Edited version of private advice

Authorisation Number: 1052242490804

Date of advice: 13 June 2024

Ruling

Subject: 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 from your consultancy activity in your calculation of taxable income for the 2021-22 financial year?

Answer

No.

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 cryptocurrency trading activity in your calculation of taxable income for the 20YY-YY financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

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

You have 2 sole trader activities that together produced a total loss in the 20YY-YY financial year.

Your 2 activities being:

•         corporate advising

•         cryptocurrency trading.

Corporate advising

You commenced corporate advising as sole trader in a particular year.

You are the director of a corporate advisory company, which was established in a particular year.

Your company pays other individuals as consultants.

You are also an individual consultant/contractor/sole trader to your company.

You refer to these other individuals as your colleagues.

There are several key individuals that act as consultants from time to time for this company.

As a sole trader, your business address is your home address.

Your company had an office/room in a client's premises from a particular date. There were three desks, where three of your company's consultants worked from, including you.

You worked regular hours on your corporate advising; however due to the nature of working with start-up clients, you received minimal income during the year.

Most of the payment for work done in the 20YY-YY financial year was received in 20YY-YY financial year.

You provided your profit and loss statement for the 20YY-YY financial year which showed your sole income being a nominal amount from Commissions.

Your expenses were provided and mainly comprised of the following:

•         car expenses

•         computer

•         CRM software

You made a loss in the 20YY-YY financial year.

The taxable income from the corporate advising activity was provided for the 20YY-YY financial year.

You provided the financial statements for the 20YY-YY to 20YY-YY financial years, which showed a profit in each year, apart from the 20YY-YY financial year.

You are registered for good and services tax (GST) and report quarterly, on a cash accounting basis.

You believe you had special circumstances that affected your corporate advising income in the 20YY-YY financial year, which included COVID-19 and a flood event.

You had to transition from working from an office to working from home, which you believe limited your earning ability as you were not able to carry on the business in the same scale as your usual business activity.

In January 2020, COVID-19 became known in Australia and you claim you were unable to attend your office where you used space belonging to one of your company's clients. You had to start working from home. You left your office furniture in the office as you were intending to return once the uncertainty around COVID-19 came to an end.

In November 20YY, your company was advised by your company's client that your lack of presence in their office had led them to want to use the space for their own employees. You all stopped working from the office but left your furniture, as your client was considering moving to bigger premises where you all could have been possibly accommodated. You have a number of colleagues that you have known for many years who you need to meet with regularly to discuss existing and new projects.

You also work with a number of start-up businesses that do not have offices. Not having an office or being able to meet in public places made it difficult to earn fees.

Your face to face meetings were held on park benches with masks and 1.5m spacing, which made it difficult to do business in the normal way.

The state's border was closed from April 2020 and re-opened in March 2022.

The state's government lifted restrictions for café meetings on 29 April 2022.

Without an office and being alienated from public meeting places, you claim it was very difficult to efficiently achieve results for your clients in the 2021-22 financial year.

The scale of your company's business activity was significantly reduced as your clients were being affected by COVID-19 and could not engage with your services in the usual manner.

COVID-19 had created an environment that made it very difficult for your clients to raise their seed capital funding that was required before paying your fees.

You claim your company had several clients that were heavily impacted by COVID-19 in the 20YY-YY and 20YY-YY financial years which stopped your ability to provide consulting services to them in the 20YY-YY financial year.

One of your company's main clients in the 20YY-YY financial year was based in another state. Due to the COVID-19 government quarantine restrictions, you advised you were unable to fly from your state to their state to meet with your client face to face.

Another corporate adviser from a third state who was able to fly from that state to the client's state made several visits to your client in late 20YY and then convinced your client to terminate your contract in January 20YY and defer the payment of your fees until the 20YY-YY financial year.

You did not invoice your company for consulting services that you had done in the 20YY-YY financial year and you were not paid any amount in 20YY-YY financial year in relation to your company's client.

Your company's contract with the client was terminated in January 20YY and at that time it appeared unlikely that the client was going to pay anything to your company. The client had been unsuccessful in raising any capital, which was a condition precedent for any fees being due to your company.

You received a number of payments from 3 during the 20YY-YY financial year, from your company. You invoiced your company, as your company received payments from their client.

Flood

On a particular date early in the 20YY-YY financial year suburb in your state experienced a flood event.

You claim your office space was flooded throughout and you had to rescue your office furniture from the water damage.

The furniture was placed in storage, and after the carpet was dried out, your company's client, then began using the office space for their own employees.

The lease agreement was verbal and there was nil rent.

You moved the company office furniture out, the day after the flood water damage. This finalised the physical use of the office, however the company continued using the office address as the mailing address for the company.

