ATO Interpretative Decision

ATO ID 2003/426 (Withdrawn)

Income Tax

• This ATO ID is withdrawn because the meaning of 'from the business activity' for the purposes of the NCL provisions is now considered in TR 2001/14..
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is an assessable bounty, subsidy or grant, received from a government agency to assist an individual's business activity to meet its trading expenses, assessable income 'from' the business activity when:

(a)

applying the loss deferral rule in Division 35, in subsection 35-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997); or

(b)

determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied?

Decision

Yes. Any assessable bounty, subsidy or grant received by a taxpayer as a direct result of carrying on their business activity will be income 'from' the business activity when:

(a)

applying the loss deferral rule in Division 35, in subsection 35-10(2) of the ITAA 1997; and

(b)

determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied.

Facts

An individual taxpayer carried on a business activity that commenced at the start of the 2000-01 income year.

During this income year, as part of an assistance package to overcome difficult trading conditions in the industry, the Federal Government provided support in the form of a subsidy. This subsidy partially reimbursed expenses which were incurred in the day to day operations of the particular business. A requirement of receiving the subsidy was that the business must be being conducted at the time of receiving the subsidy.

The taxpayer applied for, and subsequently received a payment under the assistance package.

Reasons for Decision

Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless

•

their activity satisfies one of the four tests in Division 35; or

•

the Commissioner has exercised the discretion in section 35-55 for the activity; or

•

the individual comes within the Exception to Division 35, contained in subsection 35-10(4).

(refer subsection 35-10(1) of the ITAA 1997)

If none of the conditions in subsection 35-10(1) of the ITAA 1997 are satisfied, the loss deferral rule applies. Consequently, the taxpayer is required to calculate the amount of their non-commercial loss, for the purposes of subsection 35-10(2) of the ITAA 1997, that is deferred. The amount of this 'loss' is calculated as the excess of their otherwise allowable deductions for this income year, attributable to the business activity, over any assessable income 'from' this activity.

The deferred amount cannot be taken into account when calculating their taxable income for the income year in question.

One of the four tests is the Assessable income test in section 35-30 of the ITAA 1997, which provides that the loss deferral rule in section 35-10 of the ITAA 1997 will not apply for an income year where the assessable income 'from' the business activity in question 'is at least $20,000'.

In this case, the subsidy is income according to ordinary concepts (see Lincolnshire Sugar Co Ltd v. Smart (1937) 20 TC 643).

Whether an amount of assessable income is 'from' a business activity depends on whether that activity is the source or origin of that income, based on the ordinary meaning of 'from' (see BHP Petroleum (Timor Sea) Pty Ltd & Ors v. Minister for Resources (1994) 49 FCR 155; (1994) 28 ATR 16; or whether that income is an incident of carrying that activity on (see Kidston Goldmines Ltd v. Federal Commissioner of Taxation (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

The taxpayer has received the subsidy in the course of carrying on their business activity, to assist its trading operations. Therefore, the taxpayer's subsidy income is sourced in and originating from their business activity.

Any assessable income in the form of a bounty, subsidy or grant that has a direct relationship with the business activity, for example, to assist the business' trading operations, will be 'from' the business activity for the purpose of applying the loss deferral rule in subsection 35-10(2) of the ITAA 1997, or determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   Division 35
   section 35-10
   subsection 35-10(4)
   subsection 35-10(2)
   section 35-30
   section 35-35
   section 35-40
   section 35-45
   section 35-55

Case References:
Lincolnshire Sugar Co. Ltd v. Smart
   (1937) 20 TC 643

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/14
Taxation Ruling TR 2001/14A - Addendum

Keywords
NCL assessable income test
NCL deferring non commercial losses
NCL non commercial business activity

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  30 May 2003

ISSN: 1445-2782