Edited version of private advice

Authorisation Number: 1052265175891

Date of advice: 26 June 2024

Ruling

Subject: Non-commercial loss

Question

Will the assessable Farm Management Deposit income that arises from the operation of Division 393 of the Income Tax Assessment Act 1997 (ITAA 1997) be considered assessable income from the business activity when applying the loss deferral rule in Division 35 of the ITAA 1997, and therefore be excluded from the income requirement calculation, in respect of the income year ended 30 June 20XX?

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 was previously a member of the Primary Production Partnership, XXX Partnership which commenced in 20YY. The taxpayer exited the XXX Partnership on DD MM YY.

Since 20YY, the XXX Partnership has carried on the primary production business of livestock farming at XXX Property.

For the income years ending 30 June 20YY and 30 June 20YY, the XXX Partnership provided details of their livestock sales, livestock purchases, and primary production expenses.

At the time the taxpayer was a member of the XXX Partnership, the taxpayer lodged Farm Management Deposits (FMD's)

Before the cessation of the XXX Partnership, the taxpayer commended a new Primary production Partnership, the XXX Partnership 2.

The XXX Partnership 2 carries on its primary production business of livestock farming at XXX Property 2.

For the income years ended 30 June 20YY and 30 June 20YY, the XXX Partnership 2 provided details of their livestock sales, livestock purchases, and primary production expenses:

The taxpayer withdrew a FMD amount. This withdrawal contributed to the XXX Partnership 2 Bank Account and allowed the XXX Partnership 2 to meet its ongoing primary production operating expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

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

Does IVA apply to this private ruling?

No.

Reasons for decision

For the 20YY-YY and later income years, Division 35 will apply 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.

The income requirement, set out in subsection 35-10(2E), prevents you from accessing the four tests where your adjusted taxable income exceeds $250,000 (that is, your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses but excluding your business losses).

However, not all your assessable income is included in calculating your adjusted taxable income. Any assessable income attributed to the business activity incurring the loss is not included in your adjusted taxable income. This is because it forms part of the business losses, which are disregarded (the business losses are calculated by deducting the expenses attributed to the business activity from the assessable income 'from' that business activity).

Guidance on assessable income that arises as a result of the withdrawal of a FMD is provided in Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses. Paragraph 92E of TR 2001/14 states that:

92E. In relation to the assessable income that arises as a result of the withdrawal of a FMD, the Commissioner accepts that where the FMD deposit was funded by the primary production business activity and the withdrawal occurs while that same business activity is conducted, the extent and nature of the business activity is such that the relationship between that assessable income and the conduct of the business means that the assessable income will be from the business activity for the purposes of Division 35.

Therefore, if the initial FMD deposit was funded from a primary production business activity, and the withdrawal occurs whilst that same business activity is being conducted, the withdrawal will be excluded from your adjusted taxable income for the purposes of subsection 35-10(2E).

Paragraphs 28 and 29 of TR 2001/14 also discusses the operation of the non-commercial business tests when the business activity is conducted by individuals in a partnership. Paragraph 29 states that:

29. ...the individual partner takes into account their share of the deductions and assessable income attributable to their interest in the partnership, along with any of their own assessable income and allowable deductions they have from the same, or a similar, *business activity outside of the partnership (subsection 35-35(2))

The guidance provided in TR 2001/14 above, Example 2A at paragraphs 130A to 130D, and Example 5A at paragraphs 136A to 136D can be relied on for the Commissioner's view on how the income requirement in subsection 35-10(2E) is considered.

Guidance on this issue is also found in Taxation Ruling TR 2003/3 Income tax: Non-Commercial losses - application of subsections 35-1(2) and 35-10(4) of the Income Tax Assessment Act 1997 to business activities carried on in partnership. Paragraph 4 of TR 2003/3 states:

4. The object of Division 35 is to apply certain rules, where appropriate. To each separate business activity carried on by an individual taxpayer, whether alone or in a partnership with others (see subsection 35-3(1) and 35-10(1)).

Paragraph 13 of TR 2003/3 states:

13. As noted in paragraph 4, it is clear from the scheme of Division 35 that its rules are intended to operate in respect of ach separate business activity conducted by an individual, irrespective of whether the activity is carried on by them alone, or in a partnership.

Application to your circumstances

The primary production activity of the XXX Partnership included livestock farming and related activities. The primary production activities of the XXX Partnership 2 include livestock farming and related activities.

The initial FMD deposit was funded from the primary production business activities of the XXX Partnership. The FMD was withdrawn and contributed to the XXX Partnership 2 which allowed XXX Partnership 2 to meet its ongoing primary production operating expenses.

Since both Partnerships carry on the same, or similar primary production activity of livestock farming, the assessable income that arises from the withdrawal of the relevant FMD will be considered assessable income from the business activity for the purposes of Division 35, and as such, will be excluded from the income requirement calculation in subsection 35-10(2E) in respect of the income year ended 30 June 20YY.