Working from home in the 20YY-YY financial year resulted in a lot of lost opportunities, inefficiencies in getting work done with your work colleagues and difficulties with arranging meetings with clients.

You were not using the office space from January 20YY as previously stated.

Fee Structure

Your fee structure is usually based on payments that become due after capital raising is completed. You do not have an Australian Financial Services (AFS) licence authorisation to raise capital. External parties, whose work results are outside of your control, are engaged by your clients to act as the authorised intermediary that is responsible for raising capital. You do not have control on when and how much funds can be raised.

Although you advised you worked hard on your corporate advising activities in the 20YY-YY financial year, you received nil income as your company's clients' attempts with capital raisings were unsuccessful during the financial year.

You believe one of the key difficulty factors was the impact of COVID-19 on the capital raising markets.

You chose to not invoice your company for the work you completed throughout the 20YY-YY

Cryptocurrency trading

You commenced cryptocurrency trading in during the 20YY-YY financial year.

You have previously been a certified financial planner and have a high level of knowledge around investing and share trading.

With the volume of trading activity involved, you treated the income as ordinary income rather than capital gains.

You stated that you did not believe you were in business, but that your gains should be treated as ordinary income as isolated transactions.

The cryptocurrency market went through a drop in 20YY and you stopped the trading 5 months after your commencement to minimise any further potential losses, as the market continued to drop.

The trading involved using trading software that bought and sold specific cryptocurrencies based on specified instructions that you set in place.

There were a large number of trades with a large amount of purchases and sales in the 20YY-YY financial year.

The total funds that you deposited into the cryptocurrency exchanges was provided.

There have been no further cryptocurrency trading transactions, as you are waiting for signs of the market correcting before continuing further.

As per your profit and loss statement, you made a loss in the 20YY-YY financial year.

The intention was to make a small profit of on each trade and income profits could be made on the short term volatility of the price movements.

The dominant purpose and focus was on making a daily target return of 0.5% to 1.0% income on the funds invested on each cryptocurrency. This was the result of many trades per day for each cryptocurrency and was being achieved on many of the cryptocurrencies that you were trading with in the first 2 months.

There was no intention to make staking rewards income on cryptocurrencies.

You advised the cryptocurrencies had no other use than as the subject of trading, and the transactions involving those cryptocurrencies were commercial in nature.

The focus was not on the capital value as guidelines you followed were based on capital growth supposedly ending up higher over the longer term.

You were not prepared for the drop in the cryptocurrency market in the short term and made a decision to sell in June 20YY, after the collapse of a cryptocurrency in the 20YY-YY financial year and before further significant drops happened later in 20YY.

You provided a graph showing the drop in value during June 20YY.

You were achieving good daily trading income for a period in 20YY. The market dropped and your trading bots for each cryptocurrency that you held went from being active to out of range.

You started reducing the trading price range to continue trading, which triggered losses and then realised that there was a likelihood of further market drops and decided to withdraw all funds from cryptocurrencies at the end of the 20YY-YY financial year.

The main cause of the market drop was due to a single event which you advised could not have been reasonably predicted and was advised it was outside of normal market fluctuations.

You kept records of your share cryptocurrency trading history in spreadsheets.

You provided details of your cryptocurrency at different stages that showed the date, amount, rate at which they were purchased, the type and holding value at the end.

You were unsure of what the market situation would be during May and June 20YY. You heard news of the market getting worse and also about a market recovery that would be soon to come. You sold all cryptocurrency towards the end of June as you were not feeling comfortable with taking any further losses.

It seemed to you that the use of automated XXXX was a new way of trading cryptocurrencies and was different to normal trading programs. It gave you the confidence to enter into the cryptocurrency market even though you had no previous experience. It provided you with a way to possibly make monthly income without having to do too much work, while you continued to work as a corporate advisor.

With the volume of short-term trades and the intention to make a profit from each trade, you did not think it was possible to be a cryptocurrency investor. You advised you were under the impression that a cryptocurrency investor was holding all cryptocurrencies for the longer term.

You advised your intention was to generate short-term daily profits from a large amount of trades (several hundred per day) each making a small amount of profit, which you believed was in line with being a cryptocurrency trader.

You were seeking to generate additional monthly income and at the time, the basis of the trading strategy provided in The Plan appeared to offer a realistic way to achieve this.

The funds that you used for the cryptocurrency trading were sourced from an inheritance from your relative who passed away.

The time spent on cryptocurrency trading varied each day. The time spent each day varied from nothing up to approximately one hour. You had a few periods of time where you would not check the results for a week or so. For most weeks, you would spend a small amount of time each day to check the results - seven days a week. The Plan's guidelines did suggest that after setting up the trading grids, it was best to "do nothing".

