Edited version of private advice

Authorisation Number: 1052167967415

Date of advice: 13 September 2023

Ruling

Subject: Assessable business income

Question

Is the capital gain on the sale of the farmland assessable business income, when being sold in the course of carrying on a business and therefore is not included in the assessable income for the income test in subsection 35-10(2E) of the Income Tax Assessment Act 1997 for non-commercial loss purposes?

Answer

Yes.

This ruling applies for the following period:

1 July 202X to 30 June 202X

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

The partnership is in the business of primary production.

Partner A comes from a family that has been farming for generations.

A contract was entered into for the sale of a property including the livestock and the plant and equipment.

The property was sold as part of the business plan the partners have for the future growth of their farming enterprise.

During COVID it was difficult to find employees to work.

The distance made it difficult logistically, with the additional workload and daily travel placing increased pressure on the management of the existing farming operations.

The partnership operates as a viable and profitable farming enterprise on the remaining land owned by the partners.

The partnership has made a loss in the 202X-202X financial year, as the expenses to run the property and the stock holding costs were more than the income they received for the sale of the stock.

The partnership passes the assessable income test, the profits test, the real property test and the other assets test.

Both partners have income over $250,000, which is the result of the capital gain on the sale of this property.

If it were not for the capital gain on the sale of this property, they would both have other income under $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise.

For the 2009-10 and later income years, Division 35 applies 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.

Section 35-10 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses.

You will satisfy the income requirement under subsection 35-10(2E) if the sum of the following is less than $250,000:

a.    your taxable income for that year, disregarding any assessable First home super save (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

For the purposes of paragraph (a), when working out your taxable income, disregard any excess attributable to the business activity for that year that you could otherwise deduct under the ITAA 1997 for that year.

It is accepted that purchasing the land was a direct consequence of carrying on the farming business, and it follows that any capital gain made on the disposal of the land is also a direct consequence of carrying on the farming business.

As any assessable income attributed to the business activity incurring a loss is not included in the taxable income calculation under paragraph 35-10(2E)(a), the capital gain made on the disposal of the land which is attributed to the business activity, is also disregarded.

Due to the capital gain being disregarded for the purposes of paragraph 35-10(2E)(a) each of the partners adjusted taxable income is under subsection 35-10(2E) is less than $250,000. Therefore, they both satisfy the income requirement for the income year ending 30 June 202X.