Edited version of your written advice

Authorisation Number: 1012896499113

Date of advice; 16 October 2015

Ruling

Subject: Non-commercial losses $250,000 income requirement

Question

Are carry forward losses taken into account when calculating your taxable income for the purposes of the income requirement under the non-commercial loss provisions?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Your ordinary previous year losses bought forward into the relevant financial year total approximately $200,000.

Your net assessable income, before applying prior year losses, was in excess of $400,000 in the relevant financial year.

You had no reportable fringe benefits, reportable superannuation contributions or net investment losses in the relevant financial year.

Your sole trader business activities each produced over $20,000 in assessable income and an overall loss in the relevant financial year.

Assumption(s)

All figures provided about income and expenses are correct.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 4-15

Income Tax Assessment Act 1997 - Section 8-5

Income Tax Assessment Act 1997 - Section 12-5

Income Tax Assessment Act 1997 - Section 35-10

Income Tax Assessment Act 1997 - Section 35-30

Income Tax Assessment Act 1997 - Section 36-15

Reasons for decision

The concept of taxable income is defined in section 4-15 of the Income Tax Assessment Act 1997 (ITAA 1997) as the difference between your assessable income and allowable deductions. If the deductions equal or exceed the assessable income, you don't have a taxable income.

Section 8-5 of the ITAA 1997 provides that a taxpayer can deduct an amount from their assessable income if there is a provision of ITAA 1997 which allows such an amount to be deducted. Section 12-5 of the ITAA 1997 provides a list of provisions about specific types of deductions, including Division 36 for tax losses from earlier income years.

Section 36-15 of the ITAA 1997 states that if your total assessable income for the later income year exceeds your total deductions (other than tax losses), you deduct the tax loss from that excess. This means that a tax loss from a prior year is an available deduction in calculating your taxable income in the current year.

In your case, your net assessable income, before applying prior year losses, was in excess of $250,000 in the relevant financial year. After applying your prior year losses, your taxable income in the relevant financial year was less than $250,000.

Non-commercial loss provisions

Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 

Under the rule in subsection 35-10(2) of the ITAA 1997 a loss made by an individual from a business activity will not be taken into account unless: 

• the exception in subsection 35-10(4) of the ITAA 1997 applies; or  

• you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or  

• if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

The exception contained in subsection 35-10(2) of the ITAA 1997 does not apply.

Subsection 35-10(2E) of the ITAA 1997 states that you satisfy the income requirement for an income year where the total of your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses for that year are less than $250,000.

As stated above, after applying your prior year losses, your taxable income in the relevant financial year was less than $250,000. You have also stated that you had no reportable fringe benefits, reportable superannuation contributions or net investment losses in the relevant financial year. Therefore, you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997.

Your business activities also produced more than $20,000 in assessable income; satisfying the assessable income test in section 35-30 of the ITAA 1997. As a result, the loss deferral rule in section 35-10 of the ITAA 1997 will not apply to your business losses in the relevant financial year.