Edited version of private ruling

Authorisation Number: 1011659767197

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Ruling

Subject: Contracts for differences trading - Income

1. Are you carrying on a business in trading contracts for differences?

No.

2. Is the income from your CFD trading activities included in your assessable income?

Yes.

3. Are you entitled to a deduction for losses you incur from your CFD trading activities?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are currently employed.

You also traded extensively in Contracts for Differences (CFD).

You incurred a loss on your CFD trades during the financial year.

You made numerous buy sell trades in the financial year.

The CFDs were held for varying lengths of time ranging form a few days to a few weeks.

You relied on your experience and analytical skills in determining your trading strategy.

You set targets and budgets for your trading activities for the year.

You do not maintain a separate office for the trading of CFDs.

You keep detailed monthly statements from your broker as a record of your trading activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-40

Reasons for decision

Your gains made on CFDs are assessable income and losses are an allowable deduction.

Detailed reasoning

Taxation Ruling 2005/15 deals with tax consequences of financial CFDs. Paragraph 11 in TR 2005/15 explains that gains from a financial CFD will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) if the CFD transaction is entered into as an ordinary incident of carrying on a business , or the profit was obtained in a business operation or commercial transaction for the purpose of profit making. However for those taxpayers not engaged in business operations and who have entered into a CFD as a result of carrying on or carrying out a profit making undertaking or scheme the gains made will be assessable under section 15-15 of the ITAA 1997 (paragraph 13 of TR 2005/15).

Likewise, paragraphs 12 and 14 in TR 2005/15 explains that losses form a financial CFD will be deductible under section 8-1 of the ITAA 1997 if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making. In addition, losses from CFD transactions are deductible under section 25-40 of the ITAA 1997 where the gain would have been assessable under section 15-15 of the ITAA 1997.

Therefore to determine which is the relevant legislation in your case we need to consider whether your CFD activities are regarded as being a business activity.

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.

Whether activities undertaken constitute the carrying on of a business is essentially a question of fact. Whilst each case might turn on its' own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 17 of TR 2005/15 stated that to determine if a business is being carried on, such matters as whether the transactions are entered into in a systematic, organised and businesslike way; the repetition or regularity of the transactions; the scale of the transactions; whether the transactions are related to or part of other activities of a businesslike character; the purpose of the taxpayer; the degree of skill employed in how you engage in the transactions.

Taxation Ruling 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors can be applied to other types of businesses such as CFD transactions. No individual factor is determinative, but should be weighed up in conjunction with the other factors. These factors are outlined below.

Nature of activity and purpose of profit making

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business of CFDs exists, there is usually a business plan of how the activities will be conducted.

A business plan might show, for example:

· an analysis of potential investments

· analysis of the current market value and various segments of the market

· research to show when or where a profit may arise, and/or

· the basis of decisions as to when to hold or to sell CFDs.

In your case, you do not have a business plan but aim to make a profit from trading in CFDs. You will study the market and make trading decisions based on your own analysis.

Repetition and regularity of the activities

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

You conducted numerous buy/sell trades in the financial year.

Organisation in a business-like manner and the keeping of records

Generally, a business would involve the study of trends, analysis of relevant material and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. As per case Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, this means having or operating on a particular plan with the main goal of maximising profits. If records of purchases and sales of CFDs were not kept, it would be more difficult for a person to demonstrate that a business was being carried on.

You intend to keep records of your CFD transactions in the form of detailed monthly statements form your broker and other relevant details. You do not have professional CFD qualifications, however you are an experienced CFD trader who studies the markets and base your decision making on your own analysis.

Volume of trading and amount of capital injected

A higher volume of purchases and sales of CFDs is more likely to indicate that a business is being carried on.

You completed a number buy/sell trades in the financial year.

Conclusion

After weighing up the factors outlines above, it is considered that you will not be carrying on a business of CFD trading. Although you will use various sources of information to help you with your CFD decisions and will keep records, you have not shown that you will utilise a sophisticated business technique.

However, as your CFD activities were undertaken with a view to making a profit, your gains from trading CFDs are assessable under section 15-15 of the ITAA 1997 and losses are deductible under section 25-40 of the ITAA 1997.