Private ruling: Non Commercial loss rules
Published: November 2011
Ruling period: Income year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Do you meet the income requirement of the non-commercial loss rules? | A1: No.

Relevant facts and circumstances: You are employed as a finance professional with a major corporation. You also operate a separate business of trading exchange traded options (ETO's). You also hold shares and cash deposits. For the 2012-13 income year, excluding interest and dividends, your net taxable income was slightly less than $250,000. You also received dividends and interest from your cash deposits.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 35-5 | 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)

Reasons for decision: Summary: A non-commercial business activity is a business activity where the expenses in the year exceed income. Division 35 of Income Tax Assessment Act 1997 (ITAA 97) prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year that the loss is incurred. The loss is deferred. It sets out a series of tests to determine whether a business activity is treated as being non-commercial. The deferred losses may be offset in later years against profits from the activity or, if one of the tests is satisfied or the Commissioner exercises a discretion, against other income. The Division only applies to losses from business activities and does not apply to losses arising from mere passive activities. To be able to offset a business loss against other income, you and your business need to meet a number of requirements. | Detailed Reasoning - Income requirement: Your income for non-commercial loss purposes must be less than $250,000. It includes your: · taxable income (ignoring any business losses) · total reportable fringe benefits amount · reportable superannuation contributions · total net investment loss. If you pass the income requirement you must also meet one of the business tests, unless you are covered by an exception to the rules or we exercise our discretion to allow you to offset your loss against other income. | Detailed Reasoning - Business tests: If you meet the income requirement, you can offset a loss from a business against your income from other sources if the business passes one of these tests: · The assessable income test - the business has assessable income of at least $20,000. · The profits test - the business had a profit for tax purposes in three out of the past five years (including the current year). · The real property test - the value of real property or of an interest in real property that you used in the business on a continuing basis was at least $500,000. · The other assets test - the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000. | Detailed Reasoning - Exceptions for artists, primary producers and tax break deductions: There are exceptions to the non-commercial loss rules for primary producers and professional arts businesses. In addition, in the 2009-10 and 2010-11 income years there is an exception for businesses that incur a loss solely as a result of extra deductions claimed under the 'tax break' concessions. If an exception applies, you can offset a business loss against other income even if you don't meet the usual requirements. | Detailed Reasoning - If you don't meet the income requirement: If you don't meet the income requirement, you can apply for a Commissioner's discretion to allow you to offset your loss if: · special circumstances occurred that were outside your control, or · due to the nature of the activity, there is · a lead time before the business will make a tax profit · an objective expectation, based on independent evidence, that it will make a profit in a time that is considered commercially viable for that industry. | Detailed Reasoning - Application of the law to your facts: In your case you have made a non-commercial business loss. In order to offset this loss in the current year your income for non-commercial loss purposes must be less than $250,000. The $250,000 includes your taxable income, total reportable fringe benefits amount, reportable superannuation contributions, and your total net investment loss. You have not reported that you have received a reportable fringe benefit amount, or a reportable superannuation contribution. You have also not reported a net investment loss. In your case it is only necessary to consider your taxable income. Your taxable income is calculated as follows is close to the $250,000 income requirement. You have also earned interest income and dividend income. If either of these amounts are included as part of your taxable income your income will be more than $250,000 and you will not meet the income requirement. It is then important in your case to determine whether your interest and dividend income is part of your exchange traded options business, or separate assessable income. You have earned interest income from your bank account no. 1. Entries in this bank account appear to cash transfers. The transfers do not appear to be coming from your ETO account or going to your ETO account. The connection between this bank account and the ETO business is not apparent. Accordingly, this interest cannot be attributed to your ETO business. You have earned interest from your bank account no. 2. Entries in this bank account also appear to be cash transfers. The transfers do not appear to be coming from your ETO account or going to your ETO account. The connection between this bank account and the ETO business is not apparent. Accordingly, this interest cannot be attributed to our ETO business. You have earned interest from your bank account no. 3. Entries in this bank account show transfers to and from your ETO account, rent payments, and cash withdrawals. This account does appear to have a connection to your ETO business, however, is not solely used for your business. You could apportion some of this interest on a reasonable basis to your ETO business. You have also earned dividends. You have sold no shares during the 2012-13 income year. You have held your shares on average for nine months, and your holdings are all blue chip stocks which return good dividends. In contrast, trading of ETO's is a sophisticated, high risk activity. Your share holdings and your trading of ETO's appear to be completely separate activities. Accordingly, your dividends would be considered to be unrelated to your ETO business activity, and should be included as part of your assessable income, not as part of your business activity. The inclusion of interest income and dividend income in your taxable income takes your income for non-commercial loss purposes over $250,000. Your loss from ETO trading is then quarantined, and can only be offset against future gains from that activity.