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Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question 1

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 business in your calculation of taxable income for the 20XX and 20YY financial years?

Answer:

No

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business in your calculation of taxable income for the 20XX and 20YY financial years?

Answer:

No

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You are engaged in stock trading. This is done both with the intention to make a profit, and in a systematic manner. Through the use of numerous brokers, you traded frequently and in large quantities. You undertook numerous trades in 20XX year, with purchases and sales in the hundreds of thousands dollars and numerous trades in 20YY year, with purchases and trades in the millions of dollars.

You consider that you are trading on revenue account and have incurred a business loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(1)

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

Income Tax Assessment Act 1997 subsection 35-10(2E)

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

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

Reasons for decision

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

· you satisfy the income requirement and you pass one of the four tests

· the exceptions apply

· the Commissioner exercises his discretion.

Effectively these changes to the legislation mean that taxpayers with other taxable income in excess of $250,000 will have to quarantine their losses from their business and can only offset them against the income from that business activity. In very limited circumstances they may be able to obtain the Commissioner's discretion.

In your situation, none of the exceptions would apply and you do not satisfy the income requirement. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion.

Paragraph 35-55(1)(a) of the ITAA 1997

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred.

Taxation Ruling TR 2007/6 explains that for those individuals who do not meet the <$250,000 income requirement, the Commissioner considers that it would be unreasonable to require a loss to be deferred where but for the special circumstances, the business activity would have made a profit in that year.

'Special circumstances' are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity, including drought, flood, bushfire or some other natural disaster.

In Taxation Ruling TR 2007/6 paragraph 14 states the special circumstances must be outside the control of the operator of the business. Natural disasters are considered special circumstances. In the case of other events, failure for no adequate reason to adopt practices commonly used in industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator.

Paragraph 47 of TR 2007/6 states that ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances.

In application to your case, you have argued that due to the uncertain nature of fluctuating economic markets, alongside the foreign exchange risks of investing in large volume foreign trade transactions, these circumstances form the nature of this activity.

The question that must be addressed is whether these situations listed are considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Market fluctuations within the stock market, irrespective of how abnormal, are considered to be normal risks associated with the running of a business of share trading.

The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. You are therefore required to defer your losses in the 20XX and 20YY financial years.

Paragraph 35-55(1)(c) of the ITAA 1997

Under paragraph 35-55(1)(c) of the ITAA 1997, the Commissioner's discretion can be exercised for a financial year in question where:

· it is in the nature of your business activity that there will be a period before a tax profit can be produced

· there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry.

TR 2007/6 states that the 'lead time' discretion provided for by paragraph 35-55(1)(c) of the ITAA 1997 is available for a business activity if there is an initial period from when the activity commenced where the nature of the activity prevents a tax profit from being made.

TR 2007/6 does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, because of the small scale on which it was started, because a client base is being built up or because of the particular way in which you chose to operate your business.

You have not provided any evidence to suggest that there is a lead time between the commencement of your activity and the production of any assessable income. Your business has been in operation for a period of years and was able to generate income in your first financial year in operation. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to produce a profit.

Your activity is of a type that is able to produce assessable income quite soon after its commencement, as the income in your first year of trading demonstrates. The reason for your failure to produce a profit is due to factors unique to your situation.

Therefore, the Commissioner is unable to exercise the 'lead time' discretion in paragraph 35-55(1)(c) of the ITAA 1997 with respect to the 20XX and 20YY financial years.

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