Edited version of private ruling

Authorisation Number: 1011805742039

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Ruling

Subject: Am I A Share Trader

Question 1

Are you, as trustee for the self managed superannuation fund (SMSF), carrying on the business of share trading and Contract For Difference trading?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2006

Relevant facts and circumstances

The SMSF (the Fund) has been trading in shares, derivatives and foreign exchange (forex).

An amount of capital was rolled into and contributed to the Fund by the sole member. Of that, a significant amount of the capital was deposited into a trading account.

You, as trustee, have access to an individual with extensive experience as a financial planner for a large organisation.

The Fund utilises a Contract For Differences (CFD) type facility working on margins as the Fund's loan facility.

All funds are deposited into the trading account and are separate to other funds of the SMSF.

The Fund's tax agent provided a list of buy and sell transactions for share and CFD activities undertaken during the two relevant periods through their provider. The Fund's tax agent provided a copy of the Derivative Risk Statement (DRS)Part A and B.

From the information provided, the Fund held stocks in multiple companies in the relevant income years. You, as trustee, undertook a significant number of buy transactions and sell transactions in the relevant income years. Dividends received in the relevant income years were several thousand dollars.

The volume of share and option trading has been substantial. The resulting net sales and purchases for the relevant income years exceeded several million dollars.

The purpose of the trading account is not for capital gain or return of capital.

The Fund does not rely on dividend income nor credits for revenue earning.

Dividend income is generally nil or negligible.

The Fund's account is marked to Market at the end of each year.

The systems and tools utilised to undertake and keep records of the activities are comparable to products offered by CommSec and Esuperfund. The trading platforms and tools offer CFDs on margins as little as 5%.

A home office had been established but it is not used in relation to the activities undertaken by the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 15-15,

Income Tax Assessment Act 1997 Section 25-40 and

Income Tax Assessment Act 1997 Section 118-20.

Reasons for decision

In order to determine if you are carrying on a business, the term 'Business' is defined as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Taxation Ruling 97/11 (TR 97/11) provides guidance on the Commissioner's view about carrying on a business. Whilst TR 97/11 is about carrying on a business of primary production, the business indicators have been developed by the courts of law and are used for all cases about the carrying on of a business.

The business indicators were applied in Shields v. DFC of T 99 ATC 2037; (1999) 41 ATR 1042. Block J said:

· the nature of the activities and whether they have the purpose of profit-making;

· the complexity and magnitude of the undertaking;

· an intention to engage in trade regularly, routinely or systematically;

· operating in a business-like manner and the degree of sophistication involved;

· whether any profit or loss is regarded as arising from a discernible pattern of trading;

· the volume of the taxpayer's operation and the amount of capital employed, and more particularly in respect of the activity;

· repetition and regularity in the buying and selling of stock;

· turnover;

· whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

· maintenance of an office;

· accounting for the share transactions on a gross receipts basis; and

· whether the taxpayer is engaged in another full time occupation.

Court cases such as Smith v FC of T 2010 ATC 10-146, AAT Case 6297 (1990) 21 ATR 3747 and Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 91 ATC 4689; (1991) 22 ATR 344 have held regularity in the buying and selling of shares and sales turnover to be the salient indicators of whether a taxpayer is carrying on a business of share trading. Operating in a business-like manner and the degree of sophistication involved are further supportive indicators.

Contracts For Difference (CFD)

When considering whether you, as trustee, are carrying on a business, the undertaking of foreign exchange transactions must also be considered. CFDs are a form of cash-settled derivative in that they allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Financial CFDs include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

The Commissioner's view about the tax consequences of CFD trading is found in Taxation Ruling 2005/15 (TR 2005/15). Where CFD trading is part of the carrying on of a business, the gains and losses from the CFD transactions will be accounted for under sections 6-5 and 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Otherwise, gains and losses from CFD trading will be regarded as part of the carrying out of a profit making undertaking and accounted for under sections 15-15 and 25-40 of the ITAA 1997.

Either way, the gains and losses from CFD trading are accounted for on revenue account and treated as ordinary income. 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 (CGT) provisions.

