Private ruling: Non-commercial business losses and the Commissioner's discretion
Date of advice: 15 June 2016
Published: July 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Did you satisfy the income requirement under subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997) for non-commercial loss purposes in the relevant financial year? | A1: Yes.

Relevant facts and circumstances: You have been carrying on a primary production business for more than 20 years under a partnership structure and the partnership became a member of, and supplier to, an industry co-operative (the Co-op). The partnership has supplied the Co-op for more than 20 years. Your sales over the last five years have been in excess of $20,000. Additional primary production income has also been received from livestock sales, rebates and dividends from the Co-op. As a member of the co-op, you were required to acquire shares in the Co-op and to acquire additional shares based on the quantity of product supplied. Over the past 20 years, the partnership became a large supplier to the Co-op. This growth was funded through bank borrowings which have grown in recent years. The Co-op has now become an unlisted public company (the company) and listed on the ASX. You have not purchased shares in the company since it was listed on the ASX. You are now no longer required to hold shares in the company in order to supply the company. As a result of high debt, low prices and drought, the partnership came under severe financial pressure and you were compelled to sell some of your shares. In the relevant financial year you made a gross capital gain on the sale of your shares of more than $250,000. The partnership incurred a loss in the relevant financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - Subsection 35-10(2E) | Income Tax Assessment Act 1997 - Section 995-1

Reasons for decision: Summary: The income requirement in subsection 35-10(2E) of the ITAA 1997 is met when, in a given income year the sum of the individual's taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses is less than $250,000. When calculating whether an individual has met the income requirement, they must disregard any excess deductions that are subject to Division 35. In your case, you sold your shareholding in the company as the partnership came under severe financial pressure as a result of high debt, low prices and drought, and you were compelled to sell some of your shares. The assessable capital gain on the sale of the shares is in excess of $250,000. Assessable income is defined in section 995-1 of the ITAA 1997 to include statutory income as well as ordinary income (paragraph 61 of Taxation Ruling TR 2001/14). The assessable income from your farming business activities will include both ordinary income and statutory income received in connection with the business. It is accepted that purchasing shares in the co-operative is a direct consequence of carrying on the primary production business. This is because you were required to hold a minimum number of shares, and to continue to purchase shares in the co-operative (based on the quantity of product supplied), in order to continue to supply the co-operative. The number of shares held in the co-operative was a direct result of the quantity of product supplied to the co-operative. It follows that any capital gain made on the disposal of the shares is also a direct consequence of carrying on the primary production business. For the purposes of calculating whether you have met the income requirement, the capital gain will be offset against any excess deductions from your business activity first. As a result, your income in the relevant financial year for non-commercial loss purposes is less than $250,000, satisfying the income requirement under subsection 35-10(2E) of the ITAA 1997.