Non Commercial Losses: Property test and partly used dwelling for business

Can the value of a private dwelling used partly in carrying on a business activity be taken into account for the purpose of the Real property test under section 35-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Section 35-40 of the ITAA 1997 specifically excludes from the Real property test dwellings that are used mainly for private purposes.

The taxpayer carries on a business activity in one room of a six roomed private dwelling. The room is used exclusively for the activity.

The remaining five rooms in the dwelling are used for private purposes.

Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity carried on by a taxpayer who is an individual, unless: • the business activity satisfies one of the four tests in Division 35 of the ITAA 1997, or • the Commissioner has exercised the discretion in section 35-55 of the ITAA 1997 for the activity, or • the individual comes within the Exception to Division 35 of the ITAA 1997, contained in subsection 35-10(4) of the ITAA 1997.

(refer subsection 35-10(1) of the ITAA 1997)

One of the four tests is the Real property test in section 35-40 of the ITAA 1997, which provides that the loss deferral rule in subsection 35-10(2) of the ITAA 1997 does not apply to defer any loss incurred by the individual from the activity for that income year if the total reduced cost bases of real property, or interests in real property, used on a continuing basis in carrying on the business activity in that year is at least $500,000.

The value of the real property is the reduced cost base of the property or interest, or, the market value or interest if the market value is more than its reduced cost base. The meaning of reduced cost base is the same as it is for capital gains tax purposes.

However, where the real property is partly used for carrying on a business and partly for private purposes, section 35-50 of the ITAA 1997 provides only that part of its reduced cost base, market value or other value that is attributable to its use in carrying on the business activity in that year is taken into account.

Subsection 35-40(4) of the ITAA 1997 specifically excludes from the Real property test: • a dwelling, and any adjacent land used in association with the dwelling that is mainly used for private purposes, and • fixtures owned by the individual taxpayer as a tenant.

In this case, only one room of the six-room dwelling is being used to carry on the business activity. Therefore, the dwelling is used mainly for private purposes and the value of the dwelling cannot be taken into account for the purposes of section 35-40 of the ITAA 1997.