Private ruling: Commissioner's discretion - special circumstances
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)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your trading business activity in your calculation of taxable income for the 2010-11 financial year? | A1: 


Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 35 | Income Tax Assessment Act 1997 - section 35-10 | 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 - section 35-55

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: o the exception in subsection 35-10(4) of the ITAA 1997 applies; or o 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 - The Commissioner's discretion - special circumstances: Under paragraph 35-55(1)(a) of the ITAA 1997, the Commissioner's discretion can be exercised where: o the business activity is affected by special circumstances such that it is unable to satisfy any of the tests; and o the special circumstances affecting the business activity are outside the control of the business activity. Taxation Ruling TR 2007/6 sets out the interpretation of the exercise of the Commissioner's discretion under paragraph 35-55(1)(a) of the ITAA 1997. The following has been extracted from paragraphs 47 to 53 of this Ruling. Although not limited to natural disasters, paragraph 35-55(1)(a) 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. However, the use of the word 'including' indicates that the type of circumstances to which the special circumstances limb of the discretion can potentially apply is broader than those which are natural disasters. For example, circumstances such as oil spills, chemical spray drifts, explosions, disturbances to energy supplies, government restrictions and illnesses affecting key personnel might, depending on the facts, constitute special circumstances of the type in question. In your case, you believe the affect of natural disasters on the Australian dollar caused you to lose money in your trading activity in the 2010-11 financial year. While natural disasters would generally constitute 'special circumstances' within the meaning of paragraph 35-55(1)(a) of the ITAA 1997, the affects must have prevented you from passing any of the tests. You have stated that your trading transactions are generally closed in a day and your trading account confirms this. Your trading activities involve predicting movements in the value of currencies and commodities. Fluctuations in value of the Australian dollar would not have prevented you from making a profit. It was your trading choices and not the value of the Australian dollar that caused your losses in the 2010-11 financial year. Therefore, the Commissioner is unable to exercise the discretion available in accordance with subsection 35-55(1) and paragraph 35-55(1)(a) of the ITAA 1997 in relation to your activities 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 foreign exchange and contracts for differences trading activities in July 2010. | Your plan was to analyse and capture daily movements in currencies and trade on those differences with transactions closed in a day where possible. | Your trading account shows that in the 2010-11 financial year you had total trading profits of around $15,000 and total trading losses of around $50,000 | You have stated that the affect of natural disasters on the Australian dollar caused you to lose money in your trading activity. | Your income for non-commercial loss purposes in the 2010-11 financial year was less than $250,000.