Non Commercial Losses: Assessable income test - whether an increase in the value of trading stock on hand for an income year is assessable income 'from' the business activity.

Is the amount that is included in assessable income under subsection 70-35(2) of the Income Tax Assessment Act 1997 (ITAA 1997), where the value of closing trading stock is greater than the value of opening stock, assessable income 'from' the business activity when: (a) applying the loss deferral rule in subsection 35-10(2) of the ITAA 1997; or (b) determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied?

Yes. The amount that is included in assessable income by subsection 70-35(2) of the ITAA 1997 is assessable income 'from' the business activity for the purposes of applying either:

subsection 35-10(2) of the ITAA 1997; or

section 35-30 of the ITAA 1997.

An individual taxpayer conducted a business activity during the income year ending 30 June 2002. The expenses incurred that were attributable to that business activity exceeded the assessable income derived from general trading in that year.

The taxpayer undertook a stock take at the end of the income year to determine the value of trading stock on hand.

As the value of the trading stock on hand at the end of the income year was greater than the value of the opening stock for that year, subsection 70-35(2) of the ITAA 1997 included the increase in the value in the taxpayer's assessable income for that income year.

Division 35 of the ITAA 1997 will apply to defer a non-commercial 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; or • 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.

Whether an amount of income is 'from' a business activity, depends on whether that activity is the source or origin of that income, applying 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 the context of paragraph 23(o) of the Income Tax Assessment Act 1936 , and whether income is 'from the working of a mining property').

The increase in the value of the taxpayer's trading stock is income that is sourced in, originating from, and incidental to the carrying on of the business activity. The use of this type of asset is a recognised and accepted incident of carrying on that sort of business and therefore the increase in the value of the trading stock has its source or origin in the conduct of the business activity.

The increase in the value of the taxpayer's trading stock is statutory income and only brought to account by the operation of subsection 70-35(2) of the ITAA 1997. Nevertheless, trading stock are the things in which a business trades which creates the causal relationship between the income and the business activity.

For these reasons, the taxpayer's assessable income, in the form of the increase in the value of trading stock, is assessable income 'from' the business activity for the purposes of subsection 35-10(2) and section 35-30 of the ITAA 1997.