Private ruling: Commissioner's discretion for non-commercial losses from share trading
Date of advice: 14 October 2022
Published: 9 January 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the Commissioner exercise discretion under paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your share trading business activity in your calculation of taxable income for the 20XX-XX financial year? | A1: No.

Relevant facts and circumstances: You commenced share trading activity in the 20XX/20XX financial year. You do not satisfy the less than $250,000 income requirement. You invested personal equity and obtained a loan with interest paid monthly. You spend more than 40 hours a week researching/training/trading. You have completed more than XXX trades in the past 12 months. The share trading activity was making a profit until March 20XX and subsequently made a loss due to volatility in the market due to invasion of Ukraine, the international sanctions that followed, supply chain disruptions and subsequent high inflation.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(2) | Income Tax Assessment Act 1997 subsection 35-10(2E) | Income Tax Assessment Act 1997 section 35-55 | Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision: Detailed Reasoning - Business losses: Where a person has a business loss, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) needs to be considered. Division 35 of the ITAA 1997 applies to losses from certain business activities. 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 in an income year unless: • the exception in subsection 35-10(4) of the ITAA 1997 applies, • you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or • the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. | Detailed Reasoning - Exception: The exception in subsection 35-10(4) of the ITAA 1997 applies to a primary production business or a professional arts business and where your assessable income for the income year (except any net capital gain) from other sources not related to that activity, is less than $40,000. In your case, the exception in subsection 35-10(4) of the ITAA 1997 does not apply. | Detailed Reasoning - Subsection 35-10(2E) of the ITAA 1997: The income requirement in subsection 35-10(2E) of the ITAA 1997 applies from 1 July 2009 and will be met where the sum of the following amounts for an income year is less than $250,000: • taxable income (ignoring losses subject to the non-commercial loss rules) • reportable fringe benefits • reportable superannuation contributions • net investment losses. You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997. Your losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion under section 35-55 of the ITAA 1997. | Detailed Reasoning - Commissioner's discretion: Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion ('TR 2007/6'), sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion. | Detailed Reasoning - Special circumstances: The special circumstances discretion may be exercised for the income year in question where your business activity is affected by special circumstances outside your control. 'Special circumstances' are those circumstances which are sufficiently unusual or different to distinguish them from the circumstances that occur in the normal course of conducting a business activity. The following has been extracted from paragraphs 47 to 53 of TR 2007/6 in relation to special circumstances: 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. 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. The existence of a volatile market and the associated fluctuations are expected to occur on a regular or recurrent basis when carrying on a share trading business. The market has gone down a number of times over the last twenty years including the Global Financial Crisis, COVID-19 pandemic, etc. In addition, some stocks did increase in value significantly as a result of the war in the Ukraine. It depends on the judgement of share traders as to how the market, and in particular, specific stocks, would react as to whether those traders made a gain or loss. It is considered that the invasion of Ukraine and subsequent sanctions and effects on world economies is an ordinary economic and market fluctuation. Such ordinary economic and market fluctuations are not regarded as special circumstances under paragraph 35-55(1)(a) of the ITAA 1997. In your circumstances, the Commissioner would not exercise his discretion to include any losses from the trading in the calculation of your taxable income for the stated income year. Market fluctuations and varying economic conditions are considered a normal risk of being a share trader. The losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, the losses from your share trading cannot be used against your other income in the stated income year but will be carried forward to be offset in later years when there is a profit from your share trading activity or if you meet the requirements in Division 35 to be able to claim the deferred losses in a later year.