Edited version of your private ruling

Authorisation Number: 1012449273370

Ruling

Subject: Non commercial losses

Question

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 2011

The scheme commences on:

1July 2010

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 sole trader in a primary production business.

You are a farmer.

You have incurred considerable losses on your farm over the past few years due to severe drought conditions.

In previous financial years in which the activity was profitable, you deposited funds earned from the activity into FMDs.

Your bank requested that you withdraw from your farm management deposit (FMD) to reduce your overall debt with them.

The FMD withdrawal is over the $250,000 threshold.

You meet all four tests for non-commercial loss purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 393.

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 farming 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 Income Tax Assessment Act 1997 (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 farming activity (the income is from the farming activity), the repayment will be excluded from your adjusted taxable income for the purposes of Division 35 of the ITAA 1997.

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 loss. Therefore, the special circumstances discretion does not need to be considered.