Edited version of private advice

Authorisation Number: 1052170393263

Date of advice: 21 September 2023

Ruling

Subject: Non-commercial losses - special circumstances

Question 1

Are you considered to be running a business for the purposes of accessing section 35-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the relevant financial year?

Answer

No

This ruling applies for the following period:

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

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

You ceased fulltime employment in the relevant financial year due to a medical condition.

You provided details on your medical condition.

At 2 specified times in the relevant financial year, you received payouts from your superannuation fund. You provided the figures for these payments. This increased your taxable income to exceed the income requirement.

You used a specified portion of this payout as capital to begin share trading activities.

You commenced your share trading activities in the relevant financial year with the intent of making a profit to use for retirement.

You have several years' experience in buying and selling shares as investments.

You completed short courses through a specified trading account to educate yourself further in share trading.

You limited obtaining professional assistance when purchasing shares to ensure cheaper brokerage.

You completed a specified number of buy and sell transactions in the relevant financial year.

You traded a specified average number of days each month for the relevant financial year.

You provided the total value of the buy and sell transactions for the relevant financial year.

You provided details of your trade transactions and the quantity of shares in each transaction.

You traded a specified number of Australian Securities Exchange (ASX) stocks across a range of industries.

You had a share trading loss in the relevant financial year of a specified value.

You provided details on the number of days and number of hours spent share trading and conducting research.

You record all your buy and sell transactions in a book and rely upon the specified trading app records.

You provided your trading strategy and provided details on specific research you would undertake.

You worked fulltime in an unrelated field prior to commencing your share trading activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

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

Question 1

Are you considered to be running a share trading business for the purposes of accessing section 35-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

When considered against the factors outlined in TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) your activities are consistent with someone expected to be carrying on a business of a share trader.

Detailed reasoning

Where a person trades in shares as a business, the associated income is assessable as business income under subsection 6-5(2). However, where a person is not in business, the shares will be capital assets and any gains/losses made from the shares would be subject to the capital gains tax provisions. Therefore, it is necessary to consider whether your share trading activities are regarded as business.

Business is defined in section 995-1 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view of the factors used to determine if a taxpayer is in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity as outlined in TR 97/11 are as follows:

•         Whether the activity has a significant commercial purpose or character

•         Whether the taxpayer has more than just an intention to engage in business

•         Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         Whether there is regularity and repetition of the activity

•         Whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•         Whether the activity is planned, organised, and carried on in a businesslike manner such that it is described as making a profit

•         The size, scale and permanency, and

•         Whether the activity is better described as a hobby, a form of recreation or sporting activity

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

Applying relevant business indicators to your circumstances

Significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need to be able to show that the interaction between size and scale of the activity, repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

The large quantity of the shares, the high level of transactions, along with the regularity and repetition of your trading shows that your activity has a commercial purpose.

Intention to engage in business

You had the intention to engage in your activities and completed share buy and sell transaction in the relevant financial year.

Purpose and profit as well as a prospect of profit from the activity

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business of share trading exists, there is usually a business plan on how the activities will be conducted.

Based on the information provided you had a loss and did not make a profit from your trading activity in the relevant financial year. Whilst you have incurred losses, your activity does have a potential for profit. You did, however, attempt to implement basic trading strategies, supplied substantial capital investment to initiate trading, and educated yourself further on the industries you were trading in an attempt to increase profit. This displays a purpose as well as prospect of generating profit from the trading activity.

Regularity and repetition of the activity

In the case of share trading, repetition and regularity are important indicators on whether a business is being carried on, with the size and scale of the activity being supporting factors.

You regularly traded every month in the relevant financial year, averaging a certain number of days each month. You also repeatedly spent a certain number of hours each day the market was open watching the market and researching potential trades. This indicates regularity and repetition of a commercial nature.

Activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

This indicator requires a comparison between the activity in question and those undertaken by a person in business in the same type of industry. Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be:

•         Mitigation of risk through short holding periods,

•         A high turnover of shares,

•         A share trading strategy in place,

•         Substantial levels of repetition and regularity of share sales,

•         High value of share transaction to take advantage of small movements in price.

In your case:

•         You had short holding periods

•         You had high turnover of shares

•         You had a limited share trading strategy however ensured diversity trading across several stocks and industries

•         You had regularity and repetition in you share transaction

•         You had substantial quantities of share transaction, resulting in a substantial value of transactions

This information indicates you are carrying out your activities in a similar manner to others in the industry.

Activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

This usually involves some form of forward planning such as contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

You kept records of each trade you made on excel spreadsheet and utilised the end of year reports available from your specified trading app.

The size, scale and permanency of the activity

Share trading that is being conducted on a small scale is more likely to be considered investing, however a trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

You invested a large amount of capital in your trading activities and traded in large quantities of shares in your transactions.

Better described as a hobby, a form of recreation or sporting activity

You started you share trading activity with the intention to make a profit. Your activity would not be better described as a hobby, recreation or sporting activity. It is considered business income.

Conclusion

After weighing up the factors outlined above, it is considered that you are carrying on a business of share trading for the relevant financial year.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the relevant financial year?

Summary

The Commissioner will not exercise his discretion to allow you to include any losses from your share trading activity in the calculation of your taxable income for the relevant financial year. The special circumstances you have cited do not sufficiently differ the circumstances that would occur in the normal course of conducting the share trading business activity.

Your loss is to be carried forward to be offset in later years when there is a tax profit from your share trading activity or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later year.

Detailed reasoning

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:

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

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

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

-       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 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 rules)

•        reportable fringe benefits

•        reportable superannuation contributions, and

•        net investment losses.

In your case, as your income was above the $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). There are two discretions available to the Commissioner under section 35-55 of the ITAA 1997: lead time and special circumstances. You have applied under special circumstances.

Special Circumstances

'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.

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; and

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

Paragraph 47 of TR 2007/6 explains that market fluctuations would not be considered a special circumstance as they are expected when carrying on a business within a particular industry.

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 48 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, the receipt of lump sum payments related to your medical condition attributed to you exceeding the income requirement. Receiving the payment did not affect your share trading business 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. Your business made a tax loss due to the business decisions you made utilising your trading strategy.

Conclusion

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 relevant financial year. The special circumstances must relate to, and attribute to the business activity suffering a loss. Receipt of income, regardless of circumstances revolving around receipt of that income, does not sufficiently differ the circumstances that would occur in the normal course of conducting the business activity.

Therefore, the losses from your share trading activities cannot be used against your other income but will be carried forward to be offset in later years when there is a profit from your share trading activity or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later year.