Edited version of private ruling

Authorisation Number: 1011864887886

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Ruling

Subject: Non-commercial losses

Question1

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 activities in the calculation of your taxable income for the 2009-10 financial year?

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 share trading activities in the calculation of your taxable income for the 2009-10 financial year?

Answer: No

This ruling applies for the following periods

Year ended 30 June 2010

The scheme commenced on

1 July 2009

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.

In the 20XX-XX financial year, you carried on a business of share trading.

You incurred a loss from your share trading activities.

You had a discounted capital gain related to the sale of real estate in the 20XX-XX financial year.

You do not meet the income requirement for the 20XX-XX financial year as your adjusted taxable income exceeds $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1.
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(c)
Income Tax Assessment Act 1997 - Paragraph 35-55(1)(a)

Reasons for decision

Summary

The Commissioner will not exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 (special circumstances) to allow you to include any losses from your business activity in your calculation of taxable income for the 20XX-XX financial year. There are no special circumstances that affected your business activity in the 20XX-XX year which would allow the non-deferral of losses.

The discretion in paragraph 35-55(1)(c) of the ITAA 1997 (lead time) in relation to the 2009-10 year will not apply where the failure to make a profit is for reasons other than the nature of the business itself.

Detailed reasoning

For the 20XX-XX and later income years, division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless (relevant to this division):

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

· the exceptions apply

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, excluding your business losses, exceeds $250,000) and do not come under either of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion (commonly referred to as 'special circumstances' or 'lead time' discretions).

Special circumstances

'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.

For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances:

· your business activity would have made a tax profit

· the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests.

The question of what constitutes 'special circumstances' has been judicially considered. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation:

Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course…

Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that:

The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course.

Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1:

An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.

TR 2007/6 states at paragraph 47:

ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

You have not supplied any evidence of any special circumstances which affected your business activities.

The discretion does not extend to allow you to exclude a one off capital receipt to enable you to pass the income requirement. In terms of paragraph 35-55(1)(a) of the ITAA, there are no special circumstances outside of your control that have affected your business activity in the 20XX-XX year. The capital gain is in respect of an activity outside the scope of that business activity. The Commissioner's discretion will therefore not be exercised under the special circumstances limb in section 35-55 of the ITAA 1997.

Commercially viable period 35-55(1)(c)

The 'lead time' or commercially viable period discretion may be exercised for the income year in question where:

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

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

There will be share traders that made profits in the 20XX-XX financial year as there will be traders who made losses in the 20XX-XX financial year. The results are dependant on the individual decisions that each trader makes.

The share market is volatile in nature and affected by many factors. The outcome of trades will depend on the knowledge and skills of the individuals, but it is considered there is nothing inherent in the industry that will prevent you from producing assessable income or producing assessable income in excess of the deductions attributable to that business activity.

The discretion in paragraph 35-55(1)(c) of the ITAA 1997 in relation to your share trading activities for the 20XX-XX financial year will not apply as the discretion is not available in cases where the failure to make a profit is for reasons other than the nature of the business itself.

Summary

Accordingly, as the Commissioner will not exercise his discretion, you cannot include any losses from your share trading activities in the calculation of your taxable income for the 20XX-XX financial year.