Edited version of your written advice

Authorisation Number: 1012998606443

Date of advice: 14 April 2016

Ruling

Subject: Non-commercial losses - commissioner's discretion special circumstances

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 in relation to the product in your calculation of taxable income for the 20XX-YY financial years?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

You are employed full time and deal with financial markets on a daily basis.

You began share investing (the activity) in the 20AA-BB financial year.

The activity was undertaken with a primary focus of making a profit on your investments. You conducted daily analysis and assessments through reading market reports, using charting software and reading share trading, subscription only newsletters.

In conducting the activity you utilised a large portion of your net worth and additional external bank facilities.

You actively conducted your activity every week and also engaged a stock broker.

Since your activity commenced, you have traded in various shares of differing companies.

The data on your share transactions were as follows:

20AA-BB financial year

• 4 buys

• 0 sells

20BB-CC financial year

• 6 buys

• 0 sells

20CC-DD financial year

• 0 buys

• 0 sells

20DD-XX financial year

• 4 buys

• 0 sells

20XX-YY financial year

• 7 buys

• 19 sells

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 35-1

Income Tax Assessment Act 1997 - Section 35-55

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

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

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

Reasons for decision

If an activity is not carried on as a business, and cannot reasonably be expected to produce assessable income, for example, it is carried on as a hobby then, you cannot claim general deductions in relation to it, regardless of the operation of Division 35 of the ITAA 1997. 

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11.  

In your case, your application refers to your shareholding as an investment and generally a share trader would not hold shares for an extended period of time as you have done. However, you have indicated in your application that your activity is carried on as a business and this ruling has, therefore, been determined on the basis of accepting your statement that you were carrying on a business during the 20XX-YY financial year.

Section 35-1 of the ITAA 1997 provides that an income requirement must be met (along with certain other tests), in order to include losses from a business activity in your taxable income calculation. If the income requirement is not met, the Commissioner may exercise his discretion to allow the inclusion of the losses.

You satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 if your income for non-commercial loss purposes is less than $250,000.

In your case, you do not satisfy the income requirement as your income for non-commercial loss purposes is above $250,000.

The Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for the financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity.

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. For those individuals who do not satisfy the income requirement, special circumstances are those which have materially affected the business activity, causing it to make a loss.

In regards to the share market, fluctuations are expected to occur on a regular or recurrent basis. Therefore these fluctuations would not be considered evidence of special circumstances.

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. 

The Explanatory Memorandum - Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 explains that the reason for the introduction of the income requirement for those over $250,000 was to tighten the application of the non-commercial losses rules in relation to individuals with an adjusted taxable income of $250,000 or more. The amendments were designed to prevent high income individuals from offsetting deductions from non-commercial business activities against their salary, wage or other income.

In your case, your taxable income for the 20XX-YY financial year exceeded $250,000. Receiving this income did not affect your share trading activity, causing it 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.