Non Commercial Losses: Assessable income test - reasonable estimate

Can a taxpayer who has made a reasonable estimate of assessable income and thereby satisfied the Assessable income test in section 35-30 of the Income Tax Assessment Act 1997 (ITAA 1997) later revoke that estimate?

No. Where a taxpayer has provided a reasonable estimate of the assessable income from their business activity for an income year, which results in the Assessable income test in section 35-30 of the ITAA 1997 being satisfied, they cannot later revoke that estimate.

An individual taxpayer commenced a business activity in June 2001. The taxpayer made a loss from this activity in the 2000-01 income year. The assessable income from the business activity for the period 1 June to 30 June 2001 was $6,000.

A reasonable estimate of assessable income that would have been derived from the business activity had it been carried on throughout the 2000-01 income year was made by considering such factors as (a) the amount that could have been derived for the full income year based on a pro rata calculation of the assessable income already derived for the month of June, that is, $6,000 (b) the cyclical nature of the taxpayer's business activity which may result in variations in the pattern of receipts (c) the type of business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry.

Based on a pro rata calculation of $6,000 per month for a full income year and given the nature of the business activity, the taxpayer made a reasonable estimate of assessable income of approximately $72,000 for the 2000-01 income year.

In the 2001-02 income year the business activity made assessable income in excess of $200,000. The taxpayer requested an amendment to the 2001 income tax return on the basis that the estimate should be revoked and that the Assessable income test should now be considered not to have been satisfied. The purpose of the amendment was to enable the taxpayer to claim the loss previously claimed in the 2000-01 income year against assessable income in the 2001-02 income year.

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))

*Note : In addition to these requirements subsection 35-10(2E) of the ITAA 1997 imposes an income requirement with effect from 1 July 2009.

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 (a) the income of assessable income from the business activity for the year is at least $20,000 (paragraph 35-30(a)); or (b) you started to carry on the business activity, or stopped carrying it on, during the year - a reasonable estimate of what would have been the amount of that assessable income if you had carried on that activity throughout the year is at least $20,000. (paragraph 35-30(b))

Where a business activity is not in operation for the whole of an income year therefore, paragraph 35-30(b) of the ITAA 1997 applies, so that the Assessable income test is then based on a reasonable estimate of what the assessable income from the business activity would have been if the activity was carried on for the whole of that year.

The requirement in paragraph 35-30(b) of the ITAA 1997 is that they make a 'reasonable estimate' of what their assessable income would have been had they carried on the business for a full year. Paragraph 62 of Taxation Ruling TR 2001/14 discusses how a reasonable estimate is made.

There is nothing contained in the ITAA 1997 that would allow the taxpayer to revoke a reasonable estimate made for the purposes of section 35-30 of the ITAA 1997. At the time the 2000-01 tax return was lodged, the information it contained was correct.

Accordingly, the making of a reasonable estimate under Division 35 of the ITAA 1997 for the purposes of determining whether a business activity satisfies the Assessable income test, cannot later be revoked.