Private ruling: Commissioner’s discretion for non-commercial losses from share-trading
Date of advice: 18 September 2017
Published: January 2018
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: DDMMYY

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 activity in your calculation of taxable income for the 2015-16 financial years? | A1: No | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(c) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the 2015-16 financial years? | A2: No

Relevant facts and circumstances: You do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. The trading period from approximately 1 July 201X wasn’t good. Significant losses incurred on the share market. The reasons for this included a significant drop in the world oil price resulting in significant losses in oil company stocks together with a X% fall in the ASX 200 from DDMMYY to DDMMYY By the end of mid-late 201X, after the incurrence of significant trading losses, you decided to cease business operations because your sources of capital were limited.

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: Special circumstances limb For the 200X-XX 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; or ● the exceptions apply; or ● the Commissioner exercises his discretion. In your situation, you do not satisfy the less than $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997 in the year of income under consideration. However, you do meet one of the four tests being the assessable income test. As you do not meet this income requirement you cannot access any of the four tests. Further, none of the exceptions in subsection 35-10(4) of the ITAA 1997 apply to you. 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 ordinary course of conducting a business activity. Such an expression is not capable of precise or exhaustive definition, however, the Commissioner seeks to look for circumstances surrounding the activity which may be considered unusual, uncommon or exceptional; See, Re Beadle and Director General of Social Security (1984) 6 ALD 1. Paragraph 14 of the Taxation Ruling TR 2007/6 (TR 2007/6) states the special circumstances must be outside the control of the operator of the business. 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. You stated that in the trading period from 1 July 201X you made significant losses. You attribute those losses to the significant drop in the world oil price which result in significant losses in oil company stocks together with a X% fall in the ASX 200 from DDMMYY to DDMMYY. 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 generally considered to be normal risks associated with the running of a business of share trading. The share industry is volatile in nature and affected by many factors. The outcome of trades will also depend on the knowledge and skills of the individuals who make decisions. Most business activities will have a dependence on knowledge, skills and equipment to be successful and are affected by fluctuating prices. Therefore, the Commissioner considers the market fluctuations you describe as affecting your business are not special circumstances and consequently, the discretion in subsection 35-55(1)(a) of the ITAA 1997 will not be exercised. You must defer the losses from this activity for the 2015-16 financial year. Lead time limb The Commissioner’s discretion in paragraph 35-55(1)(c) of the ITAA 1997 may be exercised for a financial year where: ● you do not satisfy the income requirement; and ● because of its nature, the activity has not produced, or will not produce, assessable income greater than the deductions attributable to it; and ● there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsections 35-10(2) and (2C)). The note to this paragraph states that it 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. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. In considering the application of your circumstances under paragraph 35-55(1)(c) of the ITAA 1997 in the 2015-16 income year, you stated that you ceased your business operations after the incurrence of significant trading losses by the end of mid-late 201X. Your business activity did not require a lead time. There was no period of time from starting the activity to when it could start producing assessable income. The first trade could produce assessable income and that was the intention when entering into that trade. The explanatory memorandum to the legislation explains that individuals: ….must demonstrate that the reason they do not or will not make a profit is because of the nature of the business and not for some other reason which is peculiar to that individual's particular business. The individual is required to establish objectively the commercially viable period for the industry concerned. Further, in your case, by ceasing the business operation there is no objective expectation that the activity will make a tax profit within a commercially viable time frame. Therefore, the Commissioner will not exercise his discretion under subsection 35-55(1)(c) of the ITAA 1997. You must defer the losses from this activity for the 2015-16 financial year.

ATO view documents: Taxation Ruling TR 2001/14