Edited version of private advice

Authorisation Number: 5010111005248

Date of advice: 11 March 2025

Ruling

Subject: Non-commercial losses

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 XX business activity in your calculation of taxable income for the relevant financial year?

Answer 1

No.

This ruling applies for the following period:

Year ended 30 June 2024

The scheme commenced on:

1 June 2023

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 carry on a XX business buying and selling XX XX XX.

You commenced business operations in the year prior to the relevant financial year.

Your aim in this activity is to generate income.

Your approach to your business is to make a profit using both technical and fundamental analysis.

Description of business methods provided.

You use an online charting platform for XX analysis and to monitor XX XX.

You conduct your XX activity through the online platform of a licensed XX.

This platform allows you to track your business and keep records which you use for taxation purposes.

You have also engaged a financial advisory firm to manage the strategic and financial aspects of your business.

You made a profit from this activity in the year preceding the relevant financial year.

Fluctuations in the performance of the XX XX impacted your business activity.

Your XX activity made significantly more than a $XXX,XXX loss in the relevant financial year.

This activity included a limited number of transactions dealing in XX XX based on XX XX of one particular product that made a loss that was greater than your total XX loss for the relevant financial year.

You expect your business activity to make a profit in the following financial year.

You have also purchased and sold cryptocurrencies in this period.

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

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•                     the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a));

•                     an exception in subsection 35-10(4) applies; or

•                     the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises their discretion.

You have requested the Commissioner to exercise their discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the relevant financial year, on the basis of 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 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.

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.

As noted in paragraph 47 of TR 2007/6:

... ordinary economic, weather or market fluctuations that 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.

In your case, you attribute your losses in your business activity in the relevant financial year to fluctuations in product prices.

The question that must be addressed is whether the situation described is considered special circumstances. Your loss in your business activity in the relevant financial year is attributable to a limited number of activities dealing in a XX XX XX based on one particular product. XX XX XX are inherently high risk products, and losses of the magnitude of those you encountered in your business of this XX are expected to occur on a regular or recurrent basis.

It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. We believe these occurrences to be standard risks of carrying out a business in your industry and not unusual or out of the ordinary.

Therefore, the Commissioner will not exercise their discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the year in question.