ATO Interpretative Decision

ATO ID 2001/23 (Withdrawn)

Income Tax

• This ATO ID is withdrawn and has been included within TR 92/3 Income tax: whether profits on isolated transactions are income.
  This document has changed over time. View its history.

Issue

Whether the entering into of a bona fide futures contract by the taxpayer who has never carried on a business is an 'isolated transaction' of the type contemplated by Taxation Ruling TR 92/3 so that the profit or gain realised on the transaction is income.

Decision

The entering into of a bona fide futures contract by the taxpayer is an 'isolated transaction' of the type contemplated by Taxation Ruling TR 92/3, so that the profit or gain realised on the transaction is income.

Facts

The taxpayer entered into a futures contract with a futures broker (a member of a recognised futures exchange) and made a substantial profit when the contract was closed four months later. No other contracts were entered into by the taxpayer during the year and the taxpayer has never carried on any type of business.

Reasons For Decision

The term 'isolated transaction', in relation to a non-business taxpayer refers to any transaction entered into by the taxpayer. Taxation Ruling TR 92/3 discusses the circumstances under which profits or gains from isolated transactions are income and hence assessable under s25(1) of the Income Tax Assessment Act 1936.

A profit from an isolated transaction entered into by a non-business taxpayer is regarded as income if:

(i)

the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

(ii)

the transaction was entered into, and the profit or gain was made, in the course of carrying out a commercial operation.

The determination of the taxpayer's intention or purpose is made after an objective consideration of the relevant facts and circumstances. Where money is speculated on a futures contract there is a degree of inevitability in the conclusion that the intention of the taxpayer entering into the transaction is to make a profit (Income Tax Ruling IT 2228). In such a case profit making is the very essence of the transaction.

Whether the acquisition of a futures contract is a commercial operation is determined by whether the transaction is commercial in character (Taxation Ruling TR 92/3).

The futures contract is entered into, and the profit is made, in the course of carrying out a commercial operation. The act of engaging a futures broker to acquire a futures contract required the taxpayer to enter a commercial market. Furthermore, by contracting with a futures broker, the taxpayer entered into a relationship of principal and agent with the broker creating rights and obligations of a commercial nature. Finally, the fact that the contract was closed quickly to realise the profit also supports the conclusion that the transaction is of a commercial character.

As the futures contract is acquired for a profit making purpose and is acquired as part of a commercial operation, it is an isolated transaction of the type contemplated by Taxation Ruling TR 92/3, and the profit or gain on the transaction is assessable income.

Legislative References:
Income Tax Assessment Act 1936
   section 25(1)

Case References:
Cooper v Stubbs
   [1925] All ER 643

Related Public Rulings (including Determinations)
TR 92/3
IT 2228

Keywords
Income
Futures
Windfall gains

Siebel/TDMS Reference Number:  NEW80208; 1-BKTYCYB

Business Line:  Small Business/Individual Taxpayers

Date of publication:  4 June 2001

ISSN: 1445-2782