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My accountant says losses and expenses related to active futures trading can't be deducted against income from a full time job, unless the profit made in trading is over $20,000. Is this so?

This question is outside my expertise. I sought help from Tony Compton, who has provided the magnificent reply below. In the area of taxation, it is important that you understand the nature of advice of this sort. Please carefully read the disclaimer at the end of Tony's answer, for your own protection.

The accountant is either wrong or his client did not understand what he was told. I will include this (with a few amendments) in the second edition of my book Shares Derivatives and Taxation published by Wrightbooks

The accountant is referring to the non commercial activity legislation. This is a result of the Ralph Report which observed a significant cost to the revenue from unprofitable activities carried out by taxpayers which were more like hobbies and/or lifestyle choices.

This legislation is contained in Division 35 of the Income Tax Assessment Act 1997.

Section 35-1 reads:

"This Division prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year the loss is incurred. The loss is deferred.


It sets out a series of tests to determine whether a business activity is treated as being non-commercial.
The deferred losses may be offset in later years against profits from the activity or, if one of the tests is satisfied or the Commissioner exercises a discretion, against other income."

The tests are as follows:

Assessable income test

The assessable income (note this does not say taxable income) from the business activity is at least $20,000.

Profits test
The rule does not apply to a business activity (with the exception of an activity carried on by one or more individuals as partners) if, for each of at least 3 of the past 5 income years (including the current year) there was a profit from the activity for that year. It does not apply for a partner if the partners share of the activity was in profit

for each of at least 3 of the past 5 income years

Real property test

If the "total reduced cost bases of real property or interests in real property" (excluding a dwelling used mainly for private purposes) " used on a continuing basis in carrying on the activity in that year is at least $500,000" the rule will not apply.

.
Other assets test
The rule "does not apply to a business activity for an income year if the total values of assets that are counted for this test ... and that are used on a continuing basis in carrying on the activity in that year is at least $100,000."

The Commissioner has a discretion to decide the rule in Section 35-10 (reproduced below) will not apply if it would be unreasonable to apply it 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 activity, including drought, flood, bushfire or some other natural disaster; or

(b) The business activity has started to be carried on and:

(i) Because of its nature, it has not yet satisfied one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and

(ii) 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 either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsection 35-10(2)). "

Section 35-10(1) and 35-10(2) read.

"35-10(1) the rule in subsection (2) applies for an income year to each *business activity you carried on in that year if you are an individual, either alone or in partnership (whether or not some other entity is a member of the partnership), unless:

(a) One of the tests set out in section 35-30 (assessable income test), 35-35 (profits test), 35-40 (real property test) or 35-45 (other assets test) is satisfied for the business activity for that year; or

(b)The Commissioner has exercised the discretion set out in section 35-55 for the business activity for that year; or

(c) The exception in subsection (4) applies for that year.

Note:This section covers individuals carrying on a business activity as partners, but not individuals merely in receipt of income jointly. Compare the definition of partnership in subsection 995-1(1).

Rule

35-10(2) If the amounts attributable to the *business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess:

(a) Were not incurred in that income year; and

(b) Were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on. "

Paragraph 27 of IT2888 reads:

"Profits derived by taxpayers who are bona fide traders in futures contracts are to be treated as assessable income and losses allowable as deductions. Bearing in mind the nature of trading in futures contracts it is correct to say that it is the profits and losses which represent assessable income or allowable deductions as the case may be. "

This means that providing there was at least $20,000 of profitable trades the assessable income test would be met. If there was $30,000 of loss trades the test would still be met as the relevant figures would be (other income and expenses disregarded):

Assessable income $20,000

Allowable Deductions $30,000

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Taxable Income $10,000 Loss

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Disclaimer

This is not be construed as advice and is offered as information only. Professional advice should be sought from a qualified taxation practitioner before acting on the contents of the reply.

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