Non Commercial Losses: Assessable income test - whether a balancing adjustment is income 'from' the business activity.

Is the balancing adjustment that arises where the termination value of a depreciated asset used in a business activity exceeds the written down value, assessable income 'from' the business activity when: (a) applying the loss deferral rule 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?

Yes. The balancing adjustment that arises where the termination value of a depreciating asset used in a business activity exceeds the written down value, is assessable income 'from' the business activity for the purposes of applying either: (a) subsection 35-10(2) of the ITAA 1997; or (b) 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.

During the income year ending 30 June 2002, and in the course of carrying on the business activity, the taxpayer sold a depreciating asset which had been used in conducting the business activity. As the amount the taxpayer received for the asset was greater than the adjustable value, subsection 40-285(1) of the ITAA 1997 included a balancing adjustment amount in the taxpayer's assessable income.

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').

In this case, the balancing adjustment amount is assessable 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 balancing adjustment amount has its source or origin in the conduct of the business activity.

While the balancing adjustment amount is statutory income, and only brought to account by the operation of subsection 40-285(1) of the ITAA 1997, the use of the asset in the activity creates the causal relationship between the income and the business activity.

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