Edited version of private advice

Authorisation Number: 1051945767281

Date of advice: 10 February 2022

Ruling

Subject: NCL Commissioner's discretion - lead time - greater than $250K share trading

Question

Will the Commissioner exercise discretion under paragraph 35-55(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your share trading business activity in your calculation of taxable income for the 2019-20 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced a share trading activity.

You do not satisfy the less than $250,000 income amount set out in Subsection 35-10(2E) of the ITAA 1997.

The sole purpose of your share trading activity is to realise short term gains or losses from trading.

You devote between XX-XX hours per week to your share trading activity, including market research and analysis, and establishing a trading strategy.

You have set up a home office for your share trading activity.

The share trading activity made a loss due to high volatility and dislocations in the market in response to the COVID-19 pandemic.

You made a tax profit in the 20XX-XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 35

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

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

Income Tax Assessment Act 1997 subsection 35-10(4)

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

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for decision

Division 35 of the ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The rule in subsection 35-10(2) of the ITAA 1997 will apply to defer a loss incurred by an individual from a business activity unless:

a)    the exception in subsection 35-10(4) of the ITAA 1997 applies

b)    you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the following four tests:

                      i.        the assessable test (section 35-30 ITAA 1997)

                     ii.        the profits test (section 35-35 ITAA 1997)

                    iii.        the real property test (section 35-40 ITAA 1997)

                   iv.        the other assets test (section 35-45 ITAA 1997); or

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

Exception

The exception in subsection 35-10(4) of the ITAA 1997 applies to primary production businesses or professional arts businesses when assessable income for the year (except any net capital gain) from other sources not related to the business activity is less than $40,000.

Commissioner's discretion

Under section 35-55 of the ITAA 1997, you can apply for Commissioner's discretion to be exercised where:

a)    special circumstances outside your control have resulted in a loss; or

b)    there is a lead time between the commencement of the activity and the production of any assessable income

Lead time

The relevant discretion may be exercised for the income year in question where:

a)    you meet the income requirement, and the nature of the business activity means there will be a commercially viable period of time before assessable income greater than the deductions attributable can be produced; or

b)    you do not meet the income requirement, and because of the nature of the business activity, there is an objective expectation that your business activity will make a tax profit within the commercially viable period for your industry.

The meaning of the phrase 'because of its nature' is expanded upon in paragraphs 77 and 78 of Taxation Ruling TR 2007/6:

77. Therefore, the phrase 'because of its nature' refers to inherent characteristics of the type of business activity being conducted by the taxpayer, which are common to any business activity of that type. These inherent characteristics must be the reason why the activity is unable to satisfy any of the tests. The discretion is not intended to be available where the failure to satisfy one of the tests is for other reasons.

78. The consequences of business choices made by an individual (for example, the hours of operation, the size or scale of the activity, and the level of debt funding) are not inherent characteristics of a business activity.

Application to your circumstances

In your situation, you do not satisfy the less than $250,000 income amount set out in subsection 35-10(2E) of the ITAA 1997 and the exception does not apply.

Commissioner's discretion

There is nothing inherent in the nature of share trading that would prevent you from making a profit from the start. The fact that your share trading activity did not produce a profit in the 20XX-XX income year is not considered to be a result of the nature of the activity under paragraph 35-55(1)(c) of the ITAA 1997.

In your circumstances, the Commissioner would not exercise his discretion to include any losses from the share trading activity in the calculation of your taxable income for the 20XX-XX year. Therefore, the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.