In this case, a total amount was rolled into and contributed by the sole member to the Fund. A substantial amount was deposited into the trading account to undertake a combination of stock, derivative and CFD activities. A CFD type facility works on margins and no further capital has been contributed. This is a significant amount of capital and it is accepted that the capital invested has a reasonable characteristic of a business. However, this factor alone does not determine if you, as trustee, are carrying on a business.

The Fund had significant sales for the relevant income years.

The trustee's tax agent provided a DRS Part A and Part B, detailing the Fund's activity strategy. The Fund's investment strategy stated derivatives should not be considered in isolation but as part of the investment strategy as a whole. There are limitations on you, as trustee, using derivatives for speculation including that derivatives will not be used to leverage of gear up the Fund that seeks to circumvent the Superannuation Industry (Supervision) Act 1993 and that the Fund must not borrow any money. You, as trustee, may delegate some investment functions to an external investment manager the prime responsibility remains with you, as trustee.

Part B of the DRS express that derivatives may be used but not exclusively limited to:

· hedging to protect the assets of the Fund against, or to, minimise liability from market value fluctuations;

· achieving transactional efficiency;

· to reduce the transaction cost of achieving required exposure;

· to obtain prices that may not be available in the cash market;

· to control the impact on portfolio valuations of market movements caused by significant transactions;

· to assist in the achievement of the best execution of security transactions

· reducing volatility;

· adjustment to asset exposures within the parameters set in the strategy;

· to adjust the duration of the a fixed interest portfolio; and

· foreign currency hedging.

The Fund's investment strategy analyses the trading position in relation to market, liquidity, counterpart, operational and currency risks adapting strategies and undertakings to counteract these risks. You, as trustee, have access to an individual who is a financial planner with a larger organisation with considerable experience in the financial sector and utilise their knowledge when undertaking the activities.

Whilst the purchase of stock with the expressed intension of receiving a dividend is not characteristic of a share trader, the Fund's strategy is focused on, but not limited to, the ability to make a profit from the transactions in the short-term. You, as trustee, traded stocks over relatively short periods of time, varying between a matter of days to several months. Stocks were not held with the express purpose of returning dividend income; demonstrated by the dividend income received in the income years. These factors indicate that the shares were being held as trading stock rather than for investment.

The Fund has undertaken activities in forex with you, as trustee, closing out the position based on the risk assessment of market trends.

The trading statements from the provider show forex transactions over a limited period in both income years; limited buy and sell transactions, employing a significant amount of capital. In isolation, the activities are not repetitively with a regular turnover. However, the holding periods of the CFDs were short. The buy and sell transactions of stocks and options were repetitive and showed regular turnover. When combined, the activities are considered repetitive with regular turnover.

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. It is necessary to consider not only the intention to make a profit, but also the objective facts of the case. This would include details of how the activity has actually been carried out.

Whilst the Fund's investment strategy does not contain information relating to the decision on repetition and regularity of activities, the strategy focuses on the fact that the you, as trustee, would make decisions based on the information obtained through daily research, analysis of Company and market performance in relation to the DRS. The trustee undertook a significant volume of transactions in the relevant income years. You, as trustee, undertook numerous transactions; consisting of buy and sell transactions in the relevant income years .The activities were undertaken for short term gains with the intention of making a profit on a regular basis. Whilst the Fund acquired shares in multiple companies' stock, the shares were purchased for trading purposes and not held to return dividend income. The dividend income was negligible.

You, as trustee, had access to an individual who is employed full time as a financial planner and utilise their skill base in relation to the Fund's activities. You, as trustee, have an established home office; however, no activities relating to the Fund are undertaken from the home office. You, as trustee, maintain records of the activities through service provider activity statements.

After weighing up the above factors, and the circumstances surrounding the buying and selling of stocks, derivatives and CFDs, the Commissioner considers that you, as trustee, were carrying on a business for the period you, as trustee, were engaged in these activities. The Fund's assets are treated on revenue account. It follows the Fund's income is assessable under section 6-5 of the ITAA 1997 and deductions relating to the Fund's trading activities are deductible under section 8-1 of the ITAA 1997.

Note:

The ruling considers the trustees obligations in relation to income tax and does not consider the implications of the Superannuation Industry (Supervision) Act 1993.

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