Private ruling: Commissioner's discretion
Published: December 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your options trading business activity in your calculation of taxable income for the 2010-11 financial year? | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 35-1. | Income Tax Assessment Act 1997 - Section 35-30 | Income Tax Assessment Act 1997 - Section 35-35 | Income Tax Assessment Act 1997 - Section 35-40 | Income Tax Assessment Act 1997 - Section 35-45 | Income Tax Assessment Act 1997 - Paragraph 35-55(1)(b).

Reasons for decision: Summary: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the financial year in which it arises unless certain conditions are met. Losses that cannot be taken into account in a particular year of income, because of subsection 35-10(2) of the ITAA 1997, can be applied to the extent of future profits from the business activity, or are deferred until one of the tests is passed, the discretion is exercised, or the exception applies. 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 unless: · the exception in subsection 35-10(4) of the ITAA 1997 applies; or · you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997 and one of the four tests is met; or · if you do not satisfy the income requirement or if one of the tests is not met, the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Your business activity is not a primary production activity or a professional arts business activity. Therefore, the exception contained in subsection 35-10(4) of the ITAA 1997 does not apply. Your income for non-commercial loss purposes is less than $250,000, therefore, you satisfy the income requirement under subsection 35-10(2E) of the ITAA 1997. However, your business activity has not satisfied any of the four non-commercial loss tests contained in sections 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) and 35-45 (other assets test) of the ITAA 1997 in the 2010-11 financial year. | Detailed Reasoning - Commissioner's discretion: You have requested that the Commissioner exercise the discretion under paragraph 35-55(1)(b) of the ITAA 1997 for lead time. Under paragraph 35-55(1)(b) of the ITAA 1997, the Commissioner's discretion can be exercised where: o the business activity has started to be carried on but because of its nature it has not satisfied, or will not satisfy, one of the non-commercial loss tests set out in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997; and o there is an objective expectation that within a period that is commercially viable for the industry concerned the activity will meet one of the tests or produce assessable income for an income year greater than the deductions attributable to it for that year. The note to paragraph 35-55(1)(b) of the ITAA 1997 referred to the paragraph being intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. It provides the example of the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. Taxation Ruling TR 2007/6 sets out guidelines on how the Commissioner's discretion under paragraph 35-55(1)(b) of the ITAA 1997 may be exercised. The following has been extracted from paragraphs 70 to 104 of this ruling. The discretion is provided to ensure that certain individuals who carry on genuine commercial businesses are not disadvantaged due to particular circumstances which prevent them from satisfying one of the tests. This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 of the ITAA 1997 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. The paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. In your case, you have not provided any independent evidence to show the lead time for an options trading business. However, it is accepted that there is nothing in the nature of the business activity generally that would prevent it from producing assessable in the first year it is commenced. The inability of your business activity to satisfy one of the four non-commercial loss tests was not due to lead time, as set out in paragraph 35-55(1)(b) of the ITAA 1997. Therefore, the Commissioner will not exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(b) of the ITAA 1997 in relation to your business activity for the 2010-11 financial year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You commenced your options trading activities during the 2010-11 financial year to provide you with an additional source of income and to possibly become your chief source of income. | You started with approximately $20,000, half of which was used for training with option trading professionals, and the balance was used to open up an account. | Initially, you did make some profits until the sudden global collapse of stocks and there was no proper direction in the markets. Overall your activities have made a net loss in the 2010-11 financial year. | Your income for non-commercial loss purposes in the 2010-11 financial year was less than $250,000.