Edited version of private ruling

Authorisation Number: 1011793574178

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Ruling

Subject: Am I in business - contracts for difference

Question 1

Are you carrying on a business of Contracts For Difference trading?

Answer: Yes.

Question 2

Can you claim a deduction for the losses you have incurred from your Contract For Differences (CFD) trading activities?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are a full time salaried employee.

You trade Contract for Differences (CFD) after hours.

You have established a home office which is clearly identifiable as a place of business. The home office area is not readily suitable or adaptable for use for private or domestic purposes in association with the home in general as it is set up as a professional business office.

You conducted weekday trading for a number of hours per week and several hours per day on the weekends analysing the market including charting, stock market report, broker research papers, financial reports and electronic newsletters to assist you in your activities.

You have a business plan and strategy. Your objectives were to generate additional income through systematic and organised share activities in addition to an existing investment in managed funds. You intended investing a minimal amount of capital, increasing the capital invested as the year progressed. Your intension was to invest in the Stock Exchange and foreign indices along with shares in blue chip companies. You would observe the market trends by reading journals, media reports and financial newspapers. You determined a 'stop loss' position and followed global cues. You would continue to upgrade your knowledge and skill base using technical tools and systems to analyse and plan your activities, including charting and identify the market trend and take on a trading position to enable you to make a profit by holding the stock for a very short period of time.

You traded on a regular basis in the last half of the financial year making significant sell trades in the income year. All transactions were conducted online through CFD provider.

You have provided trading statements from your online provider to support your application. These statements show repetitive trading transactions of varying amounts.

Your trade activities have resulted in significant sales. Your activities incurred expenses which included trade losses. You produced an amount of assessable income. Your closing stock was nil at the close of the income year.

You invested capital utilising credit card facilities to fund your activities. You do not have a Margin Loan. Have you not established a business banking 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 15-15,

Income Tax Assessment Act 1997 Section 25-40,

Income Tax Assessment Act 1997 Section 35-30,

Income Tax Assessment Act 1997 Section 118-20 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

The Commissioner's view about the tax consequences of CFD trading is found in Taxation Ruling TR 2005/15. Where CFD trading is part of the carrying on of a business, the gains and losses from the CFD transactions will be accounted for under sections 6-5 and 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

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

Either way, the gains and losses from CFD trading are accounted for on revenue account and treated as ordinary income. 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 (CGT) provisions.

In order to determine if you are carrying on a business, the term 'Business' is defined as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The business indicators were applied in Shields v. DFC of T 99 ATC 2037; (1999) 41 ATR 1042. Block J said:

· the nature of the activities and whether they have the purpose of profit-making;

· the complexity and magnitude of the undertaking;

· an intention to engage in trade regularly, routinely or systematically;

· operating in a business-like manner and the degree of sophistication involved;

· whether any profit or loss is regarded as arising from a discernible pattern of trading;

· the volume of the taxpayer's operation and the amount of capital employed, and more particularly in respect of the activity;

· repetition and regularity in the buying and selling of stock;

· turnover;

· whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

· maintenance of an office;

· accounting for the share transactions on a gross receipts basis; and

· whether the taxpayer is engaged in another full time occupation.

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, you have significant sales. You have a business plan and strategy for your CFD activities. You undertook the activity for short term gains with the intention of making a profit on a regular basis. Whilst you acquired shares in blue chip companies, you did not hold the shares to return dividend income with a nominal amount received in the income year.

Your buying and selling strategy relies on research and advice provided by brokers detailed in research papers, you analyse the stock market report and utilise information contained in the financial reports. You conduct daily market research and chart performance. The trading activities outlined in the trading statements from your online provider show you traded repetitively with a regular turnover. The holding periods of the CFDs were short.

You have established a home office as an area set aside to undertake your trading activities which has a computer resource allowing you access to brokers websites and trading on line with your provider. You consider the home office area is readily identifiable as a place of business and not readily suitable or adaptable for use for private or domestic purposes in association with the home. You maintained records of your activities. You are employed full time and dedicate time to your activities every day.

After weighing up the above factors, and the circumstances surrounding your buying and selling of CFDs, the Commissioner considers you were carrying on a business for the purpose of profit making during the period you were engaged in this activity. It follows you may be entitled to deduct your CFD trading loss under section 8-1 of the ITAA 1997.

Question 2

Income

Where a taxpayer is considered to be carrying on a business, the income from the activity is assessable under section 6-5 of the ITAA 1997. The losses related to the activity may be allowable as deductions under section 8-1 of the ITAA 1997.

However, if you're in business as an individual, either alone or in partnership, you must ensure you meet non-commercial loss rules to determine whether you can offset the loss against other income sources, such as salary and wages.

The income requirements and business tests include:

· production of assessable income of at least $20,000;

· production of a profit in three of the past five years, including the current year;

· use of real property or an interest in real property worth at least $500,000; or

· use of other assets worth at least $100,000.

If you are not able to offset your loss in the current year, you must defer the loss and may be able to offset it in a future year, either by passing one of the tests or making a profit in the business.

In your circumstances, you provided trading summaries which indicate you produced assessable income of less than the first test requirement amount and as a consequence, do not meet the first test of the non-commercial loss rules requiring the production of at least $20,000 of assessable income. In the current year, you also failed to pass any of the three remaining tests, as such, you are not entitled to offset your losses against your other income sources in the relevant income year.