Private ruling: non-commercial losses
Published: June 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2011
Date scheme commenced: 1 July 2005

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 business in your calculation of taxable income for the 2009-10 and 2010-11 financial years? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. In the 2005-06 financial year you commenced business as a share trader. You declared a profit in the 2006-07 financial year in relation to your share trading business. You incurred losses in the 2009-10 and 2010-11 financial years in relation to your share trading business. You attribute these losses to the global financial crisis.

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 paragraph 35-55(1)(c)

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: (a) you satisfy the income requirement and you pass one of the four tests (b) the exceptions apply (c) 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 Commissioner's discretion in paragraph 35-55(1)(a) of the ITAA 1997 may be exercised for a financial year where the business activity is affected by special circumstances outside the control of the operators of the business activity and the Commissioner considers that it would be unreasonable to require the loss to be deferred. '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. In Taxation Ruling TR 2007/6 paragraph 14 states the special circumstances must be outside the control of the operator of the business. Natural disasters are considered special circumstances. In the case of other events, failure for no adequate reason to adopt practices commonly used in industry to prevent or reduce the effects of special circumstances may point to the special circumstances not being outside the control of the operator. Paragraph 47 of TR 2007/6 states that ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. 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 2010-11 income year. In the 2010-11 financial year you made a share trading loss with you attribute to the global financial crisis. The question that must be addressed is whether these situations listed are considered special circumstances. It is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Market fluctuations within the stock market, irrespective of how abnormal, are considered to be normal risks associated with the running of a business of share trading. The Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997. You are therefore required to defer your losses in the 2009-10 and 2010-11 financial years

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.