Edited version of private ruling

Authorisation Number: 1011748568235

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Ruling

Subject: Non Commercial Losses

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 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2007

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· application for Private Ruling

· a financial details statement

You operate a business of trading in options.

The business holds some stocks in long term investments.

You commenced trading in options in the 2007 financial year. At that stage you made a small investment in the market, your activity was relatively passive and was conducted in an occasional and haphazard fashion. You deemed your activity in this period to be of a capital nature.

In the 2008 financial year you engaged a trading house and planned to operate the trading activity as a business.

The stock involved in your share trading business regularly exceeds $100,000.

Your income for non-commercial loss purposes is greater than $250,000 for the 2009-10 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10 and

Income Tax Assessment Act 1997 subsection 35-55.

Reasons for decision

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 financial 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 financial 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 financial year (and in later financial 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 financial 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 and in your circumstances the exceptions do not apply.

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 special circumstances.

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.

You believe the losses you incurred in the 2009 -10 financial year occurred because of the effect of the Global Financial Crisis and generally softer market conditions.

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 on 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 that but for the global financial crisis you would have generated a profit in each of the three financial years 2008 through to 2010. However, market movements in the 2009-10 financials year were considered within the normal range and were not affected by the global financial crisis which largely occurred between January 2008 and March 2009. 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 Australian All-Ordinaries Index started the 2009-10 financial year at 4249.5 and closed the year at 4324.8. From month to month the index only deviated on average 3.11% and a maximum deviation of 6.6% from one month to the next. Individual shares may have been more volatile during this period however, these individual share fluctuations are considered normal trading conditions.

The losses in the 2009-10 financial 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 financial 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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