Private ruling: Commissioner's discretion
Published: October 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you carrying on a business? | A1:  | Q2: 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 business activity in the calculation of your taxable income for the 2012-13 financial year? | A2: No.

Relevant facts and circumstances: You conduct an activity of trading in the share market. Your objective initially was to supplement your income whilst working full time on salary and wages with a long term plan to become a trader. You decided that you were prepared for trading activities and decided on your facilitator after thoroughly digesting the product disclosure statement, considering the risks involved and preparation of Trading Plan. This involved: • Utilization of education services provided. • Undertaking mentoring from established traders • Further study and reading • Paper trading for one month with observation of friends' accounts • Two week demonstration account offered by your facilitator who also provides • Excellent market updates • Mobile apps for trading • Daily morning prices • Excellent education material. Activities commenced in 20XX which involved active trading daily with the number of trades for the year ended 30 June 20XX was as approximately X. You keep a daily activity diary noting your trades per day and the profit and loss per trade that is made. The number of trades for the year ended 30 June 20YY was approximately Y. Trades are made using electronic devices such as: IPhone, IPad and home computer. You subscribe to an online service which is used extensively (research centre) for stock picks, education, strategy, marketing analysis and implementation. Swing trade entry and exit alerts are monitored as are daily market alerts, PPT methodology and charts. Research is conducted on a daily basis even if no trading occurs as there may be no particular trend evident on the day. You provided substantial capital in the year ended 30 June 20XX and the year ended 30 June 20YY. You did not meet the income requirement for Division 35 of the ITAA 1997.

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) | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Are you carrying on a business?: The Commissioner's discretion at section 35-55 of the ITAA 1997 can only be exercised for individuals (alone or in partnership) who are carrying on a business. Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators or carrying on a business, and no one factor will be decisive ( Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11. Outlined below are factors that would generally be taken into account in weighing up the indicators to establish whether a taxpayer is carrying on a business; • 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 is 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. In your case, you have conducted daily market analysis and research in order to take on a trade position that would enable you to make a profit. You spend a significant amount of time on your trading activities. You have a business plan and you take a systematic approach to your trading and you have made numerous trades on a regular basis. Based on these factors we conclude that your trading constitutes the carrying on of a business. | Detailed Reasoning - Commissioner's discretion: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply, or • the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement and you do not come under any of the exceptions. The Commissioner's discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. 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 • 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 Income Tax: non-commercial business losses: Commissioner's discretion 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 47 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, you received a large one-off payment in the 20YY financial year. Receiving this payment did not affect your business enterprise, 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. The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. There is no other discretion available to the Commissioner in Division 35 of the ITAA 1997 that would allow you to claim your losses in the circumstances you describe. You are therefore required to defer your loss in the year ended 30 June 20YY.