Edited version of your private ruling

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Ruling

Subject: Are you in business as a Contracts for Differences (CFD) trader?

Question 1:

Are the gains or losses made from your CFD trading assessed under sections 15-15 and 25-40 of the ITAA 1997 and treated as profits or losses made from an undertaking or scheme?

Answer:

No.

Question 2:

Are the gains or losses made from your CFD trading assessed under sections 6-5 and 8-1 of the ITAA 97, and treated as profits or losses made from carrying on a business of CFD trading?

Answer:

Yes.

Question 3:

Do you pass the non commercial loss tests contained in section 35-10 of the ITAA 1997?

Answer:

No.

This ruling applies for the following periods:

1 July 2011 to 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 commenced trading in CFD's during the income year ended 30 June 20XX, and continued to trade for approximately a six month period.

During this time period you completed approximately Y closed out CFD transactions. Of these transactions some trades were profitable, returning an amount of less than $20,000.

Your assessable income from your CFD trading is then less than $20,000.

You have an extensive business plan and methodology in place for your CFD trading. You carry out budgeting and forward planning. You use technical analysis to determine what your entry and exit price points are.

You utilise stop losses at the time of placing your CFD trades, and have a maximum risk per trade in place. You attend trading conferences, subscribe to market newsletters, and consult trading forums daily.

You use a laptop and you phone to research markets and place buy and sell orders for CFD's.

Your income from other sources did not exceed $250,000 during the income year ended 30 June 20XX.

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 division 35

Income Tax Assessment Act 1997 section 35-5

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 36-10

Income Tax Assessment Act 1997 section 36-15

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Tax treatment of CFD trading

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15) outlines the taxation treatment of CFD's. 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 where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be assessed under sections 6-5 and 8-1 of the ITAA 97.

Otherwise, TR 2005/15 states the trading activities will be regarded as 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.

In any case, the gains and losses resulting from a CFD transaction will be of an income nature. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from CFD contracts being assessed or under the capital gains tax provisions.

Carrying on a business of CFD trading

Section 995-1 of the ITAA 1997 defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether or not particular activities constitute a business is a question of fact and degree. A process is undertaken where all the facts of a situation are applied to the relevant indicators, taking into account the weight and influence of the facts within the context of that particular situation.

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). The ruling lists the following indicators as being relevant when determining whether or not a business is being carried on:

· whether the activity has a significant commercial purpose or character

· wether 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 in a businesslike manner such that it is directed at making a profit

· the size scale and permanency of the activity

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

Deferral of losses from non-commercial business activities

A non-commercial business activity is a business activity where the expenses in the year exceed income.

Division 35 of ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year that the loss is incurred. The loss is deferred.

It sets out a series of tests to determine whether a business activity is treated as being non-commercial.

The deferred losses may be offset in later years against profits from the activity or, if one of the tests is satisfied or the Commissioner exercises a discretion, against other income.

The Division only applies to losses from business activities and does not apply to losses arising from mere passive activities. To be able to offset a business loss against other income, you and your business need to meet a number of requirements.

Income requirement

Your income for non-commercial loss purposes must be less than $250,000. It includes your:

· taxable income (ignoring any business losses)

· total reportable fringe benefits amount

· reportable superannuation contributions

· total net investment loss.

If you pass the income requirement, you must also meet one of the business tests, unless you are covered by an exception to the rules or we exercise our discretion to allow you to offset your loss against other income.

Business tests

If you meet the income requirement, you can offset a loss from a business against your income from other sources if the business passes one of these tests:

· The assessable income test - the business has assessable income of at least $20,000.

· The profits test - the business had a profit for tax purposes in three out of the past five years (including the current year).

· The real property test - the value of real property, or of an interest in real property, that you used in the business on a continuing basis was at least $500,000.

· The other assets test - the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000.

Exceptions for artists, primary producers and tax break deductions

There are exceptions to the non-commercial loss rules for primary producers and professional arts businesses. If an exception applies, you can offset a business loss against other income even if you don't meet the usual requirements.

