Dependant Tax Offset - separate net income - non commercial losses

Is a non commercial loss incurred by a taxpayer's dependant taken into account in calculating separate net income for the purpose of a dependant tax offset under section 159J of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. A non commercial loss incurred by a taxpayer's dependant is taken into account in calculating separate net income for the purpose of a dependant tax offset under section 159J of the ITAA 1936.

The taxpayer's spouse carried on a business as a sole trader during the income year.

The business was a non-commercial business activity.

The taxpayer's spouse incurred a loss from this non-commercial business activity.

A resident taxpayer who contributes to the maintenance of a dependant may be able to claim a tax offset under section 159J of the ITAA 1936.

A dependant includes the spouse of the taxpayer under subsection 159J(2) of the ITAA 1936.

The amount of the tax offset may be reduced in part or in full by the separate net income derived by the dependant during the income year under subsection 159J(4) of the ITAA 1936.

Subsection 159J(6) of the ITAA 1936 specifically includes some receipts and excludes others from the calculation of 'separate net income' however none are relevant to the taxpayer's circumstances.

Taxation Ruling IT 2391 discusses what is meant by separate net income and makes it clear that 'separate net income' is not the same as 'taxable income'. IT 2391 provides at paragraph 6: 'Subject to the exceptions in the preceding paragraph "separate net income" includes all receipts which have the character of income whether they are liable to income tax or whether there are provisions in the income tax laws specifically exempting them from liability.'

Taxation Ruling IT 2391 then discusses the issue of deductions at paragraph 9 which provides: 'The net income is, broadly, the amount remaining after deducting from the gross income expenses which are regarded, according to ordinary accountancy and commercial principles, as a direct charge against the income. It is not the same as taxable income.'

The income that a dependant receives as a result of the operation of a business is income according to ordinary concepts and is therefore included in their separate net income. As it is necessary to determine 'net' income, the expenses the dependant incurs in obtaining that income are deducted. This includes some expenses which would not be allowable as a deduction in determining taxable income (for example travel from home to work).

Deferred non-commercial business losses are losses sustained by a partnership or sole trader in the operation of their business (considered to be a non-commercial business) that would have normally been allowable against other income but are deferred as a result of the operation of Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997). Those losses are required to be deferred to some time in the future where the business has some profit or passes at least one of four tests or the Commissioner exercises his discretion to allow the losses. If the losses are deferred, they are excluded from the taxpayer's taxable income.

Where the dependant is a partner of a partnership or is a sole trader of a non-commercial business, the income of that business will be included in their separate net income. The expenses they incur in relation to that income will taken into account in calculating their separate net income. If those expenses are greater than the income the resulting loss will be applied against other income the dependant may have received in order to determine the dependant's separate net income.

Accordingly, the deferred non-commercial losses will be taken into account in the year in which they arise in determining the taxpayer's dependant's separate net income for the purposes of calculating the dependant tax offset under section 159J of the ITAA 1936.