Primary production schemes

There has been a lot of talk in the press lately about "tax effective" primary production schemes. These are usually agricultural in nature, but may also include film and television and certain infrastructure projects.

Due to special rules that apply to these sectors, investments in primary production schemes may be tax deductible, subject to a ruling by the tax Commissioner. This means that if you want to reduce your taxable income down to some low threshold, you simply invest money (borrowed, if necessary) into an appropriate tax deductible scheme and get up to a 100% tax deduction in that year.

(For more details, see the article on tax deductible schemes in the Managed Funds FAQ and the article in the Ripoffs FAQ.)

In those other articles I already covered off on the 100% tax deduction (and how the income derived is taxable, so unless you receive the income in a year when you are on a lower marginal tax rate you only transfer your tax liability from one year to another and gain no real benefit). What follows is just a bit more information on non-commercial losses.

As a side note, in case I haven't already mentioned it, you can usually negatively gear into 100% deductible investments, claiming the interest cost as an expense.

Non commercial losses

Division 35 was inserted into the ITAA 1997 by A New Business Tax System (Integrity Measures) Act 2000. A loss is where allowable deductions exceed income assessable to an activity over an income year. Division 35 deals with whether or not a loss from a business activity can be offset against other income in that year. There are four tests to see if a deduction for the loss can be claimed, and a safeguard rule giving the Commissioner discretion to grant a deduction in other cases.

The four tests:

1. The assessable income from the business activity is at least $20,000.

2. The business activity produced a profit (for tax purposes) in at least 3 out of the last 5 years, including the current year.

3. The value of real property used in carrying out the business is at least $500,000

4. The value of other assets used in carrying on a business is at least $100,000.

Where certain conditions exist, the Commissioner may exercise a discretion to allow a taxpayer to offset amounts which are deductible against their other income if the business activity does not satisfy any of tests 1 to 4.

The discretion may be exercised for one or more income years if the Commissioner is satisfied that it would be unreasonable not to allow the losses to be offset because either:

• special circumstances are applicable to the business activity (eg drought, flood, bushfire or some other natural disaster); or

• the business activity has started to be carried on, and because of its nature it has not yet satisfied one of tests 1 to 4, and there is an objective expectation that it will either pass a test or produce profit within a reasonable time.

The discretion is provided to ensure that certain individuals who carry on genuine commercial business activities are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4.

Exception for small primary producers