Edited version of private ruling

Authorisation Number: 1011820640370

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Ruling

Subject: Am I A Contracts For Difference Trader - assessable on revenue or capital account

Question 1

Are you carrying on a business of Contracts For Difference trading?

Answer:

Yes.

Question 2:

Are any profits made from your CFD activities assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and the losses related to the activity allowable deductions under section 8-1 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You completed a relevant degree.

You intend utilising your activities to generate future income.

You have utilised a sum of capital to commence your activities.

You have undertaken a substantial volume of transactions within a 12 month period. You undertook two thirds of transactions as sell transactions and a third as buy transactions.

You undertake your activities substantial number of hours per week, researching, monitoring the market and undertaking buy and sell transactions.

You established a mobile broadband service to enable you to undertake your activities at any location, accessing the market 5 days per week over a 24 hour period.

You subscribe to specialist web-based site for advice on trading in currencies utilising an alert system and trading platform.

Your trading platform keeps records of your activities, including the profit or loss, contract size, transaction dates from opening to close by trade numbers.

Your CFDs were held for between a matter of hours, to days and weeks.

You incurred losses during the period you undertook the activities. Your assessable income obtained from the activity statement provided by your provider exceeded $20,000.

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 15-15,

Income Tax Assessment Act 1997 Section 25-40,

Income Tax Assessment Act 1997 Section 35-5,

Income Tax Assessment Act 1997 Section 35-30,

Income Tax Assessment Act 1997 Section 35-35,

Income Tax Assessment Act 1997 Section 35-40,

Income Tax Assessment Act 1997 Section 35-45,

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 995-1 and

Taxation Administration Act 1953 Section 45-330.

Reasons for decision

Question 1

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'.

Two specific factors assist in determining the activities as a business, repetition and the existence of a purpose of making a profit. (Smith v FC of T 2010 ATC 10-146). 

The decision in Smith v FC of T 2010 ATC 10-146 identifies a number of factors as being relevant as to whether a taxpayer is carrying on a business as a share trader including the nature of the activities, complexity and magnitude of the undertaking, whether there was a discernible pattern of trading, whether there was repetition and regularity in buying and selling of shares, the volume of transactions, whether the taxpayer had been operating to a plan and whether professional advice was sought.

In that case, the taxpayer was one of five directors employed by Babcock & Brown. The taxpayer's evidence was that, until 2006, he did little share buying and selling, holding his shares for considerable periods. In July 2006 he undertook a new margin loan facility and transferred his existing share portfolio to Bankers Trust on favourable terms. He then substantially increased the level of his day-to-day activities in share dealing, including the number and value of purchases and sales of parcels of shares and securities, the equity and loan capital invested, the level of personal time commitment and the range, complexity and method of operation of share dealing.

According to the taxpayer, from July 2006 he was actively dealing and trading in shares and securities through buying, holding and selling the shares and securities for short-term profit-making by way of regular and repetitive transactions. Nevertheless he did not represent himself as a share trader until after he had lodged his income tax returns for 2007 and 2008; rather he treated himself as an investor in the share market, with gains and losses from the share market returned in his income tax returns as capital gains or losses.

At issue was whether the taxpayer was carrying on a business, and specifically whether he was in the business of being a share trader rather than an investor in 2007 and/or 2008. The taxpayer submitted that whether a person was a dealer or trader was a matter of fact, and that "purpose" was relevant only where the activity had not yet commenced. In the alternative, he argued that he was carrying on a business of trading in revenue assets, and that the profits and losses from the realisation of sales of shares would be ordinary income.

The decision affirmed that the taxpayer invested reasonably large amounts of money in shares during the relevant period, and conducted various buying and selling transactions. However, he did not meet the tests in order to be held to have been conducting a business in 2007 and 2008, nor to have been a share trader in the relevant years.

The taxpayer's activities in buying and selling shares did not demonstrate that he was conducting a business, or in the business of share trading. There was no plan, repetition or regularity in the buying and selling of his shares. Moreover his activities did not demonstrate the purpose of profit-making: he held shares for longer periods than a trader would, and did not take profits as they arose. He was reliant on (and restricted by) Babcock & Brown's processing of approval to buy and sell, and he did not keep any separate accounting records. During 2008 his sales appeared to be due to the substantial downturn in values of his shares, which occurred due to the economic downturn. He gave the impression that he was more of an investor than a trader.

The taxpayer was not carrying on a business of dealing in revenue assets, rather his disposals of shares and other securities were none other than a mere realisation or change of investment. His shares could not be treated as trading stock on revenue account.

Examples of the application of these factors by the Administrative Appeals Tribunal (AAT) is evidenced in Case W8 89 ATC 171; (1988) 20 ATR 3182 a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share trading.

In contrast to that decision, Case X86, disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market.

Contracts for Difference

The Commissioner's view about the tax consequences of CFD trading is found in Taxation Ruling TR 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.

Regarding the matter of carrying on a business, court cases such as 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 is a supportive indicator.

In your case, the salient indicators are evidenced in the trading statements from your provider indicating you undertook a substantial volume of transactions, two thirds were sell and one third were buy transactions during the period you undertook the activity. Your activities were repetitive with a regular turnover. The holding periods of the CFDs were usually short. You invested an amount of capital at the commencement of your activities. Your intension was to buy and sell CFDs for short term gains with the intention of making a profit to provide an income stream of a determined amount per week. The supportive indicators include the business-like manner in which you undertook the activities. Your buying and selling strategy relied on research and advice provided by your online specialist. You conducted daily market research and analysed the market reports; utilising the information to undertake your activities. You dedicated a substantial number of hours per week to your activities. Whilst you do not use a dedicated home office to undertake your activities, you prefer to utilise your mobile broadband connection to allow you to trade at any location and use a portable computer device to access this connection to your trading platform. You maintained records of your activities.

After weighing up the above factors, and the circumstances surrounding your buying and selling of CFDs, the Commissioner considers you are carrying on a business for the purpose of profit making during the period you were engaged in this activity.

Question 2

As you are considered to be carrying on a business, it follows that the income from the activity is assessable under section 6-5 of the ITAA 1997. The losses related to the activity are allowable as deductions under section 8-1 of the ITAA 1997 with the Commissioner confirming this view in paragraph 12 of TR 2005/15 where the transaction is entered into as an ordinary incident of carrying on a business.

Note:

If you're in business as an individual, either alone or in partnership, you must ensure you meet non-commercial loss rules to determine whether you can offset the loss against other income sources, such as salary and wages.

Further information may be found on the ato.gov.au website

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