? | A1: Yes

Relevant facts and circumstances: X conducted a farming business from a farm (the Property). Prior to this, X conducted his farming business from other properties. X has now moved his farming activities to what he considered a more appropriate property. X entered a contract to sell the Property in the income year ended 30 June 20XX. X's farming activities generated deductions greater than assessable income (an excess ) for certain income years. X did not meet the income requirement under subsection 35-10(2E). Therefore, the excess pertaining to each of those income years was deferred. As a result of the sale of the Property in 20XX, X has generated a net capital gain (after applying capital losses, the discount percentage of 50% as calculated in accordance with Subdivision 115-A, and the small business concessions under Subdivision 152-C).

Relevant legislative provisions: Section 10-5 of the ITAA 1997 | Subsection 35-10(1) of the ITAA 1997 | Subsection 35-10(2) of the ITAA 1997 | Paragraph 35-10(2)(b) of the ITAA 1997 | Subsection 35-10(2E) of the ITAA 1997 | Subsection 102-5(1) of the ITAA 1997 | Subdivision 115-A of the ITAA 1997 | Subdivision 152-C of the ITAA 1997 | Section 995-1 of the ITAA 1997

Reasons for decision: Detailed Reasoning - S35-10 (1): Subsection 35-10(1) states: ' Deferral of deductions from non - commercial business activities (1) The rule in subsection (2) applies for an income year to each * business activity you carried on in that year if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), unless: (a) you satisfy subsection (2E) for that year, and one of the tests set out in any of the following provisions is satisfied for the business activity for that year: (i) section 35 - 30 (assessable income test); (ii) section 35 - 35 (profits test); (iii) section 35 - 40 (real property test); (iv) section 35 - 45 (other assets test);... ...' Subsection 35-10(2E) states: | Detailed Reasoning - 'Income requirement: (2E) You satisfy this subsection for an income year if the sum of the following is less than $250,000: (a) your taxable income for that year, disregarding your assessable FHSS released amount for that year; (b) your reportable fringe benefits total for that year; (c) your reportable superannuation contributions for that year; (d) your total net investment losses for that year. For the purposes of paragraph (a), when working out your taxable income , disregard any excess mentioned in subsection (2) for any business activity for that year that you could otherwise deduct underthis Act for that year.' As set out in the Facts and Circumstance of this Ruling, subsection 35-10(2E) was not satisfied for certain income periods. Therefore, subsection 35-10(1) was not satisfied, and the Rule in subsection 35-10(2) applies. | Detailed Reasoning - S35-10(2): Subsection 35-10(2) states: | Detailed Reasoning - 'Rules: (2) If the amounts attributable to the * business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess: (a) were not incurred in that income year; and (b) were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on.' Business Activity Taxation Ruling 2001/14 states the following in relation to what is meant by 'business activity': '36. A key concept to understand in applying Division 35 therefore is '*business activity' as the term is used in the Division. The asterisk signifies that the term includes the defined term *business, the meaning of which in section 995-1 is: '*business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.' 37. The composite term '*business activity' is otherwise undefined in the ITAA 1997. The inclusion of the extended definition of '*business' in the composite term does not, however, alter the ordinary meaning of the composite term in any significant way. That ordinary meaning is an activity forming part or all of the taxpayer's activities 'engaged in for the purpose of profit on a continuous and repetitive basis' (Hope v. The Council of the City of Bathurst 80 ATC 4386 at 4382; (1980) 12 ATR 231 at 236), or an activity that is one of the activities that makes up the 'course of conduct' (FC of T v. Murry 98 ATC 4585 at 4596; (1998) 39 ATR 129 at 145) that is the taxpayer's *business.' X's farming activities are considered a business activity. The sale of the Property is considered part of the same business activity, rather than a separate business activity. In this regard we refer to the following paragraphs in Taxation Ruling 2001/14: 38. However, while a *business may be subdivided into a number of different *business activities this cannot be carried out to the point where the composite term in Division 35, '*business activity', is deprived of practical meaning. An activity that forms part of a taxpayer's overall *business will not be a separate '*business activity' for the purposes of Division 35 unless it is capable of standing alone as an autonomous commercial undertaking of some sort (see further paragraphs 40 to 46 on identifying separate and distinct *business activities for the purposes of Division 35). And further: 43. Further, and most importantly, to be identified as a separate *business activity for Division 35 within the statutory scheme referred to, the activity (or set of activities) will need to exhibit the following: it produces a loss, in the sense that looked at as a separate activity there is clearly assessable income produced, or intended to be produced, from it, and otherwise allowable deductions attributable to carrying it on in excess of that income (otherwise Division 35 has no relevance); its conduct is not motivated by factors connected with supporting in any commercial way the carrying on of the individual's other *business activities; and it shows signs in its own right that it is unlikely to ever be profitable. The sale of the Property cannot be said to stand alone as an autonomous commercial undertaking separate from the business activity of farming. Instead it was intrinsically related to the farming activities - it was land upon which the farming activities were conducted. The purchase and subsequent sale of the Property was incidental to, and supported ' in a commercial way' , the operations of the farming activities. As set out in the Facts and Circumstances, X's farming activities have generated an excess for certain income periods. Definition of assessable income Section 995-1 states: '" assessable income " has the meaning given by sections 6-5, 6-10, 6-15, 17-10 and17-30.' Section 10-5 states the list of provisions about assessable income where you include in your assessable income amounts that are not ordinary income, and this includes capital gains under section 102-5. Subsection 102-5(1) states: 'Your assessable income includes your net capital gain (if any) for the income year. You work out your net capital gain in this way: Working out your net capital gain Step 1. Reduce the capital gains you made during the income year by the capital losses (if any) you made during the income year. ... Step 2. Apply any previously unapplied * net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of *capital gains under step 1 (including any capital gains not reduced under that step because the * capital losses were less than the total of your capital gains). ... Step 3. Reduce by the * discount percentage each amount of a * discount capital gain remaining after step 2 (if any). ... Step 4. If any of your *capital gains (whether or not they are * discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions. ... Step 5. Add up the amounts of *capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year.' X made a net capital gain from selling the Property in 20XX, after offsetting capital losses, applying the discount under Subdivision 115-A, and applying the small business concessions under Subdivision 152-C, in accordance with subsection 102-5(1). Pursuant to this subsection the net capital gain needs to be included in X's assessable income in the income tax year ending 30 June 20XX. The net capital gain forms part of X's 20XX assessable income from his farming activity (being the relevant ' business activity ' referred to in subsection 35-10(2)), and therefore forms part of the ' assessable income from the activity ' for that year under the terms of subsection 35-10(2). In accordance with subsection 35-10(2), the excess for certain income periods may be deducted against X's assessable income from farming activities for the year ending 30 June 20XX, which includes the net capital gain.