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Edited version of your private ruling
Authorisation Number: 1012598900777
Ruling
Subject: Non-commercial loss
Question
Does the capital gain form part of your adjusted taxable income for the purposes of the income requirement 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 19XX
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 are a partner in a partnership.
The partnership carries on a mixed primary production activity.
During the 2012-13 financial year you made a capital gain.
The capital gain occurred to assist in financing the ongoing primary production activity.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 35-10(1)
Income Tax Assessment Act 1997 subsection 35-10(2)
Income Tax Assessment Act 1997 subsection 35-10(2E)
Reasons for decision
For the 2009-10 and later income years, Division 35 of the 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 tests;
• the exceptions apply; or
• the Commissioner exercises his discretion.
The income requirement prevents you from accessing the four tests where your adjusted taxable income exceeds $250,000 (that is, your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses but excluding your business losses).
However not all of your assessable income is included in calculating your adjusted taxable income. Any assessable income attributed to the business activity incurring the loss is not included in your adjusted taxable income. This is because it forms part of the business losses, which are disregarded (the business losses are calculated by deducting the expenses attributed to the business activity from the assessable income 'from' that business activity).
For income to be excluded from the calculation of your income for the income requirement in subsection 35-10(2E) of the ITAA 1997, it needs to be from the business activity.
In your case, you received a capital gain during the year. If the one-off capital gain is included in your assessable income, you will fail the income requirement. In order to exclude the capital gain, you must show that it is from the business activity.
The normal meaning of the term 'from the business activity' covers activities engaged in as part of carrying on a business with a view to profit from those activities.
Taxation Ruling TR 2001/14 discusses what constitutes assessable income from the business activity in the context of Division 35 of the ITAA 1997:
92A. Watson v. Deputy Commissioner of Taxation [2010] FCAFC 17; (2010) 182 FCR 104; 2010 ATC 20-167; (2010) 75 ATR 224 (Watson) concerned whether income protection policy payments were assessable income from the business activity, being the taxpayer's financial planning business. The Full Federal Court held at paragraph 29 that the word 'from' is intended to have its dictionary meaning. It indicates the starting point, source or origin of the assessable income. It was held at paragraph 31 that if the starting point or source of the assessable income must be the business activity, then the extent and nature of that business activity must be identified to determine whether or not particular income is 'from' it'.
92B. At paragraph 30 the Court held that the assessable income referred to in subsection 35-10(2) must be 'from' the business activity in the same year in which it is assessable income of the taxpayer.
92C. In Watson the question was whether the source or origin of the policy income was the business activity. At paragraph 32 the Court concluded that the policy income was not 'from' the business activity in question because it was derived from the taxpayer's incapacity to conduct business activity, not from the activity the taxpayer actually undertook.
In your case, the capital gain arising from the sale of investments would not form part of the business activity. As such, the capital gain must be included in your assessable income which causes you to fail the income requirement. Where you can't claim your loss in the current year under the non-commercial loss rules, your losses are simply deferred until a future year.
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