Edited version of private advice

Authorisation Number: 1052118714451

Date of advice: 17 May 2023

Ruling

Subject: Non-commercial loss real property test

Question 1

With regards to the real property value, can you use the value of the acres used for your primary production business in joint names for eligibility to pass the test, or can you only use half the property due to the joint ownership?

Answer

Yes, you can use the value of acres used for primary production business in joint names for eligibility to pass the real property test.

Question 2

Can you include the value of the neighbour's land used in your primary production business within the real property calculation of value?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a sole trader.

You run a primary production business. You own a specified number of acres of land which is titled in joint names with your spouse.

You provided us with details on the number of acres used for your principal place of residence and the number of acres used to conduct your business activity.

You also conduct your business activity is conducted on another property which is in addition to the land you own in joint title with your spouse.

You do not pay a lease or rent the other property. It is provided free of charge.

You want to apply non-commercial loss rules for the specified financial years by meeting the real property test

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10

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

Income Tax Assessment Act 1997 Subsection 35-40

Reasons for decision

Taxation Ruling 2001/14 clause 16 and 17 states:

If the individual uses real property, or an interest in real property, on a continuing basis in the relevant *business activity, that has a value of at least $500,000, the rules in section 35-10 do not apply (subsection 35-40(1)).

For this test, the following assets are not counted:

•         a *dwelling, and any adjacent land used in association with the *dwelling that is used mainly for private purposes (paragraph 35-40(4)(a)); and

•         fixtures owned by an individual as a tenant (paragraph 35-40(4)(b)).

In your circumstances, the specified number of acres used for private purposes as your principal place of residence are not counted (paragraph 35-40(4)(a)) and will not apply to the real property test.

Taxation ruling 2001/14 does not specify what percentage of the property is to be owned, or whether there are limitations to the number of individuals that can be on a title of the property. It is a requirement that you as the individual use the property on a continuing basis for the relevant business activity and that you have an interest in the property.

Section 35-25(d) of the Income Tax Assessment Act 1997 states that when applying the test in sections 35-30, 35-40 and 35-45 where you carry on a business activity in an income year as a partner ignore any part of the reduced cost bases or other values of assets owned or leased by another partner that are not partnership assets and used in carrying on the activity in that year. You do not carry your business activities as a partner and carry out your business as a sole trader. The remaining specified acres of land are used for your sole trader business activities, and you have an interest in the property as you are listed on the title.

To determine whether you hold relevant interest in a property, financial investments are considered such as ownership and leasing or rental agreements. In your circumstances, for the additional property used, you are not listed on the title to the property and there is no financial agreement or leasing arrangements for the use of the land to carry out your business activity. This property is provided free of charge. Therefore, it is determined that you do not hold an interest in this property to be able to use that land to meet the real property test.