Non Commercial Losses: is exempt foreign employment income included as assessable income from an unrelated source

Is foreign employment income included as assessable income from an unrelated source when deciding whether the Exception to Division 35 in subsection 35-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies?

No. The foreign employment income in this case is exempt income under section 6-20 of the ITAA 1997 and is not taken into account in determining whether the $40,000 threshold in subsection 35-10(4) of the ITAA 1997 is exceeded.

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)

Subsection 35-10(4) of the ITAA 1997 will apply to preclude a loss from either a primary production business activity or a professional arts business activity being deferred if the taxpayer's total assessable income (excluding any net capital gain) 'from other sources that do not relate to that activity is less than $40,000' (paragraph 35-10(4)(b) of the ITAA 1997). The words 'assessable income' in subsection 35-10(4) of the ITAA 1997 have the same meaning as they do in section 35-30 of the ITAA 1997.

Subsection 6-1(3) of the ITAA 1997 provides that exempt income is not assessable income. Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax under a Commonwealth law. Where an amount of foreign employment income' is made exempt from income tax under section 23AG of the ITAA 1936, it is therefore an amount of exempt income under subsection 6-20(1). Subsection 6-1(3) of the ITAA 1997 provides that as an amount of exempt income, it is not an amount of assessable income.

In this case, the foreign employment income is exempt income under section 6-20 of the ITAA 1997 and is not taken into account in determining whether the $40,000 threshold in subsection 35-10(4) of the ITAA 1997 is exceeded.