If you don't meet the income requirement

If you don't meet the income requirement, you can apply for a Commissioner's discretion to allow you to offset your loss if:

· special circumstances occurred that were outside your control, or

· due to the nature of the activity, there is

¾ a lead time before the business will make a tax profit

¾ an objective expectation, based on independent evidence, that it will make a profit in a time that is considered commercially viable for that industry.

Application of the law to your facts

In your case, whether or not you are in business is a critical fact that will determine:

· whether your gains and losses from your CFD trading are assessed under Section 6-5 and 8-1 of the ITAA 1997 or in the alternative under Section 15-15 and 25-40 of the ITAA 97

· whether the non-commercial loss legislation applies to you.

As stated earlier the determination of whether or not an activity amounts to a business being carried on is a matter of fact, not of law. The determination is a result of the weight and influence of the facts in that situation.

The facts of your particular situation are applied to the relevant indicators as listed in TR 97/11 below:

Whether the activity has a significant commercial purpose or character

The trading of CFD's occurs without ownership of the underlying asset being traded. As such the trading of CFD's is an inherently commercial activity.

In your case you completed around Y closed out transactions in a six month period. This amount of transactions is indicative of a commercial purpose and character, and represents a significant level of commercial activity.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

In your business plan you have stated that have a profit purpose.

The trading of CFD's is an activity that does have a potential for profit, and some of your trades did generate a profit.

Whether there is a repetition and regularity of the activity

You have completed around Y CFD transactions in a six month period. This would be considered to be a level of activity that is indicative of a business being carried on.

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.

You have submitted a comprehensive business plan, and outlined your trading methodology. It is considered that your methods have the sophistication to be considered to be characteristic of a CFD trader.

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

You are setting budgets and utilising stop losses to minimise your risks while trading CFD's. You undertake your own research, and have well planned out goals and a trading methodology. Your CFD trading appears to be conducted in an organised and businesslike manner.

The size, scale and permanency of the activity

As there is no ownership of the underlying asset when trading CFD's it is the size of your profit and loss which determines the size and scale of your trading activities.

In your case your net trading position for the income year ended 30 June 20XX was a loss. Your settlement amounts were less than $Z.

The size of your CFD trading activities are not substantial, however the quantity of CFD trades made are considered to be at a commercial level.

You also carried on your activities continuously for a six month period.

It is then considered that your operations have the scale and permanency that would indicate that you are carrying on a business of CFD trading.

Conclusion

It is considered that the balance of the above factors indicate that you were carrying on a business of trading in CFD's during the income year ended 30 June 20XX. As a CFD trader, the losses you have made from your CFD activities are deductible under section 8-1 of the ITAA 1997. The loss would be included as non-primary production losses in your relevant income tax return.

As it has been determined that you are carrying on a business in CFD trading, the non-commercial loss legislation must be considered in relation to your circumstances.

You can only apply the loss from you CFD trading to calculate your income for the income year ended 30 June 20XX where the following conditions are met:

· you meet the income requirement and one of the four tests is satisfied

· an exception applies

· the Commissioner has exercised his discretion or ruled that it will be exercised to allow you to claim the loss.

You have advised us that your income from other sources during the income year ended 30 June 20XX will be less than $250,000. Accordingly, you meet the non-commercial loss income requirement.

However, you do not pass any of the four tests as:

· The assessable income from your business is below the $20,000 level.

· You could not satisfy the profits test as you have not been in business for the last five years.

· As there is no ownership of the underlying assets in CFD trading you do not satisfy the assets test.

· CFD trading does not require the use of assets valued at over $100,000 on a continuing basis.

You also do not qualify for an artist or primary producer exception.

As you do not pass any of the tests and do not qualify for an exception your business loss cannot be offset against your other assessable income earned during the income year ended 30 June 20XX.

Your loss from CFD trading would be quarantined, and is deferred until such a time in later years when it may be offset against profits from CFD trading, or until one of the tests are satisfied.

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