Edited version of private advice

Authorisation Number: 1052233875473

Date of advice: 20 March 2024

Ruling

Subject: Non-commercial loss - income requirement

Question 1

Is the capital gain on the sale of the asset 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 (ITAA 1997) for non-commercial loss purposes?

Answer

Yes.

Question 2

Will the taxpayer satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 for non-commercial loss purposes?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The taxpayer has been in the business of primary production since 1 July 20YY with the enterprise mainly being conducted at X. In previous years, the business was also conducted at the Property ABC.

For the past four years the primary production business has been in a loss position due to the property being in drought or drought affected conditions.

The taxpayer has a taxable loss for their primary production business for the income year ended 30 June 20XX.

The taxpayer also has income not related to their business activities from a number of other sources.

In the income year ended 30 June 20ZZ, the Taxpayer sold Property ABC and elected to use the small business rollover exemption. The replacement period end date was in the current financial year. No suitable replacement asset was located, and this amount is therefore assessable in the income year (CGT Event J5).

Property ABC also had a deferred capital gain amount. Therefore, CGT Event J2 also occurred in the current financial year and an additional CGT amount is assessable in the income year.

The taxpayer had income over $XX which is the result of the capital gain on the sale of Property ABC.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 35-10

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

Income Tax Assessment Act 1997 section 4-15

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

The capital gain on the sale of Property ABC is assessable business income, as it was sold in the course of carrying on the business. Therefore, it is not included under paragraph 35-10(2E)(a) for the purpose of calculating whether the income test is met in subsection 35-10(2E).

Detailed reasoning

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 saver (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.

Any assessable income attributed to a business activity incurring a loss is not included in the adjusted taxable income calculation for the purposes of subsection 35-10(2E). This is because it forms part of the business losses, which is disregarded (the business losses are calculated by deducting the expenses attributed to the business activity from the assessable income 'from' that business activity).

The full Federal Court in Watson v. Deputy Commissioner of Taxation [2010] FCAFC 17; (2010) 182 FCR 104; 2010 ATC 20-167; (2010) 75 ATR 224 (Watson) held that the word 'from' indicates the starting point, source or origin of the assessable income. It was held in paragraph 31 that:

'the starting point or source of the assessable income must be the business activity..., 'then' the extent and nature of that business activity must be identified... [to] determine whether or not particular income is 'from' it'.

Application to your circumstances

The purchasing of the primary production land, Property ABC, was a direct consequence of carrying on the primary production business. Therefore, it follows that any capital gain made on the disposal of this land is also a direct consequence of carrying on the primary production business and the source of the assessable income is the business activity.

The capital gain on the sale of Property ABC is attributed to the business activity incurring a loss and is therefore not included in the adjusted taxable income calculation for the purposes of subsection 35-10(2E).

Question 2

Summary

Based on the figures submitted with the private ruling application the taxpayer satisfies the income requirement in subsection 35-10(2E) for the income year ended 30 June 20XX.

Detailed reasoning

The income requirement in subsection 35-10(2E) is satisfied for an income year if the sum of your taxable income for that year, your reportable fringe benefits total for that year, your reportable superannuation contributions for that year and your total net investment losses for that year is less than $250,000.

Taxable income is defined in section 4-15 as assessable income minus deductions. The term 'deduction' is defined in subsection 995-1(1) to mean an amount that you can deduct.

Application to your circumstances

The capital gain on the sale of Property ABC is attributed to the business activity incurring a loss and is therefore not included in the adjusted taxable income calculation for the purposes of subsection 35-10(2E).

The taxpayer's taxable income, disregarding any assessable FHSS released amount for that year any excess mentioned in subsection 35-10(2) was less than $250,000.

The taxpayer did not have any reportable fringe benefits, reportable superannuation contributions or net investment losses for the income year ended 30 June 20XX.

Therefore, as the sum of the amounts under paragraphs 35-10(2E)(a) to (d) is less than $250,000, the taxpayer satisfies the income requirement in subsection 35-10(2E).