Non Commercial Losses: assessable income - whether Landcare grant is income 'from' the business activity

Is a Landcare grant received from the National Landcare Program considered to be assessable income 'from' the business activity when: (a) applying the loss deferral rule 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. If there is a sufficiently proximate connection between the grant and the carrying on of the business, the landcare grant is considered to be assessable income 'from' the business activity for a taxpayer who is carrying on a business when: (a) applying the loss deferral rule in Division 35, in subsection 35-10(2) of the ITAA 1997; and (b) determining whether the Assessable income test in section 35-30 of the ITAA 1997 has been satisfied.

An individual taxpayer carried on a primary production business that commenced in July 2001.

During the 2002-03 income year the taxpayer applied for and was granted a landcare grant from the Commonwealth Department of Agriculture, Fisheries & Forestry which administers the National Land Care Program. This grant was provided to enable the taxpayer to reclaim gully erosion on the farm property by fencing and planting native vegetation. The property is the major asset in the primary production business.

Division 35 of the ITAA 1997 must be considered by all individual taxpayers who carry on a business activity. Unless the business activity satisfies one of the four tests (Assessable income test, Profits test, Real Property test or Other Assets test), the primary production business exception in subsection 35-10(4) of the ITAA 1997 applies, or the Commissioner exercises the discretion in section 35-55 of the ITAA 1997; the loss deferral rule in subsection 35-10(2) of the ITAA 1997 will apply to defer the loss to a future income year.

The Assessable income test in section 35-30 of the ITAA 1997 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'.

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).

In this case, the landcare grant is provided to assist the taxpayer with restoring and conserving land and in solving land degradation problems. It is paid to maintain and improve the land which is the major business asset of the primary production business. Hence there is a sufficiently proximate connection between the grant and the carrying on of the business.

The landcare grant received by the taxpayer is considered to be 'from' the business activity as it is provided to sustain the business asset for the carrying on of the primary production business. Hence, it is included as assessable income for the purposes of both subsection 35-10(2) and section 35-30 of the ITAA 1997.

In addition, it follows that the landcare deduction is attributable to the primary production business activity.