Edited version of private advice

Authorisation Number: 1051933765151

Date of advice: 17 January 2022

Ruling

Subject: Commissioner's discretion - non-commercial losses

Question

Will the Commissioner exercise discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your CFD trading activity in the calculation of your taxable income for the 20XX-XX income year?

Answer

No

This ruling applies for the following period:

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the year ended 30 June 20XX, your income was in excess of $250,000 such that the income requirement in section 35-10(2E) of the ITAA 1997 would not have been satisfied.

You carry on a business of trading in xxxx xxxx.

You commenced this xxxx trading business in June 20XX.

You spend an average of X-X hours per day actively trading xxxx's, plus additional time reviewing the markets and commentary from various sources.

You make hundreds of trades per month depending upon market conditions.

Your strategy since the inception of his xxxx trading business has been to adopt a short strategy based upon historical overvaluation the market.

You relied upon commentary and market analysis during the 20XX-XX financial year that considered the market to be highly overvalued and likely to decline significantly.

Contrary to your expectation, the market rose during the year ended 30 June 20XX and you made a net loss of $X from your xxxx trading activity.

Your submission states that the loss during the 20XX-XX income year arise due to the special market conditions as a result of the COVID-19 pandemic.

Your previous years trading activity results are summarised as follows:

·                    Year ending 30 June 20XX - Net Loss, $XX

·                    Year ending 30 June 20XX - Net Loss, $XX

·                    Year ending 30 June 20XX - Net profit, $XX

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)

Reasons for decision

Summary

The Commissioner will not provide the discretion to allow you to include losses from your contract for difference trading activity. The unusual market conditions were not considered to be special circumstances beyond your control. Further, that as the activity is usually unprofitable, it cannot be concluded that the unusual market conditions caused you to make the loss.

Detailed reasoning

For the 2009-10 and later income years, Division 35 of the Income Tax Assessment Act 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.

In your situation, none of the exceptions would apply and although you pass the assessable income test in the financial year under consideration, you do not satisfy the income requirement as your income for non-commercial loss purposes was above $250,000. Your losses are therefore subject to the deferral rule unless the Commissioner exercises the discretion.

As you don't meet the income requirement, the Commissioner may exercise discretion to allow you to offset your loss if the business activity was affected by special circumstances that were outside your control (paragraph 35-55(1)(a) of the ITAA 1997) and it is considered unreasonable for the non-commercial loss rules to apply.

TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6) considers the exercise of the Commissioner discretion for non-commercial losses.

Paragraph 3 of TR 2007/6 states that '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.

Where the business activity is carried on by an individual who does not satisfy the income requirement and this activity would have made a loss even if it had not been affected by special circumstances, it is also unlikely that it would be considered unreasonable for the loss deferral rules to apply and therefore the Commissioner is unlikely to exercise the discretion (paragraph 50A of TR 2007/6).

Paragraph 47 of TR 2007/6 provides that ordinary market fluctuations that might reasonably be predicted to affect the business activity would not be considered special circumstances. However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case-by-case basis.

The private ruling application has stated that largely due to the COVID-19 stimulus measures, the market conditions during the 20XX-XX financial year moved against you in a highly unusual manner. This unexpected movement should be considered by the Commissioner to be special circumstances beyond your control.

The exposure to volatile markets and the associated fluctuations are expected to occur on a regular or recurrent basis when carrying on a xxxx trading business. Unlike other businesses that are fully committed and exposed to market movements as is the case for example with primary producers, there is no underlying imperative to engage in xxxx trading activities at any particular time. xxxx traders can reduce their exposure to unusual market conditions by not trading or engaging in other practises to reduce losses. As such, the Commissioner does not regard the unusual market conditions, were special circumstances beyond your control.

Further, your activity has so far only been profitable in one out of the four years it has operated. As your activity is usually unprofitable, the Commissioner is not convinced that the large losses in the 20XX-XX financial year were attributable to the market conditions alone in any case.

In conclusion, the Commissioner does not consider it to be unreasonable for the non-commercial rules to apply and will not exercise the discretion to allow you to include any losses from the trading activity in the calculation of your taxable income for the 20XX-XX financial year. Therefore, the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.