Non Commercial Losses: whether business bank interest is assessable income from the business activity

Is bank interest received from a business bank account that is used solely for the purposes of depositing takings, withdrawing wages and withdrawing amounts for business expenses, assessable income 'from' the 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.

Yes. Interest received from a business' ordinary working account that is used solely for the purposes of depositing sales proceeds, and withdrawing amounts for business purchases and for wages, is included as assessable income when: (a) applying the loss deferral rule in Division 35, 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.

An individual taxpayer carries on a business activity that commenced after 1 July 2000. The business activity incurs a loss in the income year in question. The taxpayer has a business bank account that they use solely for the purpose of depositing takings, withdrawing wages and withdrawing amounts for business purchases. The taxpayer earns interest on the bank account in the income year in question.

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.

To be included as assessable income for the purposes of Division 35 of the ITAA 1997, in particular the Assessable income test, income must be classified as assessable under Division 6 of the ITAA 1997 for the year in which the taxpayer wishes to apply the Assessable income test. Business bank interest is a business receipt that is generally categorised as ordinary assessable income under Division 6 of the ITAA 1997.

Additionally, the assessable income must be 'from' the business activity 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 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. Federal Commissioner of Taxation (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

Interest earned on a business bank account that the taxpayer uses solely for the purpose of depositing takings, withdrawing wages and withdrawing amounts for business purchases is directly sourced from, or originating from, the business activity. These activities are part of the usual course of any business' activities and interest earned from an account used for these purposes will be from the business.

Therefore, bank interest received from a business bank account that is used solely for depositing takings and withdrawing wages and expenses is income from the business as it is derived in the ordinary course of the taxpayer's business activity. Interest earned in these circumstances should be included as assessable income for the purpose of applying the loss deferral rule in subsection 35-10(2) of the ITAA 1997 and for the purpose of determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied.