ATO Interpretative Decision

ATO ID 2004/112 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the position stated in this ATO ID is no longer current. The current ATO position on this issue is contained in TR 2001/14 Income tax: Division 35 - non-commercial business losses.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the assessable income that arises as the result of the operation of section 393-15, Schedule 2G of the Income Tax Assessment Act 1936 (ITAA 1936) because a Farm Management Deposit (FMD) is repaid, 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); and/or

(b)

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

Decision

Yes. The funds placed into the FMD were from the particular activity and when repaid the funds were used in the conduct of the particular business activity. In this case, the assessable income that arises from the operation of section 393-15, Schedule 2G of the ITAA 1936, is assessable 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/or

(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 primary production business activity within Australia for the whole of the 2003-04 income year.

In the 2001-02 income year the taxpayer made a valid FMD. The funds for this deposit were from the operation of the particular primary production business activity. In the 2003-04 income year the taxpayer made the decision to expand the business' operations. To facilitate this expansion, the taxpayer had the FMD repaid and this resulted in an amount being included in the taxpayer's assessable income for that income year by section 393-15, Schedule 2G of the ITAA 1936 for the 2003-04 income year. The repaid deposit funds were used in the particular primary production business activity in the 2003-04 income year.

Reasons for Decision

When applying the loss deferral rule in subsection 35-10(2) of the ITAA 1997, a taxpayer is required to calculate the amount of their non-commercial loss. 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' the activity. The deferred amount cannot be taken into account when calculating their taxable income for the income year in question.

The Assessable income test in section 35-30 of the ITAA 1997 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'.

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).

Whilst the assessable income arising from the repayment of the FMD does not have its source or origin in the activity based on the ordinary meaning of 'from', there is a sufficiently proximate relationship between the assessable income and the taxpayer carrying on the primary production activity, such that it can fairly be said the assessable income is an incident of carrying on that primary production business.

The funds for making the FMD were from the particular primary production business activity; the decision to have the deposit repaid was made for the purpose of the primary production business and the repaid funds were used in the conduct of the primary production business. Therefore, there is a sufficiently proximate relationship between the assessable income that arises as a result of the FMD being repaid to the taxpayer and the primary production business activity in the 2003-04 income year.

On the facts of this particular case, the assessable income that arose from the repayment of the FMD is assessable income 'from' the business activity and therefore the taxpayer can take this assessable income into account for the purposes 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.

However, it is conceivable that a different set of facts (for example, using the repayment of funds for personal reasons) may lead to the conclusion that there is not a sufficiently proximate relationship between the income and the carrying on of a particular primary production business activity. In such a case it cannot be said that the assessable income that arises as a consequence of the repayment of the FMD is an incident of carrying on of a particular primary production business and therefore not from the particular business activity for the purpose of Division 35 of the ITAA 1997.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 35-10
   section 35-30
   subsection 35-10(2)

Case References:
Kidston Goldmines Ltd Federal Commissioner of Taxation
   (1991) 30 FCR 77
   22 ATR 168

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

Keywords
NCL carrying forward non commercial losses
NCL deferring non commercial losses
NCL offset against other income
Non commercial losses
Farm management bonds
Income equalisation deposits scheme

Business Line:  Small Business/Individual Taxpayers

Date of publication:  6 February 2004

ISSN: 1445-2782