Edited version of private advice

Authorisation Number: 1052070629264

Date of advice: 15 December 2022

Ruling

Subject: Non-commercial business losses

Question

Will the Commissioner exercise his discretion to allow you to include any losses from your share and cryptocurrency trading activity in your calculation of taxable income for the 2021 income year under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is an individual.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer commenced a cryptocurrency and share trading business activities from 1 July 20XX.

Taxpayer is conducting a business and is satisfied with the Commissioner taking this to be a fact.

The taxpayer had a business plan on share trading.

The taxpayer has not provided a business plan for the cryptocurrency activities.

The taxpayer sold all his investment properties. The taxpayer used the capital (from the disposal of his investment properties) to conduct a share and cryptocurrency trading activities on a full time and daily basis.

Taxpayer had been spending an average of two hours per day watching a finance app and a website platform to obtain information as well as discussing with a broker and friends to make decisions.

The taxpayer was expecting to make profits in good faith.

You state that share trading is always a risky business. Although reasonable care is being taken, there is no guarantee that profit can be made.

Taxpayer had been making good profit initially. However, there were two shares which caused that taxpayer to lose an amount in one day.

The taxpayer's income for non-commercial loss purposes is more than $250,000 for the 20XX income year.

The taxpayer calculated a loss from trading in the 20XX income year.

You state that you incurred the loss due to bad luck, his misjudgements or being conned by the sharks of the share market. You have not provided any information that suggests that you were the target of any fraud or scam.

You believe it is unfair to consider profits and defer losses which might take a long time to realise due to current economic circumstances.

The taxpayer did not expect the market could be so volatile and the shares fell by XX% within an hour.

The taxpayer cannot control the market. It is not easy to sell when market is down.

You believe the current economic climate will make the market more uncertain and volatile. There is no guarantee profits can be realized in the near future.

Based on these factors, the taxpayer requests that the Commissioner exercise his discretion and allow non-commercial business losses for the 20XX income year.

Further issues for you to consider

If you make the statement that you are carrying on a business, the Commissioner may rely on it in making the private ruling. However, the Commissioner is not prevented, for the purposes whether the ruling is legally binding, from making enquiries after this ruling process or at a later date to confirm this point.

If you would like the Commissioner to consider whether your activity is a business activity, you may apply for a private ruling on this matter.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? has more information on whether a taxpayer is carrying on a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-55

Reasons for decision

Where a person has a business loss, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) needs to be considered.

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless:

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

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

o   the assessable test (section 35-30 ITAA 1997)

o   the profits test (section 35-35 ITAA 1997)

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

o   the other assets test (section 35-45 ITAA 1997), or

•         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.

In your case, as you conduct cryptocurrency and share trading activities, the exception in subsection 35-10(4) of the ITAA 1997 does not apply to you.

Income requirement

The income requirement under subsection 35-10(2E) of the ITAA 1997 will be met where the sum of the following amounts for an income year is less than $250,000 being your:

•         taxable income (ignoring losses subject to the non-commercial loss rules)

•         reportable fringe benefits

•         reportable superannuation contributions, and

•         net investment losses.

In your case, as your income was above $250,000, you do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997 and it will not apply to you.

Your losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion under section 35-55 of the ITAA 1997.

Commissioner's discretion

The Commissioner's approach to exercising the discretion under subsection 35-55(1) of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6).

The following has been extracted from paragraphs 12 to 14 of TR 2007/6:

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

13. 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. Ordinarily, special circumstances are those which have materially affected the business activity, causing it to not satisfy any of the four tests in Division 35. In other cases, where the business activity would have failed a test in any event because it is still within the period that is commercially viable for the industry concerned, the special circumstances may extend the time within which that particular business activity could objectively be expected to pass a test (see further at paragraphs 24 to 27 of this Ruling).

13A. For those individuals who do not satisfy the income requirement in subsection 35-10(2E) special circumstances are those which have materially affected the business activity, causing it to make a loss. For these individuals the Commissioner's discretion in paragraph 35-55(1)(a) may be exercised for the income year(s) in question where:

•         but for the special circumstances, the business activity would have made a tax profit; and

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

14. The special circumstances must be outside the control of the operators of the business activity. Such circumstances are specifically defined to include drought, flood, bushfire or some other natural disaster4. In the case of other events, failure for no adequate reason to adopt practices commonly used in an industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator.

The following has been extracted from paragraphs 47 to 50A of TR 2007/6:

47. In the context of Division 35, where the income requirement is satisfied, special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral to apply. Subject to paragraphs 48 and 53 of this Ruling, ordinary economic, weather or market fluctuations 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. ...

However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case-by-case basis.

48. Although not limited to natural disasters, paragraph 35-55(1)(a) refers to special circumstances as including drought, flood, bushfire or some other natural disaster. These events are taken to be special circumstances outside the control of the operators of the business activity.

49. The special circumstances must have affected the business activity. Some indicators of the effects on the business activity that could lead to the exercise of the discretion in regard to the special circumstances limb are:

•         destruction of stock or equipment, ...

•         delays in ploughing, planting, harvesting etc, ...

•         delay in growth of crops, ...

•         inability of operator to perform duties, ... and

•         loss of business opportunities. ...

50. In the situation where a business activity would have failed to satisfy a test even if the special circumstances had not occurred, it is unlikely that the Commissioner would consider it to be unreasonable for the loss deferral rules to apply and therefore the Commissioner would be unlikely to exercise the discretion. ....

50A. 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. ....

The following has been extracted from paragraphs 53, 54, 57 and 58 of TR 2007/6:

53. Paragraph 35-55(1)(a) refers to 'special circumstances outside the control of the operators 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.

54. However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question.

57. However, if the operators of the business activity fail for no adequate reason to adopt certain practices commonly used in their industry to prevent or reduce the effects of certain circumstances, such as for example pests or diseases, then that may point to the circumstances being within their control.

58. Similarly, the acquisition of a poorly run but promising business activity would generally be considered to be within the control of the business operator and as such would not, by itself, constitute special circumstances, even though the actions of the former operator may have been outside the control of the current operator.

In your circumstances, the Commissioner will not exercise his discretion to include any losses from the trading in the calculation of your taxable income for the 20XX income year.

You commenced your cryptocurrency and share trading activities in the 20XX income year. You developed your knowledge and made decisions regarding your cryptocurrency and share trading activities using information from share trading and financial websites as well as having discussions with a broker and friends. You state that you incurred the losses due to bad luck and misjudgements.

The business decisions you made utilising your trading strategy have contributed towards the tax loss you have incurred. Further, while the fluctuations that have caused the share loss were larger than you anticipated, market fluctuations and economic conditions are considered as normal for share and cryptocurrency traders. Your business decisions in relation to the unusual market conditions are not considered outside your control. As such, the unusual market conditions are not considered to be special circumstances beyond your control.

The losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, the losses from your cryptocurrency and share trading activities cannot be used against your other income in the 20XX income year but will be carried forward to be offset in later years when there is a profit from your cryptocurrency and share trading activities or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later income year.