Private ruling: Non-commercial losses
Date of advice: 5 December 2016
Published: May 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

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 activity in your calculation of taxable income for the 20YY financial year? | A1: No.

Relevant facts and circumstances: You do not satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997. You are engaged in foreign exchange, futures and contracts for difference (CFD) trading (the activity) as a sole trader. You have been doing this type of activity professionally for various businesses previously. You state the following in relation to the activity: ● you started out with an initial trading account ● you have undertaken a significantly large number of trades ● due to an unexpected crash, your business suffered a substantial trading loss ● throughout this event, you were continually adding cash through the day to your account to cover the losses that were occurring ● the magnitude of the market move was so large that your losses reached the permitted limit and your trades were closed out automatically for a significant loss ● you were not able to recover from this event, resulting in an overall business loss for the financial year You have submitted information to support that this crash was the largest one day loss since 20ZZ.

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)

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: ● you satisfy the income requirement and you pass one of the four tests ● the exceptions apply, or ● the Commissioner exercises his discretion. In your situation, you do not satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, exceeds $250,000) and you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial year in question where your business activity is affected by special circumstances outside your control. '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. For individuals who do not satisfy the income requirement, the business activity must have been materially affected by the special circumstances, causing it to make a loss. In this context, the Commissioner may exercise this discretion for the income year(s) in question where, but for the special circumstances: ● your business activity would have made a tax profit, and ● the activity passes at least one of the four tests or, but for the special circumstances, would have passed one of the four tests Taxation Ruling TR 2007/6 sets out the Commissioner's 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) 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. 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 20YY financial year. You state that due to an unexpected significant market crash, this resulted in you incurring significant trading losses from which you were unable to recover throughout the rest of the year. The question that must be addressed is whether the situation described above is considered special circumstances. Whilst we acknowledge your situation, it is not accepted that these circumstances constitute special circumstances in the way this term is used in the legislation. Currency and stock market fluctuations, irrespective of how abnormal, are considered to be standard risks of carrying on a business in your industry and are not unusual or out of the ordinary. Therefore, the Commissioner will not exercise his discretion under paragraph 35-55(1)(a) of the ITAA 1997 and as such, not allow you to include any losses from your activity in the calculation of taxable income for the 20YY financial year.