Edited version of private ruling

Authorisation Number: 1011832715951

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Ruling

Subject: Am I A Contracts For Difference Trader?

Question 1

Are any profits made from your CFD activities in the 2008-09 income year assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and the losses allowable deductions under section 8-1 of the ITAA?

Answer:

No.

Question 2

Are any profits made from your CFD activities in the 2009-10 income year assessable under section 6-5 of the ITAA 1997 and the losses allowable deductions under section 8-1 of the ITAA 1997?

Answer:

No.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You have undertaken activities related to CFDs during the relevant income years.

You do not utilise a margin loan to fund your activities.

You do not have a formal business plan or trading strategy.

You have included copies of the following documents which are to be read with and form part of the scheme for the purpose of this private binding ruling:

Markets statement for the income year A;

Markets statement for the income year B.

In income year A, you conducted a very small number of transaction with buy and sell transactions through an online provider for profit in a certain currency and trading losses of in two other currencies. No dividend income was earned.

In income year B, your trading activity increased through your online provider for profits in three currencies and trading loss including commission in three currencies. There was a very small amount of dividend income received.

You undertake your activities for a minimal amount of time per week, researching, monitoring the market and undertaking buy and sell transactions.

You have established a home office which 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 subscribe to specialist web-based site for advice on trading in currencies through your online provider and utilise this trading platform.

You keep records of your activities using the activity statements provided by your online provider.

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 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

CFDs

The Commissioner's view about the tax consequences of CFD trading is found in Taxation Ruling 2005/15 (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.

Regarding the matter of carrying on a business, court cases such as Smith v FC of T 2010 ATC 10-146, 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.

Your status as a CFD trader or CFD investor should be assessed regularly as this status can change over time as your levels of activity changes.

Question 1

2008-09 income year

The salient indicators are evidenced in the trading statements from your online provider; indicating you undertook minimal CFD transactions, of buy and sell transactions in income year A. Your activities were conducted over a short period of time, being under a month. The amount of capital invested in the income year was minimal. Whilst the transactions were repetitive over a very short period of time, the volume of trades is not indicative of you carrying on a business.

The supportive indicators; including the manner in which you undertook the activities and the degree of sophistication involved further support our decision that you were not carrying on a business of CFD trading in income year A.

After weighing up the above factors, and the circumstances surrounding your buying and selling of CFDs, the Commissioner considers you are not carrying on a business for the purpose of profit making during income year A.

As you are not considered to be carrying on a business in income year A, it follows that the income from the activity is not assessable under section 6-5 of the ITAA 1997. The losses related to the activity are not allowable as deductions under section 8-1 of the ITAA 1997.

Question 2

2009-10 income year

The salient indicators are evidenced in the trading statement from your online provider indicating you undertook an increased level of transactions, 2/3^rd being buy and 1/3^rd being sell transactions in income year B. Your activities increased in volume and were repetitive with a regular turnover. The holding periods of the CFDs were usually short. You invested a relatively small amount of capital. Your intension was to buy and sell CFDs for short term gains with the intention of making a profit.

The supportive indicators include the business-like manner in which you undertook the activities. Your buying and selling transactions did not follow a business plan or trading strategy. You conducted market research and analysed the market reports; utilising the information to undertake your activities. You dedicated a small amount of time to your activities. You have a dedicated home office to undertake your activities, which you assert in not readily suitable or adaptable to private or domestic purposes. You maintain your records utilising the activity statements provided by your online provider.

After weighing up the above factors, and the circumstances surrounding your buying and selling of CFDs, the Commissioner considers you are not carrying on a business for the purpose of profit making during income year B.

As you are not considered to be carrying on a business in income year B, it follows that the income from the activity is not assessable under section 6-5 of the ITAA 1997. The losses related to the activity are not allowable as deductions under section 8-1 of the ITAA 1997.

Assessable income

In your circumstances, as your CFD activities were a profit marking undertaking or scheme, any gain resulting from your CFD activities in income years A and B are assessable under section 15-15 of the ITAA 1997 and any loss an allowable deduction under section 25-40 of the ITAA 1997. These views are confirmed in paragraph 13 and 14 of TR 2005/15.