Non Commercial Losses: is exempt foreign employment income included as income 'from' a business activity

Is foreign employment income included as income 'from' a business activity when determining whether the Assessable income test in section 35-30 Income Tax Assessment Act 1997 (ITAA 1997) has been satisfied.

No. The foreign employment income in this case is not 'from' the taxpayer's business activity, for the purposes of section 35-30 of the ITAA 1997.

The taxpayer is an individual who commenced a professional arts business, as defined in subsection 995-1(1) 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 current income year.

During the current income year the taxpayer was employed as a lecturer overseas and earned foreign employment income. This income is exempt from income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

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; 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 will not apply for an income year where the assessable income 'from' the business activity in question 'is at least $20,000'.

For an amount to come within section 35-30 of the ITAA 1997, it must be both: (a) 'assessable income', as defined in section 6-1 of the ITAA 1997; and (b) 'from' the business activity, for the income year in question.'

In this case, the question is whether the foreign employment income is income 'from' the business activity in question, and not whether it is assessable income. This is because the test in section 35-30 of the ITAA 1997 looks to the amount of assessable income from the business activity carried on by the individual, rather than the individual's assessable income generally. The income in question, which is exempt under subsection 23AG(7) of the ITAA 1936, was derived by the taxpayer in the capacity of an employee.

Therefore, the taxpayer's foreign employment income will not be taken into account when determining if their business activity has satisfied the Assessable income test in section 35-30 of the ITAA 1997. This is due to the fact that the foreign employment income is not income from a business activity, rather than because it is not assessable income. In this regard we note that occupation as an employee is specifically excluded from the definition of 'business' in subsection 995-1(1) of the ITAA 1997.

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 income from the foreign employment is neither sourced in, nor originating from, the professional arts business. The source and origin of this income is the employment as a lecturer overseas. The income from the taxpayer's employment is therefore not 'from' their professional arts business, for the purposes of section 35-30 of the ITAA 1997.