Edited version of your written advice

Authorisation Number: 1013115039892

Date of advice: 27 October 2016

Ruling

Subject: ABC trading

Question 1

Are your ABC activities regarded as a business for taxation purposes?

Answer

No.

Question 2

Is the income from your ABC trading regarded as assessable income?

Answer

Yes.

Question 3

Are you entitled to a deduction for your losses in relation to your ABC activities?

Answer

Yes.

Question 4

Are your ABC trading activities regarded as gambling?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You have been trading in ABC.

You spent money on ABC trading and lost the majority of your money.

You earned some income from your ABC trading.

You stopped trading after a few months as you became busy with work and family life.

You traded on XYZ. The right prediction provides up to 80% return, while the wrong prediction loses the money. The expiry time can be as little as 30 seconds. A minimum deposit of $XX is required.

You are a professional and work full time.

You have no business plan or detailed strategy.

You treat your trading like betting, where you guess whether XYZ will increase or decrease.

Before starting you did some research on whether the trading was a scam and some research on XYZ Trading.

You did not have a budget for your trading. If you felt like trading, then you deposited and traded.

You have not traded in ABC or other financial products previously.

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 paragraph 118-37(1)(c).

Reasons for decision

Carrying on a business

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Where a person trades in options as a business, the associated income is assessable as business income under subsection 6-5(2) of the ITAA 1997.

However where a person is not in business, the options may be assessable as a profit making activity or as a capital gain.

Therefore it is necessary to firstly consider whether your ABC option activities are regarded as a business.

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

● 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 regularity and repetition of the activity

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

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

Applying the relevant indicators to your circumstances

In your case, the lack of a structured business plan does not support a business like operation. There was no stated intention of engaging in business. You did not carry on the activities in a similar manner to that of ordinary traders in the business of financial investments, nor did you plan, organise or carry out the activities in a systematic or businesslike manner. Your ABC activities were carried on for a relatively short period of time during the year, that is, there was no permanency in your activities.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not a ABC trader and your activities are not regarded as a business for taxation purposes.

Profit making activity

Section 15-15 of the ITAA 1997 states that you assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income where the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business.

The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer), that:

The authorities establish that a profit or gain so made [in an isolated transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) states that isolated transactions includes 'transactions entered into by non-business taxpayers'.

The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences and Australian Taxation Office Interpretative Decision ATO ID 2010/56 Assessable income: derivation of income - spread betting are also relevant in your situation even though you did not trade in contracts for differences or spread betting.

TR 2005/15 states at paragraph 23 that:

…speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets.

In concluding that speculation on a financial risk can be characterised as being commercial, TR 2005/15 bases that conclusion on the following attributes of a financial contract for differences:

● it cannot be assigned;

● it does not provide ownership of the underlying asset;

● they are essentially contracts of speculation productive of a gain or a loss stemming from exposure to a short term financial risk; and

● the risks assumed are all the basic subject matter of the financial services industry.

It is considered that ABC have the same characteristics. That is, they are seen as commercial transactions. ABCs provide a means of accessing the financial markets and are marketed as investments. ABCs are influenced by movements in various financial markets, indices or commodities. They allow the person to choose the duration of the ABCs trade which provides some level of control over the risk the person exposes themselves to. ABCs are held short term and result in a gain or a loss under each transaction.

Those participating in ABCs trading generally have an underlying intention to make a profit. Therefore the net profits from such a venture/activity would be assessable as either ordinary income under section 6-5 of the ITAA 1997, or assessable under section 15-15 of the ITAA 1997 as a profit making undertaking.

In your case, although you may not have had a specific profit making plan, the outlay of capital coupled with the number and nature of your transactions indicate there was a purpose of profit in your activities. It is considered that your ABCs trading was a profit making undertaking. Therefore, the income received from your trading is included in your assessable income.

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

Section 25-40 of the ITAA 1997 allows a deduction for a loss arising from the carrying on or carrying out of a profit-making undertaking or plan if any profit from that plan would have been included in your assessable income by section 15-15.

As stated above, you are considered to have a profit-making undertaking in carrying out your ABC trading. Therefore the losses on your activities are an allowable deduction.

Gambling

A gain or loss from ABCs 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 ABC trading entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

TR 2005/15 at paragraph 43 establishes that there are two factors that differentiate between profit-making and gambling:

● the chance-to-skill spectrum; and

● the private/recreational-to-commercial spectrum.

Paragraph 70 of TR 2005/15 states the distinguishing factor between financial contract for differences and recreational gambling is the degree of control investors have in determining when to close out a financial contract for differences. This degree of control allows skill and judgment to be exercised right up to the time of termination.

From a review of trading platform which offers ABC trades, it does not appear that ABCs have the same degree of control as financial contracts for differences as there is no 'close out' option (or stop-loss feature). ABCs appear to offer less control than financial contracts for difference and are therefore one step further away from the skill end of the chance-to-skill spectrum than financial contracts for difference.

Whilst not the same type of control, an element of control lies in the ABC trade that a taxpayer decides to carry out. A trader can choose to carry out a high/low trade, a one touch trade, a boundary trade or a 60 seconds trade. A taxpayer is also able to select the expiry time for the trades. In addition, the target price of the indices, XYZ rates, stocks or commodities on which trades are placed are constantly fluctuating and require constant concentration to ensure the trade puts you in the best position possible.

It can be concluded that there is skill required in carrying out ABCs trading. Whilst the skill and judgment required for ABCs trading may not be as high as a threshold compared to financial contracts for difference, the skill and judgment required for someone trading with ABCs is over and above the skill required to say, place a bet on horse races or on roulette at a casino.

On a consideration of the overall facts in your case and the particular attributes of ABCs, ABCs trading appears to lie marginally towards the skill end of the chance-to-skill spectrum.

The conventional forms of gambling have a strong association with the concept of recreation and in some cases, are a social or community activity. In the case of ABCs trading, financial contract for differences and spread betting, there is no strong link with recreation or with a social or community activity for any of these types of investments, or any link between recreation gambling and the financial investment industry in general.

Case X85 90 ATC 615; (1990) 21 ATR 3728 (Case X85), in considering the loss incurred by a taxpayer involved in a futures contract, states at paragraph 13 that:

The essential question in the gambling cases is whether, by granting deductibility to the expenditure, the tax system is subsidising the personal “consumption”' activities of the taxpayer. It may seem strange, but I understand that there are Australians who view the losing of money at the racecourse or on other forms of gambling as a leisure pursuit.

However, it is not ordinarily expected that ABC trading is entered into for recreation. The action of purchasing financial risk is essentially commercial.

In your case, you spent money for your ABCs trading. You carried out several transactions in your X month period. You ceased trading when you became busy with work and family life. You are a professional and did some research on XYZ Trading. Although you had no previous experience in trading ABCs, your ABCs trading is not considered to be a gambling activity. There is no evidence to show your ABCs transactions were part of an overall pursuit of recreational gambling for you.

Therefore where your ABC trading activities were regarded as being capital, the exemption under paragraph 118-37(c) of the ITAA 1997 would not apply.

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