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Is employment income of the taxpayer, a lecturer, 'from' a professional arts business activity when: (a) applying the loss deferral rule in Division 35, in subsection 35-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997), or (b) determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied.

No. Assessable income from the taxpayer's employment is not from a business activity for the purposes of applying either subsection 35-10(2) or section 35-30 of the ITAA 1997.

The taxpayer is an individual who commenced a 'professional arts business', as defined in subsection 35-10(5) of the ITAA 1997, before 1 July 2000. They expect that their otherwise allowable deductions attributable to this activity will exceed the assessable business income from this activity for the income year ending 30 June 2001.

During the current income year the taxpayer is employed as a lecturer in art at a tertiary institution. It is a requirement of their employment that they practise as an artist and produce and exhibit works of art. Some of these works are sold as part of the taxpayer's professional arts business.

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity carried on by a taxpayer who is an individual, unless: • their business activity satisfies one of the four tests in Division 35, • the Commissioner has exercised the discretion in section 35-55 for the activity, or • the individual comes within the Exception to Division 35, contained in subsection 35-10(4).

(refer subsection 35-10(1) of the ITAA 1997)

One of the four tests is the Assessable income test in section 35-30 of the ITAA 1997, which provides that the loss deferral rule in section 35-10 of the ITAA 1997 will not apply for an income year where the assessable income 'from' the business activity in question 'is at least $20,000'.

If none of the conditions in subsection 35-10(1) of the ITAA 1997 are satisfied, the loss deferral rule applies. Consequently, the taxpayer is required to calculate the amount of their non-commercial loss, for the purposes of subsection 35-10(2) of the ITAA 1997, that is deferred. The amount of this 'loss' is calculated as the excess of their otherwise allowable deductions for this income year, attributable to the business activity, over any assessable income 'from' this activity. The deferred amount cannot be taken into account when calculating their taxable income for the income year in question.

In this case, if the taxpayer's employment income is 'from' their business activity, then there would be no excess of deductions to which subsection 35-10(2) of the ITAA 1997 could apply.

Whether an amount of income is 'from' a business activity, depends on whether that activity is the source or origin of that income based on the ordinary meaning of 'from' (see BHP Petroleum (Timor Sea) Pty Ltd & Ors v. Minister for Resources (1994) 49 FCR 155; (1994) 28 ATR 16); or whether that income is an incident of carrying that activity on (see Kidston Goldmines Ltd v. FC of T (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

In this case, the taxpayer's employment income is neither sourced in, nor originating from, their professional arts business. The source of the employment income is the relevant terms of their contract of employment, and its origin is the employment relationship that the taxpayer has with their employer.

Even though carrying on their professional arts business is an incident of the taxpayer's employment, it does not follow that their employment is an incident, in the relevant sense, of carrying on their professional arts business.

The assessable income from the taxpayer's employment is therefore not 'from' their professional arts business, for the purposes of either subsection 35-10(2) or section 35-30 of the ITAA 1997.