Edited version of private advice

Authorisation Number: 1051814644920

Date of advice: 18 March 2021

Ruling

Subject: Non-commercial losses - profits test

Question

Do you satisfy the profits test so that the rules under Division 35 of the Income Tax Assessment Act 1997 do not apply to any losses from your share trading business activity in the calculation of your taxable income for the 20XX-XX financial year (FY)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

You satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997).

You commenced the non-primary production business activity of share trading on XX May 20XX in a country outside of Australia.

You submitted an Income Tax Return in Australia for the 20XX-XXFY indicating you were not an Australian resident. You did not record any assessable income from your share trading business activity in the 20XX-XX Income Tax Return.

As an Australian resident for tax purposes you have continued your non-primary production business activity of share trading recording a loss in the 20XX-XX FY and a profit in the 20XX-XX FY and 20XX-XX FY.

You recorded a loss in the 20XX-XX FY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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)

Income Tax Assessment Act 1997 subsection 35-35

Reasons for decision

Division 35 of the ITAA 1997 requires the deferral of losses unless you satisfy the income requirement and you pass one of the four tests in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) in the ITAA 1997.

You satisfy the income requirement as your income for non-commercial loss purposes in the income year prior to the income year of this application was less than $250,000.

Subsection 35-35(1) of the ITAA 1997 states:

The rules in section 35-10 do not apply to a business activity (except an activity carried on by one or more individuals as partners, whether or not some other entity is a member of the partnership) for an income year (the current year ) if, for each of at least 3 of the past 5 income years (including the current year) the sum of the deductions attributable to that activity for that year (apart from the operation of subsections 35-10(2) and (2C) ) is less than the assessable income from the activity for that year.

Further clarification is specified at para 93 in Taxation Ruling 2001/14 in relation to the profits test stating:

The Profits test in section 35-55 requires that the business activity has produced 'profits' in 3 out of the past 5 income years (where this five year period includes the current income year), for the activity to satisfy this test. The term 'profit' refers to the excess of the tax law assessable income from the activity for the income year in question, over the tax law deductions attributable to carrying on the activity in that year (but does not include any deduction deemed attributable to the activity under subsection 35-10(2) in relation to a non-commercial loss deferred from a previous year).

Subsection 6-5(1) ITAA 1997 states your assessable income includes income according to ordinary concepts which is called ordinary income. With further clarification in relation to non-residents found within Subsection 6-5(3) ITAA 1997 that your assessable income includes

(a)  the ordinary income you derived directly or indirectly from all Australian sources during the income yare; and

(b)  other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian Source.

In your case the fifth year relevant to the profits test is the 20XX-XX FY. In that year you were not a resident of Australia for taxation purposes, and you did not record any assessable income in relation to your business activity.

The term profits test refers to the excess of the tax law assessable income from the activity for the income year in question, over the tax law deductions attributable to carrying on the activity in that year. There is a requirement of assessable income within the profits test. You have not met the criteria of the profits test as you did not have assessable income from the business activity for the income year in question. Therefore, you cannot include any losses from your share trading business activity in the calculation of your taxable income for the 20XX-XX FY.

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