Edited version of your private ruling

Authorisation Number: 1012284130216

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Ruling

Subject: Trading of contracts for differences

Question 1:

For the year ended 30 June 2012, were you in the business of trading contracts for difference (CFD's)?

Answer:

Yes.

Question 2:

For the year ended 30 June 2012, was your CFD activity, the carrying out of a profit making undertaking or scheme?

Answer:

No.

Question 3:

For the year ended 30 June 2012, did you pass the non-commercial loss, assessable income test?

Answer:

No.

Question 4:

For the year ended 30 June 2012, will you be able to claim your business loss?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

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 are employed on a full time basis drawing a salary and you trade contract for differences (CFD's) after work.

You invested an amount of your own funds for trading the CFD's.

You conducted daily market analysis which included charting, stock market reports, broker research papers and financial news on television to assist in your trading.

You spend approximately three to four hours every weekday evening trading the market and five hours on Saturday or Sunday formulating trading strategies and studying stock chart patterns. Your objectives were to identify the market trend and take on a trade position that would enable you to make a profit after holding the CFD's for a very short period of time (mostly for a few days or less).

You traded on a regular basis making a significant number in the year ended 30 June 2012. All transactions were conducted through an online CFD provider.

Your assessable trade activities amounted to income which was less than $10,000 and your total trading activities ultimately resulted in a loss. You have provided a summary of your activities from the online CFD provider and this summary forms part of this private ruling.

You have a home office set up in your house used solely for the purpose of conducting the business of trading the CFD's. The home office is also not readily suitable for other private or domestic uses. The room was set up with furniture and equipment like an office. The home office you have set up in your home is clearly identifiable as a place of business. You have a designated PC with dual monitor for trading uses, and other office supplies and equipments which you would find in a proper office (for example, printer with fax ability, phone, filing cabinet etc).

You intend to use the fixed rate method to compute your running expenses in relation to your home office in the year ending 30 June 2012. You have operated in the home office for a significant number of hours and thus intend to claim an amount for expenses.

You have yet to establish a business banking account. There are minimal banking transactions at the current time and thus you had been transferring funds from your personal banking accounts. However you will be looking to establish a business banking account to segregate between your private and business funds in the near future as your banking transactions increase.

You have the intention to operate full time in the business of trading from your home office. This will happen gradually as you get more successful in your trading. You also intend to register for an Australian business number if you progress to full time trading.

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,

Income Tax Assessment Act 1997 Section 35-10,

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 and

Income Tax Assessment Act 1997 Section 35-55.

Reasons for decision

Profits and losses from CFD's

Taxation Ruling TR 2005/15 considers the tax consequences of financial CFD's.

Paragraph 11 of TR 2005/15 states that a gain from a financial CFD will be assessable income under 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the transaction is entered into as an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

Paragraph 12 of TR 2005/15 states that a loss from a financial CFD 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.

Are you carrying on a business?

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators or carrying on a business, and no one factor will be decisive (Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). These indicators are described in Taxation Ruling TR 97/11. Outlined below are factors that would generally be taken into account in weighing up the indicators to establish whether a taxpayer is carrying on a business;

· 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 a similar manner to that of the ordinary trade in that line of business,

· whether the activity is planned, organised and carried on is 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.

In your case, you have conducted daily market analysis and research in order to take on a trade position that would enable you to make a profit. You spend a significant amount of time on your trading activities and have established a home office in which these activities are undertaken. You have a business plan and you take a systematic approach to your trading .You have made numerous trades on a regular basis. Based on these factors we conclude that your trading of CFD's constitutes the carrying on of a business rather than the carrying out of a profit making undertaking or scheme.

Non-commercial loss rules (NCL)

Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years.

Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual from a business activity will not be taken into account in an income year unless:

· the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies - where taxpayers carry on a professional arts business or a business of primary production. Taxpayers in these categories may offset a business loss against their other income if their other income for that year is $40,000 or less, or

· you meet the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the four tests in section 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

· the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Section 35-10 of the ITAA 1997 includes an income requirement that must be met (along with certain other tests) in order to include losses from a business activity in the taxable income calculation for the 2009-10 and later income years.

You meet the income requirement if the total of your following income was less than $250,000 for the 2009-10 and later income years:

· taxable income (ignoring any business losses)

· total reportable fringe benefits

· reportable superannuation contributions

· total net investment losses - including financial investment losses and rental property losses.

As outlined above, when the income requirement has been met, taxpayers must also pass one of the four following tests:

· you have assessable income from the business of at least $20,000;

· you have made a profit from the business in three out of the last five years;

· you use real property or an interest in real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business; or

· you use other assets worth at least $100,000 (excluding motor vehicles) on a continuing basis in the business.

In your case, it has been determined that you were carrying on a business of CFD trading in the year ended 30 June 2012.

The losses you made from your CFD activities were business losses and as such, the NCL rules apply.

While you meet the income requirement, you have not passed any of the other four tests. Accordingly, the loss that you incurred from your CFD trading is deferred. Please be advised that losses deferred under the NCL rules are not disallowed but are carried over to offset against future profits.

Please find enclosed a fact sheet that provides some information in respect of the Commissioners discretion and an application for a private ruling on the exercise of the Commissioners discretion for NCL purposes.

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