The Commissioner of Taxation has forwarded the following memorandum for advice:

I shall be glad if you will be good enough to favour me with your opinion on the following matter:

Section 18 of the Income Tax Assessment Act 1915 reads:

In calculating the taxable income of a taxpayer the total income derived by the taxpayer from all sources in Australia shall be taken as a basis, and from it there shall be deducted-

(a) all losses and outgoings, including commission, discount, travelling expenses, interest, and expenses actually incurred in Australia in gaining or producing the gross income . . . Section 21 ibid, reads:

Where a taxpayer either alone or with other persons carries on or is interested as a partner in more than one business the income (if any) from which would be taxable, and makes a profit in one or more of such businesses, and a loss in another or others, the taxpayer shall be entitled to deduct the sum of the losses from the sum of the profits.

The question has arisen as to whether a taxpayer who derives income from property and who is also engaged in a grazing business which has been carried on at a loss, is entitled to deduct from the income from property the losses incurred by the unsuccessful conduct of his other business.

The inclusion of section 21 in the Act appears to my mind to imply that without it it would not be possible under the general clauses above quoted to secure the same end. The language employed however is so comprehensive that it is difficult to see how a taxpayer could be prohibited from claiming the advantage of deducting total losses from total income, provided the losses were incurred in the production of income.

Can it however be said that where no income has been produced in a particular enterprise that the losses on that enterprise are losses incurred in the production of income? If so, can these losses be allowed to eat into other income which is not derived from a second business?

As the point is far reaching and will affect the assessment of a large number of returns, I should be glad if the matter were treated as urgent.

Since the date of the Commissioner's memorandum section 18 of the Act has been amended by the addition (inter alia) of a new sub-section ⁽¹⁾as follows:

The deductions specified in paragraph (b) of sub-section (1) of this section, or being sums expended for repairs to or on any property from which rent is received shall be made from the income from property, and all other deductions allowed by this section shall be made from the income from personal exertion:

Provided that if the income from either source does not amount to the sum to be deducted from that source, the balance of the sum to be deducted may be deducted from the income from the other source.

The effect of this amendment is that certain deductions apply primarily to the different classes of income, but if any particular class is not large enough to allow of the whole of the deductions applicable to that class to be so deducted, the balance is to be deducted from the other class. A person is not to be deprived of the total of his deductions as long as there is any income from which the deductions can be deducted.

Section 21 deals only with the deductions within the personal exertion class of income, so that the losses from one business can be deducted from the profits from another. If there is still a balance of losses, then as losses are a deduction under section 18 (a), and there is no longer any income from personal exertion from which the balance can be deducted, then the balance, under the proviso to sub-section (2) of section 18 can be deducted from the income from property.

In my opinion, a taxpayer can deduct the loss on a business carried on by him from his income from property.

[Vol. 14, p. 154]

(1)Sub-section (2),added by section 6 (g) of the Income Tax Assesment Act (No.2) 1915.