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Ruling

Subject: Am I in business - Contract for Difference (CFD) trading

Question 1

For the year ended 30 June 2012, were you carrying on a business of trading in contracts for difference?

Answer

Yes.

Question 2

Can you offset your net non primary production business loss against your other income?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You began trading futures during the tax year ended 30 June 2012.

You engaged the services of a broker to facilitate the trades.

You kept extensive records of your transactions which indicate you conducted numerous trades over the twelve month period from 1 July 2011 to 30 June 2012, these trades were conducted on a daily basis.

You transacted in foreign currencies, primarily trading in commodities including Crude Oil (CL) and gold (GC) on an exchange located in the foreign country.

Gains are derived from speculative transactions (i.e. not a hedge) to profit from short term movements based on strength and resistance levels using a charting program.

Contracts are not held overnight or until maturity.

Gains for the period totalled A$X.

Losses including wire fees for the period totalled A$Y.

The result for the year ended 30 June 2012 was a loss of A$Y. ($X -$Y)

Your adjusted taxable income for the year ended 30 June 2012 was less than $250,000 and your assessable income for that year from the activity is greater than $20,000.

The following documents are to be read with and form part of the scheme for the purposes of the private binding ruling.

Your private ruling application

Reconciliations futures trading - Year ended 30 June 2012.

List of trades - Year ended 30 June 2012.

Copy of invoice from your broker.

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 25-40

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-30

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Summary

For the year ended 30 June 2012 you were carrying on a business of trading in contracts for differences.

Detailed reasoning

CFDs are a form of cash-settled derivative in that they allow investors to take risks on movements in the price for a subject matter (the underlying) without ownership of the underlying.

Participants in CFDs take a risk that the price of the underlying will or will not exceed a price for that underlying at some time in the future.

CFDs include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

A loss from CFDs 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 or in a business operation or commercial transaction for the purpose of profit making.

Carrying on 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. The Courts have held that the following indicators are relevant:

· whether the activity has a significant commercial purpose or character;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Conclusion - Applying the criteria to your circumstances

The factors and indicators that give the overall impression that you were carrying on a business of trading in contracts for differences for the year ended 30 June 2012 were:

· You began regular trading during the year ended 30 June 2012.

· Contracts for differences were held over night or to maturity.

· You engaged the services of a broker to conduct your trades.

· You operated in a business like manner, that is you followed your business plan and used a degree of sophistication; your trading was not left to chance.

· You traded contracts for differences in a regular, routine and systematic manner.

There was a high number of trades and a high turnover of contracts for differences.

The overall impression gained is that you were in the business of trading in contracts for differences for the year ended 30 June 2012.

Question 2

Summary

You can offset your net non primary production loss against your other income for year ended 30 June 2012.

Detailed reasoning

From 1 July 2000, legislation came into effect regarding losses from 'business' activities. Division 35 of the ITAA 1997 contains the measures, known as the non-commercial losses (NCL) legislation.

This Division prevents losses of individuals from NCL being offset against other assessable income in the year the loss is incurred when the individual is not able to pass a test, an exception applies or the individual has been granted the Commissioner's discretion.

If the individual does not pass the test, the tax loss from the business activity is deferred to a later year when the individual is able to pass a test, an exception applies or you have been granted the Commissioner's discretion.

For the 2009-10 income years and future income years, you must first meet the income requirements before you can apply the NCL tests. You meet the income requirement if your income for NCL purposes is less than $250,000.

Conclusion - Applying the criteria to your circumstances

As your adjusted taxable income for the year ended 30 June 2012 was less than $250,000 and your assessable income for that year from the activity is greater than $20,000. You do not come under the measures set out in Division 35 of the ITAA 1997 and you are able to offset your losses from trading in CFDs against other income earned in the year ended 30 June 2012.

In completing your Year ended 30 June 2012 Income Tax Return, you must include your income from your CFD trading activities as the trading is conducted from an establishment in Australia and as a result the income is derived from Australia.

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