Edited version of private ruling

Authorisation Number: 1011725551549

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Ruling

Subject: Non-Commercial Losses Special Circumstances

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your share trading business in your calculation of taxable income for the 2009-10 income year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2005

Relevant facts

You are an employed stock broker and actively involved in advising clients on share acquisitions.

You commenced a business of share trading on 1 July 2005.

You made a loss from your share trading business in the 2009-10 income year.

You trade actively in large volumes and do not hold equity positions open for extended periods of time. You trade in a systematic, planned and deliberate fashion in order to extract value and make profits from short term movements in the market.

You currently have an amount of your own funds in the market and have access to an approved trading facility with a further cash facility available to purchase shares. At any given time you could have a substantial amount in the market and during the past five years have in fact had that level of exposure on many occasions.

You expect to make a profit from share trading every year.

You have not passed the income requirement for non-commercial loss purposes in the 2009-10 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 35-10(2)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Detailed reasoning

Carrying on a business

For the non-commercial losses rules to apply to an individual (or an individual partner in a partnership) they have to be carrying on a business for taxation purposes. You stated in your Private Ruling Application that your activity was carried on as a business. This ruling is made on the basis of accepting this claim.

Division 35 overview

The effect of the non-commercial losses legislation is to restrict the circumstances where a business loss can be offset against other income.

Prior to the 2009-10 income year if you passed one of four tests under Division 35 of the ITAA 1997, obtained the Commissioner's discretion or if an exception applied, the losses could be offset against your other income.

Changes were made to the operation of the non-commercial losses legislation to apply for the 2009-10 and later income years to further restrict the circumstances where a business loss could be offset against other income with the introduction of an income requirement.

To satisfy the income requirement for an income year the sum of the following had to be less than $250,000:

· your taxable income for that year;

· your reportable fringe benefits total for that year;

· your reportable superannuation contributions for that year; and

· your total net investment losses for that year.

For the purposes of calculating your taxable income you do not take into account any excess from the business activity affected by the non-commercial losses.

You have provided information indicating that you do not meet the income requirement therefore the new restrictions will apply to you for the 2009-10 income year (and in later income years if you don't pass the income requirement in those years).

Under these changes you do not have access to the four tests in the 2009-10 income year as you did not pass the income requirement (under subsection 35-10(2E) of the ITAA 1997). You can therefore only rely on obtaining the Commissioner's discretion or having one of the exceptions apply. Neither of the two exceptions apply to you as your assessable income from other sources was greater than $40,000, and you do not operate a professional arts business. The only option available to you is the Commissioner's discretion.

There are two types of discretions referred to as 'special circumstances' and 'lead time' discretions. From the information you supplied in your Private Ruling Application you want the Commissioner to exercise his discretion in relation to the nature of the activity. The nature of the activity relates to the lead time for the activity. You have been trading for 5 years now so lead time will not be considered. We will however address the Commissioner's discretion in relation to special circumstances only.

Special circumstances

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the income years in question where the business activity is affected by special circumstances outside the control of the operator of the business activity.

Paragraph 35-55(1)(a) of the ITAA 1997 states the business activity was, or will be affected, in the excluded years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster. In Taxation Ruling TR 2007/6, the Commissioner provides further guidance to taxpayers in what he considers to be special circumstances for the purposes of paragraph 35-55(1)(a) of the ITAA 1997. Apart from drought, flood and bushfire which are specifically mentioned in the legislation, it may also include:

· earthquakes

· hailstorms

· an oil spill

· a chemical spray drift

· a gas plant explosion

· a power plant shutdown

· a water authority malfunction

· government authority restriction imposed on land use, or

· other events (for example, illness of the operator or employee(s)) which have significantly affected the ability of the operator to carry on the business activity.

You stated you made a loss in the 2009-10 income year as a result of the global financial crisis and generally softer market conditions. Market movements in the 2009-10 income year were considered within the normal range and were not affected by the global financial crisis. In addition, generally softer market conditions are part and parcel of being in the business of share trading. It is in the nature of share trading that you normally operate in a volatile market.

The losses in the 2009-10 income year were not caused by special circumstances of the kind outlined in the legislation and TR 2007/6. You are therefore required to defer your losses from the 2009-10 income year until such time as you pass the income requirement (and pass one of the four tests), you receive the Commissioner's discretion (special circumstances) or the business makes a taxation profit.

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