Edited version of private ruling

Authorisation Number: 1011572745651

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Ruling

Subject: Capital gains tax - contracts for difference - call and put options - losses

Questions

1. Were you carrying on a business trading in contracts for differences (CFD) during the 2007-08, 2008-09 and 2009-10 income years?

Answer: No.

2. Can you claim deductions for any losses made from your CFD trading during the 2007-08, 2008-09 and 2009-10 income years?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You have traded in contracts for differences for a number of years.

You have provided the following information:

· your intention in trading in the contracts for differences was to make a profit

· you have not been able to ascertain the amount of time spent per week trading in the contracts for differences

· you subscribed to share information resources and read most financial journals

· you chose the contracts for differences based on the information you had obtained by reading as much as possible in relation to the companies you dealt in

· your strategy in regard to buying and selling the contracts of difference was to try to buy low and sell high

· you do not have a business plan for your activities

· you do not set budgets and targets in relation to your trading activities

· you funded your trading activities from work related income and investments prior to your retirement, and from then, funding sourced from your superannuation income and investments

· you did not borrow any money to fund your trading activities; and

· you do not have any qualifications in trading in contracts for differences, but have attended many seminars.

You have provided copies of trading statements for your contracts for differences, which form part of, and should be read in conjunction with this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 25-40

Income Tax Assessment Act 1997 Section 118-20

Reasons for decision

The Commissioner's view about the tax consequences of financial contracts for differences (CFDs) is found in Taxation Ruling TR 2005/15 (TR 2005/15). TR 2005/15 states a loss from CFD trading will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business.

The Commissioner's view on carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11). The indicators in TR 97/11 have been developed by the courts of law and are used for all cases about the carrying on of a business. Whether activities undertaken constitute the carrying on of a business is essentially a question of fact. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

For a CFD trader, the two salient indicators are:

· the repetition and regularity of the activities; and

· organisation in a businesslike manner, which includes whether the activity is carried on in a similar manner to that of the ordinary trade in that line of business and the use of a system or method.

If a taxpayer is not carrying on a business of CFD trading, a loss from CFD trading is an allowable deduction pursuant to section 25-40 of the ITAA 1997, where a taxpayer enters into a CFD transaction in carrying out a profit making undertaking or scheme. TR 2005/15 regards non-business profits and losses from CFD trading as falling under sections 15-15 and 25-40 of the ITAA 1997 rather than falling under the capital gains tax provisions because there is no ownership of the underlying assets by the trader. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from CFD trading to be accounted for under the capital gains tax provisions.

In your case, we have considered the following factors:

· you commenced trading in CFDs after you had retired from full time employment

· you aim to make a profit by buying low and selling high

· you do not have a business plan and did not employ any compelling businesslike method

· you do not have any professional CFD qualifications, however, you have attended seminars on share and option trading

· you studied and researched CFD trading through publications and other reference material; and

· you have provided copies of your CFD trading statements, which outline the number of CFDs that you made during each month.

After weighing up the factors related to your case, there is not one factor which provides any weight to the fact that you were carrying on a business as a CFD trader. The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. There is no obvious pattern or regularity to your CFD trading, and you did not trade during some months. You have not advised how much time each week you spent on your CFD trading and based on the information that you have provided, you have not displayed repetition and regularity in your CFD trading that a person in the business of CFD trading would display. Therefore, it is the view of the Commissioner that you were not carrying on the business of CFD trading.

As the Commissioner generally regards CFD trading as 'an act of commerce', your CFD trading will be viewed as activities carried out by you as part of a profit making undertaking. Therefore, your gains from trading CFDs are assessable under section 15-15 of the ITAA 1997 and losses are deductible under section 25-40 of the ITAA 1997. Any losses that you have made from your CFD trading can be claimed as deductions in the income years in which the losses occur.

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