Non-commercial losses: income from employment as an art lecturer and the Exception in subsection 35-10(4)

In determining whether the Exception in subsection 35-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) applies, is income from employment as an art lecturer regarded as income from a source that does not relate to a professional arts business?

Yes. Assessable income from the taxpayer's employment as an art lecturer is from a source that does not relate to the taxpayer's professional arts business for the purposes of subsection 35-10(4) of the ITAA 1997. As such, the employment income is taken into account in determining whether the income threshold in subsection 35-10(4) is exceeded.

The taxpayer is an individual who has carried on a 'professional arts business', as defined in subsection 35-10(5) of the ITAA 1997, for some years.

Otherwise allowable deductions attributable to this activity exceeded assessable income from the activity for the income year.

During the income year the taxpayer was employed as a lecturer in art at a tertiary institution.

The conditions of employment required the taxpayer to undertake suitable research on an ongoing basis. This requirement could be met by the production and exhibition of works as a professional artist.

The taxpayer satisfied the research requirement by continuing to carry on a business as a professional artist.

The taxpayer's assessable income for the income year from employment as a lecturer in art was more than $40,000.

The taxpayer satisfied the income requirement in subsection 35-10(2E) of the ITAA 1997 for the income year.

Division 35 of the ITAA 1997 applies to defer a non-commercial 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 of the ITAA 1997; or • the individual comes within the Exception contained in subsection 35-10(4) of the ITAA 1997.

(refer subsection 35-10(1) of the ITAA 1997) Note : with effect from 1 July 2009, subsection 35-10(2E) of the ITAA 1997 imposes an income requirement that also has to be satisfied.

The Exception in subsection 35-10(4) of the ITAA 1997 provides that a loss from either a primary production business activity or a professional arts business activity is not 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)). If assessable income is from other sources that do relate to the activity, it will not be taken into account in determining if the $40,000 threshold is met.

Whether a source of income relates to a business activity is a matter of overall impression. It requires an association or connection between the two, but the required extent of that association or connection will depend on the purpose and context of the provision in question (see Tooheys Ltd v. Commissioner of Stamp Duties (NSW ) (1961) 105 CLR 602, Secretary, Department of Foreign Affairs and Trade v. Boswell (1992) 36 FCR 367).

The purpose and context of subsection 35-10(4) of the ITAA 1997 do not suggest that any indirect or less than substantial connection between the two will be sufficient. Rather, they point to the relationship between the business activity and the source of the other income needing to be more than a remote one.

In this case, the taxpayer's employment, as a source of assessable income, is only indirectly and less than substantially related to their professional arts business: • whilst the activities conducted by the taxpayer as part of the professional arts business may be relevant for employment purposes, the employment is not relevant for the purposes of the professional arts business; • different types of contract are used in the production of the assessable income from the two different sources, with different terms and conditions; • different assets are used in producing the different types of assessable income; • the nature of the income from the two sources is different (on the one hand, salary or wages are derived under a contract of service; on the other hand, business income from the sale of art is derived under contracts for the sale of goods); and • the level of risk attaching to whether income will be derived from either source is different and unrelated.

As a matter of overall impression therefore, the assessable income from the taxpayer's employment is from other sources not related to their professional arts business.

The taxpayer's situation must be distinguished from that of the taxpayers in Spriggs v. Federal Commissioner of Taxation, Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; 2009 ATC 20-109; (2009) 72 ATR 148 ( Spriggs ). There the High Court found that each taxpayer, who was a professional sportsman, carried on a business of commercially exploiting his sporting prowess and reputation for profit and that employment with a club was part of that business.

The High Court said that whether, in relation to any sporting artistic or professional activity, an individual is carrying on a business that includes employment activities as opposed to pursuing activities of unrelated income derivation depends on a 'wide survey and an exact scrutiny' of the individual's activities. It indicated that the contractual framework under which an individual carries out their income earning activities, and the synergy or connection between the various activities, would be relevant in deciding this.

In the present circumstances, unlike the arrangements in Spriggs , the taxpayer's contract of employment is solely a contract of employment between the taxpayer and the tertiary institution. It is not a broader contract involving additional parties that provides for the carrying on of other income-producing activities as well as the employment activities. There is no necessary connection effecting a clear 'synergy' between the employment as an art lecturer and the conduct of the professional arts business.

The amount of the employment income is therefore taken into account in determining whether the $40,000 threshold in subsection 35-10(4) of the ITAA 1997 is exceeded.