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Ruling

Subject: Am I in business as a futures trader?

Question 1

For the income year ending 30 June 2011, were you carrying on a business of trading in futures?

Answer

No.

Question 2

For the income year ending 30 June 2011, are the gains or losses made from your futures trading treated as profits or losses made from an undertaking or scheme, and assessed under sections 15-15 and 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

For the income year ending 30 June 2011, do the gains or losses made from your futures trading activities fall under the capital gains tax (CGT) provisions?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 2011.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

At some time during the 2011 income year you commenced trading futures through your broker. From that time until the end of the 2011 income year you completed buy and sell transactions.

Your profit and loss from these trades ranged from a profit of under $500 to a loss of under $500. You made an overall profit of less than $5,000.

You received daily charting listings. You paid for trading room access, and received training education on futures trading. Your trades were conducted via the internet.

You had a profit making intention.

Your investment amount was less than $10,000.

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

Reasons for decision

Tax treatment of futures

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR2005/15 is about the taxation treatment of financial contracts for differences (CFD). A CFD is a form of cash settled derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

TR 2005/15 states speculating on the financial market via a CFD is very similar to speculating in futures contracts. While financial markets describe subtle differences between CFD's and futures contracts, the provisions in TR 2005/15 apply to both. This is because both trading products are derivatives where there is no purchase or sale of the underlying commodity, and a profit or loss is not realised until the transaction is completed, or closed out.

TR 2005/15 states where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be accounted for under sections 6-5 and 8-1 of the ITAA 1997.

Otherwise, TR 2005/15 states the trading activities will be regarded as part of the carrying out of a profit making undertaking and a net gain or a net loss from trading will be accounted for under either section 15-15 or 25-40 of the ITAA 1997.

Either way, the gains and losses resulting from a futures transaction will be of an income nature. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from futures contracts being accounted for under the capital gains tax (CGT) provisions.

Regarding the matter of carrying on a business, Administration Appeals Tribunal Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 listed the following indicators as those to be considered for carrying on a business of share trading:

· 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 by him;

· and more particularly in respect of share traders:

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

· 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;

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

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR 97/11). It lists the same indicators as above. TR 97/11 states in determining whether an entity is carrying on a business, all of the above indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character.

In your case, for the income year ending 30 June 2011, you were not carrying on a business of futures trading for the following reasons:

For the tax period from in question, you displayed some regularity and repetition in trading on a short term basis, which is a favourable indicator of carrying on a business. However, your transactions had little commercial significance, averaging profits and losses of less than $500 per trade. The amount of capital invested by yourself would not be considered a commercial amount

It follows the relevant indicators of a business such as turnover, amount of capital employed, the complexity and magnitude of the undertaking, operating in a business like manner and the degree of sophistication involved were not satisfied.

Your lack of a commercial character was shown by your low gross trading profit and your low gross trading loss. Please note in futures trading, as there is no ownership of the underlying asset, your gross trading profit and loss is not calculated from the value of the underlying commodity.

The impression gained is your activities were an experimental foray into futures trading rather than the carrying on of a business. Paragraph 41 of TR 97/11 states experimental or pilot activities generally do not amount to a business.

This impression gained is supported by the low volume of your trading activity.

To conclude, for the income year 30 June 2011, you were not carrying on a business of futures trading. However, TR 2005/15 states where a business is not carried on, a net gain or net loss from futures trading will be accounted for under section 15-15 or section 25-40 of the ITAA 1997. It follows your net gain or net loss from your futures trading will form part of your ordinary income.

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