As a rough estimate, approximately 80% of time was spent on researching and 20% of time on trading and monitoring. Once the trades were set up, the trading platform provided an automated system that did not require many manual changes.

Time was mostly spent on trying to find the next possible cryptocurrency that would be suitable to set up on the trading platform. Despite the time spent researching, the guidelines that you had to find suitable cryptocurrencies were somewhat hit and miss.

Past performance did not always mean the same result was possible in the future.

You followed what was being suggested by a guideline you obtained on the internet to find cryptocurrencies of interest to do further research on. After running a back test of what could have been achieved for selected cryptocurrencies, you would run up to 20 cryptocurrencies at a time which did not use real money. You would monitor that for a few days, before setting up the trading parameters for that cryptocurrency using real money.

You spent approximately up to 10 hours per week initially researching cryptocurrency trading strategies, before starting the trading. You did not get any expert advice, as you did not know anyone who could provide you with advice on cryptocurrency trading.

For the research process, you hand wrote records for each cryptocurrency that you back tested and again for each cryptocurrency that you ran a demo on. You did this so that you could become better at seeing quickly which cryptocurrencies were getting the best results. You could also go back and see if a particular cryptocurrency had started performing better or worse than it had when you previously looked at it.

For the trading, the internet guideline provided very detailed summaries for each cryptocurrency and for all the cryptocurrencies together.

You provided transaction summaries and balances on excel spreadsheets.

The taxable income for the cryptocurrency trading in the 20YY-YY financial year is $0.

You provided a complete list of the different cryptocurrency assets and tokens you traded.

You worked from a home office to conduct the cryptocurrency trades.

You did not provide a business plan.

Cryptocurrency trading resumed in the 20YY-YY financial year and you expect to make a profit in the 20YY-YY financial year.

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

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 from your consultancy activity in your calculation of taxable income for the 20YY-YY financial year?

Summary

Your consultancy activity does not constitute a business activity under section 35-5 of the ITAA 1997, the Commissioner will not grant the discretion under section 35-55 of the ITAA.

Detailed reasoning

Non-commercial losses

Division 35 was introduced into the ITAA 1997 via the New Business Tax System (Integrity Measures) Act 2000. It applies from 1 July 2000 to each and every income year in which an individual taxpayer carries on a relevant *business activity. The main operative provision in the Division is section 35-10. The major rule in section 35-10 is that unless in each year:

(a)          the individual's *business activity meets one of the four tests, and for the 2009-10 and later income years, the income requirement is also satisfied.

(b)          the individual comes within the Exception; or

(c)          the individual is covered by an exercise of the Commissioner's discretion in relation to that *business activity,

a loss from the *business activity will not be deductible in the income year in which it arose. The law applies as if the loss were not incurred in the income year.

Instead, the loss is deemed to be an amount deductible from the assessable income from the activity for the next year in which this activity is carried on. The deferral of deduction rules in section 35-10 are then applied to that year. However, Division 35 does not apply to activities that do not constitute carrying on a *business (subsection 35-5(2) of the ITAA 1997).You do not satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceed $250,000).

Business Activity

Division 35 applies only to an individual who is carrying on a '*business activity' in an income year, either on their own, or in a general law partnership (section 35-5). Division 35 does not apply to any other entity. The Division operates by identifying a specific '*business activity' for calculating whether a non-commercial loss has been made from that activity, which would, but for Division 35, be able to be offset against other income (in the calculation of the individual's taxable income).

A key concept to understand in applying Division 35 therefore is '*business activity' as the term is used in the Division. The asterisk signifies that the term includes the defined term *business, the meaning of which in section 995-1 is:

'*business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.'

Your only client, is your own company. The relationship you describe is one that would be better described as one of employment.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view on the meaning of carrying on a business for primary production and outlines a number of factors developed by courts and tribunals that they have found to be indicative of when a taxpayer is carrying on a business of primary production. These indicators are also applicable to non-primary production activities:

•         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 repetition and regularity of the activity.

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

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

•         The size, scale and permanency of the activity, and

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

The above factors must be considered in light of one another, with no single factor being determinative of whether one 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 (paragraph 25 of TR 97/11).

Whether a business is being carried on for income tax purposes is a question of fact and degree, to be determined objectively on the specific circumstances of the case, weighing the various indicators outlined above against one another (paragraph 16 of TR 97/11). Repetition and regularity are important indicators on whether a business is being carried on, along with the size and scale of the activity being supporting factors.

Your activity does not meet any of the indicators of business, you did not invoice your sole client during the period, you therefore have shown you do not have an intention to engage in business, nor do you have a prospect of profit. You do not have repetition and regularity of your activity, as while you claim the activities of the company as your own, any external clients are those of your company, not yours as a sole trader.

