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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012454949470

Ruling

Subject: Am I in business trading contracts for difference

Question 1:

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

Answer 1:

Yes.

Question 2:

For the year ended 30 June 2012, did you pass the non commercial business loss rules, so that you can offset your CFD business loss in the current year, (year ended 30 June 2012) against your other income?

Answer 2:

Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

You have been trading in CFD's since 1 July 2011.

You have a CFD trading account in your name only with a broker.

Prior to setting up your CFD activity you researched online business news and a certain financial commentator's trading reports.

In regard to training, you have undertaken a Masters of Business Management; and one of the units of study was CFD trading.

You fund your shares and CFD trading through your mortgage redraw loan and facilitate CFD margin calls with your credit cards.

You initially invested a small amount in the first month of trading in CFD's and this reached a much higher amount by the year ended 30 June 2012.

You have no written formal business plan, however your market strategy is to reasonably follow the recommendations of a certain financial advisory firm and supporting news events. All decisions regarding how you carry out the CFD trades is based on this information.

You spend about 40 hours per week carrying out your CFD trading.

For the year ended 30 June 2012 you closed out over 1000 CFD transactions.

You made gains from profitable trades of over $20,000.

You made losses from losing trades of far greater than your profitable trades.

You made an overall net business loss from CFD trading of a certain amount for the year ended 30 June 2012.

You meet the income requirement for the year ended 30 June 2012. The total of the following is less than 250,000:

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

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 35-10,

Income Tax Assessment Act 1997 Section 35-30,

Income Tax Assessment Act 1997 Section 36-10 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

For the year ended 30 June 2012, you were carrying on a business of share trading contracts for difference (CFD's). The losses from your business of CFD trading will be deductible on revenue account in the current year (year ended 30 June 2012), because you pass the non commercial business loss rules.

Detailed reasoning

Contracts for difference

CFD's are a form of cash-settled derivative in that they allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Financial CFD's include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

Unlike share trading, the non-margin amount of a CFD position is merely a deposit. When a transaction is made, the deposit is not included in the calculation of gross receipts. The Commissioner's view about the tax consequences of CFD trading is found in Taxation Ruling TR 2005/15 Income Tax: tax consequences of financial contracts for differences (TR 2005/15). Where CFD trading is part of the carrying on of a business, the gains from the CFD transactions will be accounted for under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and the losses under section 8-1 of the ITAA 1997.

Otherwise, the CFD trading will be regarded as part of the carrying out of a profit making undertaking and the gains from the CFD transactions will be accounted for under section 15-15 of the ITAA 1997 and the losses under section 25-40 of the ITAA 1997.

Either way, the gains and losses from CFD trading are accounted for on revenue account. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from CFD trading to be accounted for under the capital gains tax provisions.

However, a gain or loss from CFD trading entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 nor be deductible under section 8-1 of the ITAA 1997 or section 25-40 of the ITAA 1997. Further, a capital gain or capital loss from a financial CFD entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

In your case, your CFD trading allowed you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

Regarding the matter of whether you were carrying on a business of CFD trading in the year ended 30 June 2012, court cases such as AAT Case 6297 (1990) 21 ATR 3747 and Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 91 ATC 4689; (1991) 22 ATR 344 have held regularity in the buying and selling of shares and sales turnover to be the salient indicators of whether a taxpayer is carrying on a business of share trading. Operating in a business-like manner and the degree of sophistication involved is a supportive indicator.

In your case, in the year ended 30 June 2012, the factors that gave the overall impression that you were in business are:

In regard to the non commercial business loss rules you firstly meet the income requirement because the sum total of the following is less than $250,000.

You must the assessable income test because the total of your profitable trades for the year ended 30 June 2012 is greater than $20,000, you estimate a figure of about $40,000.

Consequently for the year ended 30 June 2012, the losses from your business of CFD trading will be deductible on revenue account in the current year.

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