Edited version of private advice

Authorisation Number: 1051999860346

Date of advice: 28 June 2022

Ruling

Subject: Non-commercial loss

Question

Did the Taxpayer satisfy the income requirements under subsection 35-10(2E) of the Income Tax Assessment Act 1997 ('ITAA 1997') for non-commercial loss purposes in the 20XX-YY financial year?

Answer

Yes.

This ruling applies for the following periods

X XX 20XX to Y YY 20YY

The Scheme commences on

X XX 20XX

RELEVANT FACTS AND CIRCUMSTANCES

1.      The Taxpayer resides at XYZ.

2.      The Taxpayer carries on a primary production business. During the financial year ending Y YY 20YY, the business was carried on by 2 partnership entities - Partnership A (X XX 20XX - Y YY 20XX) and Partnership B (Z ZZ 20XX- Y YY 20YY).

History of the dairy farming business

3.      From 19XX the original partner carried on a primary production business in partnership with his wife and son, the Taxpayer's husband.

4.      The original partner passed away on X XX 20ZZ.

5.      The original partner's interest in the business was inherited in equal shares by the Taxpayer and her husband. The Taxpayer joined the other partners on A AA 20AA

6.      Another original partner passed away on Y YY 20XX.

7.      During the financial year ending Y YY 20YY, the primary production business was carried on as Partnership A.

8.      The other original partner's interest in the business was inherited in equal shares by the Taxpayer and her husband.

9.      From X XX 20XX, the primary production business was carried on by the new 50: 50 partnership of the Taxpayer and her husband (Partnership B).

History of the interest in the shareholding in the Co-operative

10.   From 19XX, the partnership of the two original partners and their son, was a member of an industry Co-operative.

11.   In those days, the entity or associated individuals were required to hold a minimum number of shares and were required to acquire additional shares based on the quantity of products supplied to the Co-operative.

12.   The shares were held by the partnership and each partner only had an interest in the partnership assets and did not hold the shares individually.

13.   After listing of the shares on the Australian stock exchange in XX 20ZZ, the entity or associated individuals were no longer required to hold the shares in order to supply their produce to the factory.

14.   Due to the drought, the partnership sold some shares in 20XY to fund the purchase of fodder and associated freight, the capital gain of which was accounted for in the individual partner's returns at the time.

15.   The only shares that have been acquired since the listing on the Australian Stock Exchange were the shares allotted under the initial and only dividend reinvestment plan the company offered in 20XY and those allotted shares were sold in 20YX.

16.   No further shares have been acquired. All shares held are shares that the partnership was required to acquire as a supplier to the industry Co-operative.

Income requirements under subsection 35-10(2E) ITAA 1997

17.   The assessable gains following the sale of the shares and fully franked dividends distributed by the partnership has given each of the partners, the Taxpayer and her husband, a total income from other sources above the $250,000 limit.

18.   Following the continued increased expenditure associated with severe impact from the 2019/20 bush fires, and the deduction of the balance of the small business pool under temporary expensing rules, the business has incurred a loss in both partnership entities - Partnership A and Partnership B.

19.   For the financial year ending Y YY 20YY, the net amounts directly attributed to the 2 partnership business activities was a loss of $xyz (which includes reconciliation adjustments).

20.   Fully franked dividends were paid on X XX 20XX and Y YY 20YY, a total of $xxx was received by Partnership B. The Taxpayer received a distribution of $yyy (including the $xy franking credits).

21.   Shares were sold in XX and YY 20XX, while still trading in Partnership A.

22.   The Taxpayer had a xx% interest in the shareholding and had a gross capital gain of $xyz.

Information provided

23.   You have provided a number of documents containing detailed information in relation to the Taxpayer, including:

•           Private Binding Ruling ('PBR') Application, dated X YY 20ZZ

•           Response to further questions provided - Financial statements.

24.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 392-80(2)

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

The Taxpayer satisfies the income requirements under subsection 35-10(2E) of the Income Tax Assessment Act 1997 ('ITAA 1997') for non-commercial loss purposes in the financial year ending Y YY 20YY.

DETAILED REASONING

25.   Subsection 35-10(2E) of the ITAA 1997 states the following with regard to the deferral of deductions from non-commercial business activities:

You satisfy this subsection for an income year if the sum of the following is less than $250,000:

(a)  your taxable income for that year, disregarding your assessable FHSS released amount for that year;

(b)  your reportable fringe benefits total for that year;

(c)   your reportable superannuation contributions for that year;

(d)  your total net investment losses for that year.

26.   Subsection 392-80(2) of the ITAA 1997 states that:

Your assessable primary production income for the current year is the amount of your basic assessable income for the current year that was derived from, or resulted from, your carrying on a primary production business.

27.   The dividends received from shares acquired by the Taxpayer under the industry Co-operative compulsory share acquisition scheme are assessable primary production income, as defined under subsection 392-80(2) of the ITAA 1997, because there is a close and direct relationship between the dividends received and the primary production business.

28.   Any assessable income attributed to a business activity incurring a loss is not included in the adjusted taxable income calculation in subsection 35-10(2E).

29.   It is accepted that acquiring shares in the Co-operative is a direct consequence of carrying on the dairy farming business, and it follows that any capital gain made on the disposal of the shares, along with any assessable income from any dividends received, is also a direct consequence of carrying on the dairy farming business. The capital gains and dividends received from disposing of or holding such shares are accepted as resulting from carrying on a primary production business.

APPLICATION TO YOUR CIRCUMSTANCES

30.   Based on the above, the dividends as well as the capital gain received from holding or disposing of the shares are primary production income as they result from carrying on the primary production business. Consequently, the Taxpayer satisfies the income requirements under subsection 35-10(2E) of the ITAA 1997 as the amounts do not form part of the calculation of taxable income for the $250,000 threshold.

CONCLUSION

The Taxpayer satisfies the income requirements under subsection 35-10(2E) of the Income Tax Assessment Act 1997 for non-commercial loss purposes in the financial year ending Y YY 20YY.