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Ruling

Subject: Non-commercial losses

Question

Will the non-commercial loss provisions contained in Division 35 of the Income Tax Assessment Act 1997 apply to defer the partnership losses incurred in the 2011-12 financial year?

Answer

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You operated a primary production business under a partnership structure.

You changed your business structure to commence a new partnership.

Both of these enterprises were in the business of grain growing.

Due to the seasonal nature of the business of grain growing, the majority of income within a financial year is earned in July-March and the majority of expenses incurred in April-June.

You made a profit from your original business structure and a loss in the new business structure.

If the business had traded under the one structure the overall profit.

It is anticipated that the new partnership that has been established will be profitable in the 2012-13 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(3)

Reasons for decision

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:

· the type of activities being carried on

· the location the activities are carried out

· the types of assets used

· the types of goods and services produced and related market conditions

· interdependency between the activities

· commercial links between the activities.

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

In your case, the particular business activity is primary production and was initially operated by one partnership and more recently by a different partnership structure. The business has continued on after the change in ownership therefore, it is considered that there is one business activity involved.

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