Therefore, we do not consider you to be carrying on a business, and therefore not eligible to apply the non-commercial loss provisions outlined in Division 35 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. 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

Had we considered you to be in business, 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.

Whilst you claim the reason you did not make a profit was because of special circumstances, specifically impacts of COVID-19, the reason you did not make a profit was due to you not invoicing your company for work you completed.

Therefore, the Commissioner will not grant the discretion under section 35-55 of the ITAA.

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 cryptocurrency trading activity in your calculation of taxable income for the 20YY-YY financial year?

Summary

You were not carrying on a cryptocurrency trading business and are not entitled to Commissioner's discretion for special circumstances as there were none and they do not apply when not in business.

Detailed reasoning

As above, Division 35 is not intended to apply to activities that do not constitute carrying on a * business.

As above the factors outlined in TR 97/11 must be considered.

Your activity through a platform was conducted over a number of consecutive days during the 5 months from when you made your first trade. You ceased trading at the end of the 20YY-YY financial year.

You did not have a pattern of trading and used automated XXXX as a new way of trading cryptocurrencies and was different to normal trading programs. Trades were daily apart from the gaps mentioned above and the number of trades varied daily.

You completed many trades during the 5 months. The trading frequency would be considered to be a high level of transactions and keeping with the number that would be expected of a person who was carrying on a business, had you been doing the trades yourself and not using a XXXX You however thought it provided you with a way to possibly make monthly income without having to do too much work, while you continued to work as a corporate advisor.

You spent from zero hours to approximately 1 hour per day on the activity and had periods where you would not check the results for a week or so. For most weeks you would spend a small amount of time each day to check the results - seven days a week. You followed guidelines you obtained, which suggested after setting up the trading grids or parameters that it was best to do nothing.

You spent 80% of time on researching and 20% on trading and monitoring. Once the trades were set up, the trading platform provided an automated system that did not require many manual changes.

You followed what was being suggested by guidelines you obtained on the internet to find cryptocurrencies of interest to do further research on.

You not provide a business plan. From your research process you had hand wrote records for each cryptocurrency that you back tested and for each cryptocurrency that you ran a demo on. You could go back and see if a particular cryptocurrency had started performing better or worse than it had when you previously looked at it. For the trading, the internet guide provided very detailed summaries for each cryptocurrency and for all of the cryptocurrencies together. The trading platform provided transaction summaries and balances on excel spreadsheets.

You mentioned the above methods of familiarising yourself with cryptocurrency; however, your trading strategy and strategy to preserve capital did not display the sophistication that may be expected of a business. You were also engaged in another full-time occupation during the relevant financial year.

In your circumstances when you started trading, it was a decision made to achieve returns on each trade. This can be seen in the transaction data provided that shows buy/sell occurring on the same day; however you set parameters for self-trading and sporadically checked on your results and used a couple of strategies for market drops. You had a varied income increase. You have also chosen these trading platforms based on advice and research provided to you and conducted by yourself, without the full intention of running a business. You implemented changing cryptocurrency where you were taking losses.

You entered into this activity with the purpose to make a profit or potential profit, based on research that you conducted.

It is acknowledged that the activity undertaken had a profit purpose. There are some characteristics that aligned the activities to those associated with carrying on a business.

However, the activities also lacked indicators of a 'significant commercial purpose or character'. That is, there was no business premises, but a home office which you also mentioned existed for your consultancy activity, no staff, limited time given to the activity, no plan to expand the activities, you did not continue with the activity after the platform collapse, and no design or purchase of customised market analysis tools. Overall you have made a loss over the 5 months of the activity, including a substantial loss from one of the platforms, as you have not received any return from it.

All the indicia summarised in TR 97/11 have been considered. The indicators have been considered in combination and as a whole. At present, it is not considered that your activity has the size, scale and permanency of a business. Based on the information that has been provided there was no business activity being performed in the 20YY-YY financial year.

As you were not in business you do not meet the requirements in Division 35 of the ITAA 1997 to be considered for the Commissioner's discretion to claim the losses.

Similarly, the profits and losses are not treated as isolation transactions in accordance with Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income and Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible. Whilst you claim you had an intention to enter into the transactions for a profit making purpose, paragraph 13 of TR 92/3 provides:

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a)          the nature of the entity undertaking the operation or transaction;

(b)          the nature and scale of other activities undertaken by the taxpayer;

(c)          the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d)          the nature, scale and complexity of the operation or transaction;

(e)          the manner in which the operation or transaction was entered into or carried out;

(f)          the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g)          if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h)          the timing of the transaction or the various steps in the transaction.

As previously outlined, the transactions are not isolated, and whilst the number of transactions is high, this was solely through the use of XXXX. The amount of work and the manner in which you operated was that in line with an investor.

Your losses are capital in nature, and will be deferred until you make a capital gain.