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Authorisation Number: 1011779328896

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Ruling

Subject: Farm management deposit

Question

Does the repayment of funds from a farm management deposit (FMD) cause you to fail the income requirement under subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are a partner in a partnership which conducts a primary production business.

The partnership made a loss in the 2009-10 financial year.

In previous years, each partner deposited amounts generated from the primary production business into FMDs.

All eligibility rules for FMDs have been satisfied.

In the 2009-10 financial year you withdrew more than $250,000 from the FMD.

The funds repaid were used for running expenses for the primary production activities.

You do not have any other income besides income from the primary production business.

If your FMD withdrawal was included in your adjusted taxable income, it would cause your adjusted taxable income to exceed $250,000.

The business meets all four tests in sections 35-30, 35-35, 35-40 and 35-45 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 393-15(2) of Schedule 2G

Income Tax Assessment Act 1997 Subsection 35-10(2E)

Reasons for decision

Summary

The assessable income resulting from the withdrawal of the FMD is properly attributable to your partnership business activity. Therefore, the amount is not included in your adjusted taxable income for the purposes of determining whether you exceed the $250,000 income requirement under subsection 35-10(2E) of the ITAA 1997.

Detailed reasoning

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).

As your FMD is properly attributable to your partnership business activity (the income is from the partnership activity), the repayment will be excluded from your adjusted taxable income and you will satisfy the income requirement.

As you satisfy the income requirement and meet at least one of the four non-commercial loss tests, you are not required to defer your share of any loss from the partnership. Therefore, the special circumstances discretion does not need to be considered.