Private ruling: Non-commercial losses
Date of advice: 17 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: 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 FOREX trading activity in your calculation of taxable income for the 2014-15 financial year? | A1: No.

Relevant facts and circumstances: You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You have been engaged in FOREX trading (the activity) since 20XX. You commenced the activity with an initial purchase using a trading platform, with a view to make profits from your transactions. In 20YY, the FOREX for your relevant contract was negatively impacted, where you lost a substantial amount in one day. As a result of this loss, the trading platform consolidated all accounts and realised all your FOREX contracts. You then had to fund an additional amount to cover the FOREX losses. You contend that because the trading platform closed your account, this left you no choice but to realise your losses and if they had not gone under administration and you had been able to keep your account open, you would have had an opportunity to recoup the losses or meet the $20,000 assessable income test.

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: Summary: 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, none of the exceptions would apply and although you satisfy the income requirement, you do not meet any of the four tests in the years of income under consideration. Your losses are therefore subject to the deferral rule, unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. '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 satisfy the income requirement, the business activity must have been materially affected by the special circumstances, preventing it from making a profit or passing one of the four tests. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances your business would have: • made a tax profit or • 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 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 application to your case you have requested that the Commissioner exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 in the 20YY financial year. The question that must be addressed is whether your situation is considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Whilst we acknowledge your situation, it is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Currency fluctuations, irrespective of how abnormal, are considered to be standard risks of carrying on activities in this industry and are not unusual or out of the ordinary. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 for the years in question.