Edited version of private ruling

Authorisation Number: 1011499573946

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Ruling

Subject: on-line trading and deduction for expenses

1. Are you assessable on the income derived from your on-line trading in foreign indices?

Yes.

2. Can you claim a deduction for any losses incurred through your trading activities?

Yes.

3. Can you claim a deduction for the ongoing monthly fee payable to the investment advisors?

Yes.

4. Can you claim an immediate deduction for the fee for the daily trade alerts included in the 10 year trading package?

No.

5. Can you claim an immediate deduction for the fee for the on-going support included in the 10 year trading package?

No.

6. Can you claim a deduction for a proportion of the fees for the daily trade alerts and the on-going support over the eligible service period of 10 years?

Yes.

7. Can you claim a deduction for the fees for the personal one-on-one training and the investment advisor's training manual which are included in the 10 year trading package?

No.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have been approached by an investment advisor company about following a strategy for trading on foreign indices through an online bookmaker.

The strategy will consist of you placing a minimum number of trades a day, Monday to Friday every week.

The amount you invest on each 'bet' is up to you.

You will pay a membership fee to the investment advisors which will cover you for 10 years.

The membership fee covers the following:

· alerts each day

· five day a week client ongoing support for trading help

· personal one-on-one initial training

· the investment advisor's training manual

· 10 year membership period (period of time the membership is for is covered in above costs)

You will also pay an ongoing investment service fee each month. This fee is for administration and covers the cost of sending the trade alerts each week.

The investment advisor company will do the research and recommend the trade alerts each day to you.

You have read some books on the subject but you have not undertaken any courses to do with trading in foreign indices.

You will set up an online account with the on-line bookmaker.

The profits from the trades will be credited to your trading account which you will link to either your credit card or personal bank account.

Any profits will be credited to your trading account once the trade is closed. Each trade is only over an hour of the market being open so they are cleared into your trading account the next day.

You are not required to follow the trade advice that is provided by the investment advisor.

Reasons for decision

Summary

You are assessable on the gains made from your online trading in foreign indices and any losses from your trading activities are deductible. The on-going monthly fee is deductible. The fees for the daily trade alerts and the ongoing support for trading help which are included in the trading package are allowable but must be apportioned over the 10 years. However, the fees included in the trading package for the personal one-on-one initial training and the training manual are not allowable as a deduction as they are incurred at a point too soon, that is, they are incurred prior to the income earning activities actually commencing.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are an Australian resident your assessable income includes all income derived directly or indirectly from all sources, whether in or out of Australia during the income year.

Taxation Ruling TR 2005/15 specifically deals with the taxation consequences of financial contracts for differences (CFDs). CFDs include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

TR 2005/15 states that entering into a CFD is essentially a commercial activity of purchasing a financial risk in the financial markets.

Generally, CFDs are a form of cash-settled derivative in that they allow investors to take risks on movements in the price for a subject matter (the underlying) without ownership of the underlying product. Participants in CFDs take a risk that the price of the underlying will or will not exceed a price for that underlying at some time in the future.

Financial CFDs are productive of a gain or loss stemming from exposure to typically short term financial risk. The risks assumed in financial CFDs, namely stock indices, individual shares, currencies, financial products, interest rates and commodities are all the basic subject matter of the financial services industry.

According to TR 2005/15, gains made from entering into a CFD will be assessable as ordinary income under subsection 6-5(2) of the ITAA 1997 where:

· a taxpayer enters into a CFD as an ordinary incident of carrying on a business; or

· the CFD is obtained in a business operation or commercial transaction for the purpose of profit making (Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693).

Whether or not the activities constitute the carrying on of a business, gains from entering into a CFD will be assessable under section 6-5 of the ITAA 1997, where it is obtained in a business operation or commercial transaction for the purpose of profit making: Federal Commissioner of Taxation v. Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693.

In your case, based on the facts that you have provided, your online betting in relation to the movements in the foreign Indices is equivalent to trading in CFDs. Based on the information provided, we do not consider that your activities constitute you carrying on a business. In arriving at this decision, we took into account the number of trades, your banking situation for your trading activities, your knowledge and education in relation to trading and that the research and selection regarding your trades is being conducted by your investment advisor. However, as you will carry out the online trading transactions for the purpose of profit making from the expected movement in the financial market, this establishes that your purpose and intention in making the transactions are entered into as a part of a commercial transaction.

Therefore, any gain will be assessable as ordinary income under section 6-5 of the ITAA 1997.

Losses made from entering into a CFD

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 or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Therefore, as you are considered to be entering into the transactions as part of a business operation or commercial transaction for the purpose of profit making so that gains from the contracts are assessable under section 6-5 of the ITAA 1997, losses incurred on the contracts would be deductible under section 8-1 of the ITAA 1997.

On-going monthly fee

Taxation Ruling IT 39 discusses expenditure incurred in servicing an investment portfolio. This ruling discusses the decision in Federal Commissioner of Taxation v. Green (1950) 81 CLR 313; (1950) 9 ATD 142; (1950) 4 AITR 471 which allowed a taxpayer a deduction in relation to the management of the income producing enterprises of the taxpayer. The ruling concluded that expenditure in 'servicing' the portfolio should be regarded as incurred in relation to the management of income producing investments and as such has a revenue character.

As the on-going monthly fees paid by you will be incurred for the purpose of providing you with investment advice, the expense for these fees are deductible under section 8-1 of the ITAA 1997.

Trading Package fees

Where a taxpayer who is not carrying on a business incurs an expense for a service that covers a period greater than 12 months and the expenses would normally be deductible under section 8-1 of the ITAA 1997, the prepayment provisions of section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936) must be considered.

The effect of section 82KZM of the ITAA 1936 is to evenly spread the deduction for the fees paid over the years comprising the eligible service period. The eligible service period is the period to which the fees relate, up to a maximum of 10 years.

You are required to pay the trading package fees in advance to cover a period of 10 years. The break-up of the fees shows that they are to cover a number of different items. Expenses for the daily trade alerts and the ongoing support for trading help would normally be deductible under section 8-1 of the ITAA 1997. Therefore, the prepayment provisions apply to these two items.

Expenditure for the personal one-on-one initial training and the training manual is not incurred in the course of gaining or producing the assessable income from the trading activities. These expenses are incurred prior to the activities starting and as such are incurred at a point too early in time to be an expense that is part of the income producing process. Therefore, you are not entitled to a deduction for that part of the trading package for the expenses covering these items.

However, you are entitled to a deduction for the balance of the expenditure for the trading package fee (fees for daily trade alerts and the ongoing support) which is to be apportioned over the eligible service period of 10 years.