Non Commercial Losses: loss deferral rule - long-term averaging of primary producers' tax liability

Are amounts that are deferred by the loss deferral rule in subsection 35-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) included when calculating the primary producer averaging adjustment under Division 392 of the ITAA 1997?

No. Amounts that would otherwise be deductible in the income year which have been deferred by the Rule in subsection 35-10(2) of the ITAA 1997 are not amounts that a taxpayer can deduct in that year of income and are not included in the calculation of the primary producer averaging adjustment in Division 392 of the ITAA 1997.

An individual taxpayer carried on two primary production business activities in Australia for the income year ended 30 June 2002. One of the activities incurred a loss which was deferred to a future income year by subsection 35-10(2) of the ITAA 1997. The taxpayer's income tax liability for the income year ended 30 June 2002 was subject to the primary producers' averaging provisions in Division 392 of the ITAA 1997.

Taxable income

All taxpayers are required to calculate their taxable income for an income year. Section 4-15 of the ITAA 1997 defines 'taxable income' as assessable income minus deductions. The term 'deduction' is defined in subsection 995-1(1) of the ITAA 1997 to mean an amount that you can deduct.

Loss deferral rule

The Rule in subsection 35-10(2) of the ITAA 1997 operates to defer the amount by which deductions attributable to a business activity exceed the assessable income from the business activity for the year of income. Paragraphs 35-10(2)(a) and 35-10(2)(b) provide that the excess deductions are treated as if they were not incurred in that income year, but are an amount attributable to the activity that can be deducted from the assessable income of the business activity in the next year the activity is carried on.

As a result the excess deduction amount does not satisfy the definition of a deduction in the income year and is not an amount that can be included in the calculation of taxable income for that income year.

Primary producer averaging adjustment calculation

The primary producer tax liability averaging rules are contained in Division 392 of the ITAA 1997.

Two sections in Division 392 of the ITAA 1997 are directly affected by amounts deferred by the Rule in subsection 35-10(2) of the ITAA 1997. Relevantly, for the income year, section 392-15 of the ITAA 1997 requires 'basic taxable income' to be calculated and section 392-80 of the ITAA 1997 requires 'taxable primary production income' to be determined.

The 'basic taxable income' of a primary producer is calculated by making adjustments to the taxpayer's taxable income. On that basis, when determining the quantum of 'basic taxable income', the 'excess deductions' deferred by subsection 35-10(2) of the ITAA 1997 are not included in the calculation.

Similarly, determining a taxpayer's 'taxable primary production income' requires that a taxpayer's taxable income is dissected into primary production and non primary production components. When identifying primary production deductions for the income year, Step 1 of the Method statement in subsection 392-80(3) of the ITAA 1997 requires that amounts included are amounts that 'you can deduct', except for apportionable deductions. In the context of calculating the primary production deductions and taxable primary production income under subsection 392-80(1)of the ITAA 1997, the Method statement refers to deductible amounts (or parts of amounts) that continue to be able to be claimed in the process of calculating taxable income under section 4-15 of the ITAA 1997. The amount of 'excess deductions' that you cannot deduct because of the operation of subsection 35-10(2) of the ITAA 1997 will also be an amount that will not meet the description of an amount 'you can deduct' for the purposes of Step 1 in subsection 392-80(3) of the ITAA 1997.

In this case the taxpayer's 'taxable primary production income' for the purposes of section 392-80 of the ITAA 1997 would be calculated without including the amount deferred by the Rule in subsection 35-10(2) of the ITAA 1997. Consequently, the excess deductions (or parts of amounts), that are deferred by the Rule in subsection 35-10(2) of the ITAA 1997 are not included when calculating the taxpayer's primary producer averaging adjustment.