Edited version of your written advice

Authorisation Number: 1013118394043

Date of advice: 1 November 2016

Ruling

Subject: XYZ investments

Questions 1

Are the profits from your investment activities assessable?

Answer

Yes.

Questions 2

Are any losses from your investment activities deductable?

Answer

Yes.

Questions 3

Will your investment activities be subject to capital gains tax?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You and your spouse have commenced investment activities.

You have a managed account with an investment organisation.

You will make a number of trades each year.

Some of the trades are short term trades expiring on the same day and some trades are done months in advance.

You will reinvest any profits you make.

Your investment activities are for the purpose of profit making.

Trades are placed a number of times a week by your account manager and you place small trades yourself.

You access your account on a daily basis to check the progress of account.

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 15-5

Income Tax Assessment Act 1997, Section 25-40

Income Tax Assessment Act 1997, paragraph 118-37(1)(c)

Reasons for decision

The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences (TR 2005/15) and ATO Interpretative Decision ATO ID 2010/56 Assessable income: derivation of income - spread betting (ATO ID 2010/56) have been applied.

Participation in investment trading has been identified as a commercial transaction and seen as speculation on a financial risk similar to what is discussed in the ATO views contained in TR 2005/15 and ATO ID 2010/56.

Therefore in adopting the above view, where the trading is carried on as a business, the gains from the 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.

If the trading is not carried on as a business, but is however carried on as either:

• commercial trading with a profit making purpose; and/or

• a profit making undertaking of trading,

then any profit will be assessable on revenue account as either ordinary income and accounted for under section 6-5 of the ITAA 1997.

Carrying on a business

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) specifically refers to primary production. However the same principles apply to all businesses. The indicators of carrying on a business which the courts have considered to be relevant include:

• whether the activity has a significant commercial purposes 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.

No one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). The indicators must be considered in combination and as a whole.

In applying factors (a) to (h) from TR 97/11 to determine whether you are carrying on a business, it is acknowledged that the activity undertaken by you has some characteristics that aligned with it being a business, rather than a hobby such as the purpose of profit, and it is characterised by regular and repetitive activity.

Thus, after consideration all of the relevant indicators and the circumstances of your case, it is considered that you are not carrying on a business of trading as your level of knowledge and preparation is limited and not as sophisticated as that of a person who would be in the business of this investment and you have engaged an account manager to assist you in your profit making endeavours.

Commercial trading with a profit making purpose; and/or A profit making undertaking of trading. (Not carrying on a business of trading.)

Section 6-5 of the ITAA 1997 states that: 'Your assessable income includes income according to ordinary concepts, which is called ordinary income.' Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if 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 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides the ATO view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5 of the ITAA 1997.

The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers'.

Paragraph 16 of TR 92/3 states that:

If a taxpayer who is not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

For example, paragraph 19 of TR 2005/15 confirms the principles established in Myer and TR 92/3 are applicable to financial contracts for differences where the profit or loss was made in either a business operation or a commercial transaction for the purpose of profit making.

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 this investment has the same characteristics. They are commercial transactions.

This trading is seen as commercial transactions, this combined with the fact that you had a profit making purpose, means that if you make net profits from the venture / activity they 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.

Recreational Gambling

It is also necessary to consider whether the trading activities constitute recreational gambling rather than a profit-making activity. In most but not all circumstances, profits and losses from gambling activities are not assessable as income or deductible as expenses.

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.

TR 2005/15, paragraph 70 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.

Based on information available to us, it does not appear that this investment has the same degree of control as financial contracts for differences as there is no 'close out' option (or stop-loss feature). This investment appears 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 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, Forex rates, stocks or commodities on which trades are placed are constantly fluctuating and, require constant concentration to ensure the trade puts the investor in the best position possible.

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

This type of trading appears to lie marginally towards the skill end of the chance-to-skill spectrum, albeit the skill is exercised in the case by the account manager rather than by yourself.

The more closely an activity is identified as undertaken for recreational purposes, the less likely it will have tax consequences.

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 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, at paragraph 15 and 45 of TR 2005/15 it is conceded that financial contracts for differences can, in limited circumstances, be treated as gambling. Paragraph 45 lists the criteria that would need to be met for financial contracts for differences to be considered gambling:

We have indicated above that the terms of the financial contract for differences are such as to tend to stamp it as an act of commerce. However, a taxpayer who enters into a financial contract for differences only once, or very occasionally, who has no expertise in the price of the underlying by which the gain or loss of the financial contract for differences will be calculated, does not engage in any income-producing activities of a character bearing some association or connection with the financial contract for differences or its underlying, and, in particular, who gambles in the ordinary recreational way and who has entered into the financial contract for differences in circumstances such that the financial contract for differences may be seen to be part of that recreation may establish that the gain or loss is the product of gambling (and not the result of a profit-making endeavour.).

On this basis, it is accepted that your trading account is not related to either a one-off gambling transaction or ongoing recreational gambling activities.

Capital Gains Tax

While the trades may involve CGT assets, section 118-20 of the ITAA 1997 will operate to reduce any capital gain to the extent that the gain or loss on these trades is assessable income. Equally, pursuant to section 110-55 of the ITAA 1997, an amount cannot be included in the reduced cost base when calculation a capital loss to the extent that the amount is deductible under section 8-1 or section 25-40 of the ITAA 1997.

In your case your trading does not constitute the carrying on of a business of trading and does not constitute recreational gambling.

Your trading does constitute trading with a profit making purpose and or a profit making undertaking or plan of trading.

Any profits will be assessable income and any losses will be deductable.

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