Edited version of your private ruling

Authorisation Number: 1012563104490

Ruling

Subject: Non commercial losses

Question 1

Does the withdrawal of the farm management deposit (FMD) form part of the primary production business income for the purposes of the assessable income test within the non-commercial loss rules in Division 35 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 1980

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 conduct a business activity of livestock farming.

In the relevant financial year your business made a loss.

During the 2012-13 financial year you withdrew money from a farm management deposit (FMD).

This income is directly attributable to business income you have earned in the past.

The income was put into the business bank account to be used in the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10.

Income Tax Assessment Act 1997 section 35-30.

Reasons for decision

Summary

The withdrawal of the farm management deposit will be considered to be part of the assessable primary production income when applying the assessable income test to determine whether the primary production business loss needs to be deferred under the non commercial loss provisions.

Detailed reasoning

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four business tests

· the exceptions apply

· the Commissioner exercises his discretion.

The four business tests are:

· The business produces assessable income of at least $20,000

· The business has produced a profit in three of the past five years (including the current year)

· The business uses real property or an interest in real property worth at least $500,000 on a continuing basis

· The business uses other assets worth at least $100,000 on a continuing basis

ATO Interpretative Decision 2004/112 (ATO ID 2004/112) has reviewed the assessable income test in relation to withdrawals from farm management deposits (FMD). The facts used in ATO ID 2004/112 consider the situation where all of the withdrawn funds were used in the business operations.

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 withdrawal 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.

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.

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