Edited version of your private ruling

Authorisation Number: 1012527984209

Ruling

Subject: Losses - share trading

Question

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses you have incurred in relation to your share trading activities?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

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.

You and your spouse had a joint bank account from which you purchased shares and deposited the proceeds of the sale of shares.

You and your spouse participated in a significant number of share transactions in the relevant income year.

The transactions were completed through various organisations.

You and your spouse kept accurate records of your share trades.

You and your spouse only held the shares that you purchased for a short period of time.

You and your spouses' share trading activities returned assessable income of over $20,000 but resulted in an ultimate trading loss.

You have developed a trading plan for your share trading activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 35-10,

Income Tax Assessment Act 1997 Section 35-30,

Income Tax Assessment Act 1997 Section 35-35,

Income Tax Assessment Act 1997 Section 35-40,

Income Tax Assessment Act 1997 Section 35-45 and

Income Tax Assessment Act 1997 Section 35-55.

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Share trading

A loss from share trading will be an allowable deduction where the transaction, or transactions, is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.

Whether activities undertaken constitute the carrying on of a business is essentially a question of fact. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Taxation Ruling TR 97/11 provides the Commissioners view of the indicators that are taken into account when determining when a taxpayer is carrying on a business of primary production. The principles provided in TR 97/11 are not confined to primary production activities are applied to all manner of business activities including share trading.

Paragraph 13 of TR 97/11 provides that the courts have held that the following indicators are relevant:

· whether the activity has a significant commercial purpose or character;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose or profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

We have considered the relevant factors and have determined that your share trading activities were carried out on a scale and in a manner such that they constitute the carrying on of a business. Accordingly the Commissioner is satisfied that you were carrying on a business of share trading in the relevant income year.

Non-commercial loss rules (NCL)

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years.

Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies - where taxpayers carry on a professional arts business or a business of primary production. Taxpayers in these categories may offset a business loss against their other income if their other income for that year is $40,000 or less, or

· you meet the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the four tests in section 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Section 35-10 of the ITAA 1997 includes an income requirement that must be met (along with certain other tests) in order to include losses from a business activity in the taxable income calculation for the 2009-10 and later income years.

You meet the income requirement if the total of your following income was less than $250,000 for the 2009-10 and later income years:

· taxable income (ignoring any business losses)

· total reportable fringe benefits

· reportable superannuation contributions

· total net investment losses - including financial investment losses and rental property losses.

As outlined above, when the income requirement has been met, taxpayers must also pass one of the four following tests:

· you have assessable income from the business of at least $20,000;

· you have made a profit from the business in three out of the last five years;

· you use real property or an interest in real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business; or

· you use other assets worth at least $100,000 (excluding motor vehicles) on a continuing basis in the business.

In your case, it has been determined that you were carrying on a business of share trading in the relevant year and the losses you made from your activities were business losses and as such, the NCL rules must be considered.

However, as you meet the income requirement and your also have assessable income of over $20,000 from your business in share trading, the NCL rules will not apply and you are entitled to deduct your losses in the relevant income year.

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