ATO Interpretative Decision

ATO ID 2003/62 (Withdrawn)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• This ATO ID is withdrawn because the meaning of 'from the business activity' for the purposes of the NCL provisions is now considered in TR 2001/14..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

Are payments received by the taxpayer under a personal income protection insurance policy 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

No. Assessable income from the taxpayer's personal income protection insurance policy is not 'from' a business activity for the purposes of applying either subsection 35-10(2) or section 35-30 of the ITAA 1997.

Facts

An individual taxpayer conducted a financial planning business activity during the income years ending 30 June 2001 and 30 June 2002. The expenses attributable to that business activity exceeded the assessable business income from the activity in those years.

During the income years ending 30 June 2001 and 30 June 2002 the taxpayer also received assessable income from a personal income protection insurance policy in the form of weekly benefits.

The insurance policy personally indemnified the taxpayer against loss of income should a specified event occur to the taxpayer. The taxpayer suffered a medical condition that qualified as a specified event in the policy. In calculating the amount of weekly benefits payable, the financial planning business activity's income and expenses for prior periods were considered.

The taxpayer's assessable income from the personal income protection insurance policy exceeded $20,000 in each of the income years ending 30 June 2001 and 30 June 2002.

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 business activity satisfies one of the four tests in Division 35,

•

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)

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'.

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.

In this case, if the taxpayer's personal income protection insurance policy income is 'from' their business activity, then there would be no excess of deductions to which subsection 35-10(2) of the ITAA 1997 could apply to.

Whether an amount of 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. FC of T (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168.

In this case, the taxpayer's income from the insurance policy is neither sourced in, nor originating from, the financial planning business. The source and origin of this income is their personal income protection insurance policy.

The weekly benefits do not arise as a result of the use of a business asset in any way that is an incident of carrying on a financial planning business. The income arises under the insurance policy, being a chose in action. The policy is not an asset that a person would dispose of if they were to dispose of their financial planning business and, therefore, can neither be considered a business asset, nor used in any way that can be fairly described as a recognised incident of carrying on a business as a financial planner.

For these reasons, the taxpayer's assessable income in the form of weekly benefits from the personal income protection insurance policy is not 'from' their financial planning business activity, for the purposes of either subsection 35-10(2), or section 35-30 of the ITAA 1997. Consequently the Assessable income test in section 35-30 of the ITAA 1997 is not satisfied.

In this case, the taxpayer did not satisfy the Assessable income test in section 35-30 of the ITAA 1997, however it was decided to exercise the Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 in accordance with the principles set out in Taxation Ruling TR 2001/14.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 35-10
   section 35-30

Case References:
Kidston Goldmines Ltd v. FC of T
   (1991) 30 FCR 77
   91 ATC 4538
   22 ATR 168

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

Related ATO Interpretative Decisions
ATO ID 2003/88
ATO ID 2003/89

Keywords
Non commercial losses
NCL assessable income test

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  15 March 2003

ISSN: 1445-2782