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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

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Ruling

Subject: non-commercial losses

Question

Does the income from your old partnership cause you to fail the income requirement under subsection 35-10(2E) of the Income Tax Assessment Act (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were partners in a partnership on a farm that has been held in the family for many years. You left the partnership to carry on your own business on a section of the farm. A new partnership has been created comprising parent, child and family trust.

The change in the partnership resulted in a profit (in excess of $250,000 for each partner) from the old partnership and a loss for the following period in the new partnership.

The profit from the old partnership resulted from the same type of farming activity, farming exactly the same land and using the same equipment as the subsequent loss in the same year in the new partnership.

Reduced income is expected for the year ended due to severe drought conditions in the region.

Reasons for decision

Summary

It is considered that your old partnership and new partnership activities are of a similar kind. This means they can be combined together resulting in an overall profit from the grouped activity. As an overall profit has been achieved, the non-commercial loss provisions of the legislation do not apply.

Therefore you are able to offset the loss attributable to your new partnership activity against your other income from the old partnership.

Detailed reasoning

Division 35 of the ITAA 1997 applies to losses from certain business activities for the year ended 30 June 2001 and subsequent years. The provisions only apply to individuals who conduct a business activity as either a sole trader or a partner in a partnership and made a loss from that business activity.

From 1 July 2009 where a taxpayer's taxable income for non-commercial loss purposes exceeds $250,000 their activity must meet certain additional requirements before a loss from the activity can be offset against the taxpayer's other income.

Taxation Ruling TR 2001/14 discusses the Commissioner's view of the non-commercial business loss provisions of the taxation legislation.

In Allied Mills Industries Pty Ltd v. FC of T 88 ATC 4852 it was acknowledged that a taxpayer might carry on several distinct businesses.

A single business may consist of several separate business activities. Where there are separate business activities, each business activity must individually meet the requirements of Division 35 of the ITAA 1997.

Paragraph 45 of TR 2001/14 provides a list of factors which may be considered in determining if separate business activities are being carried on. The factors include:

Where a taxpayer's activities are viewed as separate businesses, subsection 35-10(3) of ITAA 1997 allows the activities to be grouped together as a single activity if they are of a similar kind.

What will be a business activity 'of a similar kind' to another business activity will be a question of fact and degree. The question involves a comparison of the relevant characteristics of each activity.

Application to your circumstances

You were a partner in a partnership which operated a farm.

You formed a new partnership creating a separate farm on a section of the land.

The new partnership carries out the same farming activities as the old partnership.

The same assets are used on the farm.

As the business activities are of a similar kind, they can be grouped together. Thus, your income from the grouped activities is calculated as the income from the old partnership plus the loss from the new partnership.

As there is an overall profit from your grouped activities, the non-commercial loss provisions of the income tax legislation do not apply.

Therefore, the loss attributable to the new partnership may be offset against the income from the old partnership.

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