Edited version of your private ruling

Authorisation Number: 1012441220259

Ruling

Subject: Non-commercial losses

Question

Will the Commissioner exercise the discretion in section 35-55(1) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2011-12 financial years?

Answer

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

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

You carry on share and option trading business

Your plan was to take advantage of the market in stocks that was prevailing at that point in time particularly at the quality end of the market.

You made a profit in the relevant financial years.

You made a loss in the later financial year which you attribute to market fluctuations.

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)(c)

Reasons for decision

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

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

· the exceptions apply; or

· the Commissioner exercises his discretion.

In your situation, you do not satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion.

The relevant discretion may be exercised for the 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; and

· 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 number of years and was able to generate income in previous financial years. 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 and do not extend the commercially viable period for your industry. 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 make a tax 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 meet the assessable income test was due to factors unique to your situation.

Therefore, the Commissioner is unable to exercise the 'lead time' discretion in with respect to the later financial year.

The relevant discretion may also be exercised for the financial year in question where your business activity is affected by special circumstances outside your control.

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.

Taxation Ruling TR 2007/6 sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this ruling:

Although not limited to natural disasters, paragraph 35-55(1)(a) of the ITAA 1997  refers to special circumstances outside the control of the business activity, including drought, flood, bushfire or some other natural disaster. Cyclones, hailstorms and tsunamis are examples of other natural disasters that would come within the scope of the paragraph. These events are taken to be special circumstances outside the control of the operators of the business activity. The special circumstances must have affected the business activity. 

In your case, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000. However this has no affect on your enterprise, it did not cause your activity to make a loss. Instead it caused you to fail the income requirement under subsection 35-10(2E) of the ITAA 1997. This is not considered to be 'special circumstances' for the purposes of paragraph 35-55(1)(a) of the ITAA 1997.

While we appreciate your situation, there is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe.