Private ruling: Non-commercial losses-Commissioner's discretion
Published: October 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2009

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 person X to include any losses from their share trading activity in their calculation of taxable income for the relevant financial years? | A1: No.

Relevant facts and circumstances: The income for person X for the relevant years exceeds the non-commercial losses threshold of $250,000. Person X commenced share trading in the 200X financial year and did not made a profit in any year. In the relevant financial years there was considerable share trading transactions. In 20YY person X was diagnosed with an aggressive illness and ceased work. Significant amounts of shares were sold during the 20ZZ financial year as person X was unable to manage the purchases due to illness. In 20YY person X had a major operation in relation to illness and ceased work. After surgery person X rested in recovery from the operation for a period of months and commenced part time work in 20ZZ. Person X was required to cease work later in 20ZZ but recommenced part time work in 20VV with the expectation of returning to full time work in late in 20VV however succumbed to illness and passed away. The trading activities resulted in a loss in the relevant financial years due to unforseen market conditions.

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 paragraph 35-55(1)(a)

Reasons for decision: Summary: Paragraph 35-55(1)(a) of the ITAA 1997 sets out the first arm of the Commissioner's discretion as follows: The Commissioner may decide that the rule in section 35-10 does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because: (a) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances. No exhaustive definition of 'special circumstances' is given. The question of what constitutes 'special circumstances' has been judicially considered on many occasions. In the Federal Court case of Community Services Health, Minister for v. Chee Keong Thoo (1988) 8 AAR 245; (1988) 78 ALR 307, Burchett J considered 'special circumstances' in the context of the Health Insurance Act 1973 and made the following observation: Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of 'special circumstances' is that there is something unusual or different to take the matter out of the ordinary course… Later, in the Federal Court Case of Secretary, Department of Employment, Education, Training & Youth Affairs v. Barrett and Another (1998) 82 FCR 524 'special' was considered in the context of 'special weather conditions' for the purposes of the Austudy Regulations 1990. Tamberlin J observed that: The word 'special' must be read in context. In normal parlance it signifies that the event or circumstances in question are out of the ordinary or normal course. Tamberlin J then quoted the following passage with approval from the AAT case of Re Beadle and Director-General of Social Security (1984) 1 AAR 362; (1984) 6 ALD 1: An expression such as 'special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special. In the context of Division 35 of the ITAA 1997, special circumstances are ordinarily those affecting the business activity such that it would be unreasonable for the loss deferral rule to apply. TR 2007/6 states at paragraph 47: ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. In Scimitar Systems Pty Ltd v. DFC of T (2004) 56 ATR 1162; [2004] AATA 720 ( Scimitar ), the AAT decided that the prevailing economic conditions pertaining to the IT industry did not constitute 'unusual circumstances' applying to the taxpayer in the relevant year of income. The Commissioner did not find in favour of the taxpayer where an economic downturn in the industry was the reason the taxpayer failed to meet a specific test in relation to personal services income. Paragraph 50A of TR 2007/6 states that where the business activity is carried on by an individual who does not satisfy the income requirement and this activity would have made a loss even if it had not been affected by special circumstances, it is also unlikely that it would be considered unreasonable for the loss deferral rules to apply and therefore the Commissioner is unlikely to exercise the discretion. Past performance of the business activity would be a consideration in these cases. In this case trading activities resulted in losses in the relevant financial years due to unforseen market conditions. Whilst we accept that unforseen market conditions in those years were not within person X's control, we consider the fluctuations to be a normal part of the share market and financial industry. In the 20YY financial year when the illness was first diagnosed and person X underwent and rested from surgery the share trading transactions increased both in sales and purchases in comparison to the previous year. In the 20ZZ financial year the trading transactions were again considerably greater compared to the period prior to the illness. This leads to the conclusion that although person X was ill trading continued and the fluctuating market was the reason for the sustained losses over those years rather than the inability to manage the trading due to illness. In view of the above, the Commissioners discretion in respect of special circumstances will not be exercised for the relevant financial years.