ATO Interpretative Decision

ATO ID 2007/56

Superannuation

Self Managed Superannuation Funds: contracts for differences (CFDs) - no fund assets deposited with CFD provider
FOI status: may be released
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Has a trustee of a self managed superannuation fund (SMSF) contravened the Superannuation Industry (Supervision) Act 1993 (SISA) by investing in CFDs?

Decision

No. The trustee of an SMSF has not contravened the SISA by investing in CFDs where they have not deposited fund assets with the CFD provider.

Facts

CFDs are synthetic financial products that enable the investor to access the price movement in shares and other instruments such as stock indices, stock options, currencies and futures contracts without owning the underlying product.

When a CFD is opened the investor pays a deposit into a CFD bank account and may be required to make additional margin payments to cover running losses on open positions. CFDs have a leveraging effect with consequent exposure to potentially large gains and losses stemming from exposure to short term financial risk in relation to a relatively small deposit.

The trustee of an SMSF has invested in CFDs.

The investment is for hedging purposes in accordance with the fund's investment strategy.

Under the product disclosure statement the CFD provider may, under a related agreement, permit an investor to deposit assets with the provider as security against their obligations to pay deposits or margins. The trustee has not entered into any such agreement and has not granted a charge over any fund assets in relation to the obligations to make payments under the CFD.

Reasons for Decision

No provision of the SISA or the Superannuation Industry (Supervision) Regulations 1994 (SISR) specifically prohibits trustees of SMSFs from investing in CFDs.

There is no loan between the CFD provider and the SMSF trustee and therefore no contravention of the prohibition on borrowing by trustees in section 67 of the SISA. The requirement to pay a deposit and meet margin calls does not represent borrowing, they are rather contractual liabilities to make payments if and when required and are not repayments (Prime Wheat Association Ltd v. Chief Commissioner of Stamp Duties (NSW) 97 ATC 5015; (1997) 37 ATR 479). The obligations in relation to CFDs are distinguished from margin lending through a broker's margin account in relation to the purchase of shares by an SMSF, which does represent a prohibited borrowing under the SISA.

The operation of the CFD bank account and the obligation to pay deposits and margins does not create a charge over any assets of the fund. The parties are relying on the contract and not on any security interest to be created by the contract (White v. Conroy (1921) 21 SR (NSW) 257; (1921) 38 WN (NSW) 63, Berrington v. Evans (1839) 3 Y & C Ex 384; 160 ER 73). Under the CFD, the monies in the CFD bank account are the property of the CFD provider and the fund (investor) has no beneficial interest in the account. (Trustees need to examine individual product disclosure statements and contracts to ensure that there is no charge made over an asset as prohibited in regulation 13.14 of the SISR and that all requirements of the SISR and SISA are adhered to.)

The trustee has not entered into any collateral agreement to the CFD that places a charge over any asset of the fund.

The investment is in accordance with the fund's investment strategy as required under paragraph 52(2)(f) of the SISA and regulation 4.09 of the SISR.

Date of decision:  9 March 2007

Year of income:  30 June 2007

Legislative References:
Superannuation Industry (Supervision) Act 1993
   section 67
   section 52

Superannuation Industry (Supervision) Regulations 1994
   regulation 4.09
   regulation 13.14

Case References:
Prime Wheat Association Ltd v. Chief Commissioner of Stamp Duties (NSW)
   97 ATC 5015
   37 ATR 479

White v. Conroy
   (1921) 21 SR (NSW) 257
   (1921) 38 WN (NSW) 63

Berrington v. Evans
   (1839) 3 Y & C Ex 384
   160 ER 73

Related ATO Interpretative Decisions
ATO ID 2007/57
ATO ID 2007/58

Keywords
Superannuation
Self managed superannuation funds
SMSF borrowings
SMSF charge over assets
SMSF investment strategy
SIS covenants

Business Line:  Superannuation

Date of publication:  23 March 2007
Date reviewed:  6 August 2014

ISSN: 1445-2782