Edited version of private ruling

Authorisation Number: 1011834512376

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: contracts for difference trading

Question

Are the gains from your Contracts for Differences (CFDs) trading activities included in your assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You have entered into CFDs.

In 2010 you had approximately X trades for a total of approximately $X000 profit.

You place orders on items that are in your opinion in long term bull trend.

You do not do any charting as you don't have the time.

You used to be a consistent gambler.

In recent years your success on gambling has decreased significantly.

Your intention of starting to trade in CFDs was to replace your normal gambling, as a side line interest to your main income.

You also hoped to make some money from this activity.

You have no specific skill in relation to CFDs and you have not dealt with CFDs in the past.

You have no formal education in this area.

Your occupation is unrelated to the financial markets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5 and

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The gains you make from trading CFDs are assessable as they were obtained in a commercial transaction for the purpose of profit making.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Taxation Ruling TR 2005/15 deals with the tax consequences of financial CFDs. CFDs are essentially a commercial activity of purchasing a financial risk in the financial markets.

TR 2005/15 states that gains made from entering into a CFD will be assessable as ordinary income under section 6-5 of the ITAA 1997 where:

· a taxpayer enters into a CFD as an ordinary incident of carrying on a business; or

· the CFD is obtained in a business operation or commercial transaction for the purpose of profit making: Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199: 87 ATC 4363; (1987) 18 ATR 693.

Gains will be assessable under section 15-15 of the ITAA 1997 where a taxpayer enters into a financial CFD in carrying on or carrying out a profit-making undertaking or scheme, and the gain is not assessable under section 6-5 of the ITAA 1997.

Gains are not assessable where they are of a recreational, gambling nature, involving chance.

Paragraph 43 of TR 2005/15 states

A taxpayer who enters into a financial contract for differences only once, or very occasionally, who has no expertise in the price of the underlying by which the gain or loss of the financial contract for differences will be calculated, does not engage in any income-producing activities of a character bearing some association or connection with the financial contract for differences or its underlying, and, in particular, who gambles in the ordinary recreational way and who has entered into the financial contract for differences in circumstances such that the financial contract for differences may be seen to be part of that recreation may establish that the gain or loss is the product of gambling (and not the result of a profit-making endeavour.)

The distinction between profit-making and gambling is a question of fact in each case. The horse race betting cases have established that:

· there is a chance-to-skill spectrum and gains which depend on a significant element of skill are more likely to have tax consequences than 'gambling on merely random events' (Brajkovich v. Federal Commissioner of Taxation 89 ATC 5227 at 5233 and 20 ATR 1570 at 1576-77 (Brajkovich)); and

· there is a private/recreational-to-commercial spectrum and the more closely an activity is identified as undertaken for recreational purposes, the less likely it will have tax consequences.

Paragraphs 66 and 67 of TR 2005/15 state:

66. The Tax Office view is that financial contract for differences transactions and horse race betting are different in character. In particular, transacting with a financial contract for differences is closer to the skill end of the chance-to-skill spectrum and the commercial end of the private/recreation-to-commercial spectrum than a bet on horse racing.

67. Transacting with financial contracts for differences is essentially a commercial activity of investing in a cash-settled derivative, albeit in the legal form of a contract of gaming and wagering, in relation to an underlying financial risk. The action of purchasing financial risk is essentially commercial.

Application to your circumstances

It is not considered that you are carrying on a business. However, due to the number of transactions that you have entered into and the inherent commercial nature of CFDs it not considered that you are involved in merely a gambling activity.

Based on the facts that you have provided, you enter into CFDs with a purpose of profiting from the expected movement in the financial market. This establishes the existence of a profit making intention and the CFDs will be entered into in the course of carrying out a commercial transaction. Therefore, any gain will be assessable as ordinary income under section 6-5 of the ITAA 1997. Alternatively, the gain will be assessable under section 15-15 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).