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Edited version of private ruling

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Ruling

Subject: Deductions for brokerage

Question:

Can you claim a deduction for the brokerage that your broker has not disclosed to you but which has been added to the buying rate and deducted from the selling rate for each transaction?

Answer:

No.

Relevant facts and circumstances

You carry on a business of trading in foreign currency (forex).

Your broker charges a commission to you for each transaction but does not disclose the amount of the commission fee to you.

Instead your broker takes into account the commission fee by adding it to the buying rate and deducting it from the selling rate for each transaction. The revised rates are the rates that your broker quotes to you.

You generally trade in actual full currency but at times also trade with a 20% margin via the broker.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1. 

Income Tax Assessment Act 1997 Section 6-5. 

Income Tax Assessment Act 1997 Section 775-15. 

Income Tax Assessment Act 1997 Section 775-30. 

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Where an outgoing is of a capital nature in relation to the cost base of a CGT asset, it will be accounted for under section 110-25 of the ITAA 1997, which includes subsection 110-25(3) for incidental costs. Remuneration for the services of a broker is an incident cost listed in Section 110-35 of the ITAA 1997 that can be included in the cost base of a CGT asset.

In general, brokerage fees are an allowable deduction when incurred in the trading of contracts for differences (CFD) and similar cash settled derivatives or futures. A characteristic of a CFD is the trader does not have ownership of the underlying asset. Taxation Ruling TR 2005/15 provides CFD trading is generally accounted for on revenue account, regardless of whether or not a taxpayer is carrying on a business. It follows the brokerage on a CFD trade is a deductible expense (rather than an incidental cost included in the cost base of a capital gains tax asset).

Where a trader has ownership of the underlying asset in respect to trading in foreign currency, the tax treatment will fall under Division 775 of the ITAA 1997, specifically forex realisation event 1 in section 775-40 of the ITAA 1997.

The object of Division 775 is to recognise foreign currency gains and losses for income tax purposes by including forex realisation gains in assessable income (section 775-15) and by allowing forex realisation losses as deductions (section 775-30) that are made from forex realisation events.

Forex realisation event 1 is CGT event A1 that happens if you dispose of foreign currency or a right or a part of a right, to receive foreign currency. Although forex realisation event 1 is CGT event A1, the gains or losses will be accounted for as assessable income or income deductions, that is, on revenue account. However, as CGT event A1, any brokerage incurred in foreign currency trading will form part of the CGT cost base under sections 110-25 and 110-35 of the ITAA 1997.

Although sections 8-1 and 775-30 allow income deductions for brokerage fees, when a broker does not disclose to a trader the quantum of their brokerage fees and instead revises the rates quoted to the trader to take into account the commission, the trader cannot claim a deduction for the undisclosed fee. The reason for this is the trader will have already received the benefit of a deduction for the brokerage fee. The trader's proceeds on profitable trades will have been reduced by the brokerage fee and the trader's losses on unprofitable trades will have been increased by the brokerage fee.

For example, a broker charges $50 per trade. When a trader makes a profitable trade of $1,000, they will receive proceeds of $950. The trader's assessable income is $950 instead of $1,000. The cost of the brokerage has already been deducted from their assessable income.

Similarly, when a trader makes an unprofitable trade of $1,000, they will bear a loss of $1,050. The trader's assessable income includes a loss of $1,050 instead of a loss of $1,000. The cost of the brokerage has already been deducted from their assessable income.

To conclude, you cannot claim a deduction for your undisclosed brokerage fees because that would result in you receiving a second deduction for a cost that has already been deducted from your assessable income.


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