Edited version of your private ruling

Authorisation Number: 1011948275853

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Subject: contracts for differences - business losses - non-commercial losses - expenses - deductions

Issue 1

Question 1: Will you be eligible to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the losses made on your contracts for difference (CFD) activities?

Answer: Yes.

Issue 2

Question 1: Will you be eligible to claim the full cost of air fares, accommodation and meals as deductions under section 8-1 of the ITAA 1997 for expenses incurred over a number of days to attend a company AGM?

Answer: No.

Question 2: Will you be eligible to claim deductions under section 8-1 of the ITAA 1997 for expenses incurred to inspect premises owned by the company in which you are a shareholder?

Answer: No.

This ruling applies for the following period:

Income year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You commenced your CFD trading activities after 20 September 1985.

You undertook a significant number of CFD transactions during the income year this private ruling applies to.

Your main objective is to make a profit, or regular income through buying and selling CFDs.

Your buying strategy is based on analyst tips and recommendations gained from a number of sources on shares with growth potential translating into short term gains, or where experience or price falls indicate bargain hunting and opportunities for short term gain.

When making your decisions to buy and sell, you use short-term and long-term trend charts, updated news from various sources, growth ratios, funding and debt ratios, profit forecasts and recommendations.

You conduct daily research, and source information from magazines, television and web sites to source analyst tips and recommendations. You analyse these daily recommendations using a number of resourced.

You use the graphs and analytical tools offered by a number of brokers for your decision making.

Under your buying strategy, a sell might occur when the profit target is realised, mostly in the short term, or when the price falls or keeps falling, and based on analyst tips and recommendations. A sell might also occur in order for you to better employ capital to maximise short term gains on bargain shares in the market.

You would make higher deposits for stocks with superior growth prospects and great gain potential. Your general profit target was left open to capture market opportunities and volatile conditions.

The majority of your capital is sourced from your credit cards.

You have accounting qualifications in Australia and in an overseas country. Your current and previous employment roles have involved business analysis, fund and risk management, financial and management accounting.

You attended CFD and share seminars to obtain product knowledge and techniques.

You operate your CFD activities from a bank account in conjunction with some personal transactions.

You spend a significant number of hours a week on your CFD activities.

You use brokerage services for your CFD activities on a daily basis, checking prices, positions, and making buy and sell decisions.

You use your mobile phone or mobile phone internet to call your broker.

You have a home office which you use exclusively for your CFD activities. You have a personal laptop, with wireless internet connection and printer, dedicated for usage in relation to your CFD activities. You intend claiming depreciation for your laptop.

For the purposes of this private ruling, you will make a loss on your CFD activities.

You have provided a copy of your CFD trading plan which forms part of, and should be read in conjunction with, this private ruling.

You arranged your travel plans to travel to the AGM and site inspection tour before you travelled based on the cheapest airfares.

You incurred air fare expenses to attend the AGM of a company in which you own shares, Company A.

It was your intention to undertake a tour of a site owned by Company A on the day following the AGM in order to talk to the directors and senior management on a face to face basis on current developments, future prospects of the mine and to view the mining site operation with the view to evaluate the potential to increase the size of your investment if there were short or medium term prospects for making a profit from dividends and capital gains.

It was announced during the AGM that the site tour scheduled for the following day had been cancelled due to unsafe weather conditions.

You stayed in rented accommodation on the date of the AGM and for a number of nights after the initial day.

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 Division 35

Income Tax Assessment Act 1997, Section 35-10

Income Tax Assessment Act 1997, Section 35-30

Income Tax Assessment Act 1936 Subsection 51(1)

Reasons for decision

ISSUE 1

THE LAW

Losses from CFDs

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.

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.

CFDs include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent that 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.

A loss from CFDs will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.

A loss from CFDs where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997.

Carrying on a business

 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. The Courts have held that the following indicators are relevant:

· whether the activity has a significant commercial purpose 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 repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

Non-commercial losses legislation

From 1 July 2000, legislation came into effect regarding losses from 'business' activities. Division 35 of the ITAA 1997 contains the measures, known as the non-commercial losses (NCL) legislation.

This Division prevents losses of individuals from NCL being offset against other assessable income in the year the loss is incurred when the individual is not able to pass a test, an exception applies or the individual has been granted the Commissioner's discretion.

If the individual does not pass the test, the tax loss from the business activity is deferred to a later year when the individual is able to pass a test, an exception applies or you have been granted the Commissioner's discretion.

For the 2009-10 income years and future income years, you must first meet the income requirements before you can apply the NCL tests. You meet the income requirement if your income for NCL purposes is less than $250,000.

Income for NCL purposes is the sum of the following:

· Your taxable income (ignoring any business loss);

· Your total reportable fringe benefits;

· Your reportable super contributions; and

· Your total net investment losses (such as rental properties and financial investments).

As outlined above, when the income requirement has been met, taxpayers must pass one of the four following tests:

· You have assessable income from the business of at least $20,000;

· You have made a profit from the business in least three out of the last five years;

· You use real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business; or

· You actively use assets worth at least $100,000 (excluding motor vehicles) in the business.

Exceptions to passing the four tests apply for taxpayers carrying on a professional arts business or a business of primary production. Taxpayers in these categories may offset a business loss against their other income if their other income for that year is $40,000 or less.

APPLICATION OF THE LAW TO YOUR FACTS

You conducted a significant number of CFD transactions during the income year this private ruling applies. Your main objective was to make a profit, or regular income through buying and selling CFDs.

Under your buying strategy, a sell might occur when the profit target is realised, mostly in the short term, or when the price falls or keeps falling, and based on analyst tips and recommendations. A sell might also occur in order for you to better employ capital to maximise short term gains on bargain shares in the market.

You use the brokerage services on a daily basis, checking prices, positions, and making buy and sell decisions.

Your CFD trading is complemented by your qualifications and the positions you have held. You have attended CFD and share seminars to obtain product knowledge and techniques. This is indicative that you had a profit making intention when trading CFDs.

An intention to engage in trade regularly, routinely and systematically is a significant characteristic when considering if someone is a share trader. In FCT v Radnor Pty Ltd (1991) 22 ATR 344, a trader was not held to be carrying on a business of share trading, primarily because there was no pattern of buying and selling and the low volume and frequency of transactions that were made.

A commercial trader trades on the basis that is both routine and regular. You have traded a significant number of times during the 2010-2011 income year. It is considered that you trade on a regular, routine and systematic basis and the number of transactions completed during the year shows that you have undertaken an activity of some magnitude.

Generally is can be said that most businesses would have some form of forward planning to take into account of contingencies and market fluctuations. They would also set profit targets, budgets, have periodic financial reviews, record keeping systems, an appropriate office and so forth. It would be reasonable to expect such a business to involve the study of daily and longer term trends, analysis of company's prospectus and annual reports, and seeking the advice of experts. As per Case X86 90 ATC 621, this means having or operating on a particular plan with the main goal of maximising profits.

You conduct daily research, and source information from magazines, television and web sites to source analyst tips and recommendations. You analyse these daily recommendations using a number of resources.

Your buying strategy is based on analyst tips and recommendations on shares with growth potential translating into short term gains, or where experience or price falls indicate bargain hunting and opportunities for short term gain. Your general profit target was left open to capture market opportunities and volatile conditions.

You use the graphs and analytical tools offered by a number of resources. When making your decisions to buy and sell, you use short-term and long-term trend charts, updated news from various sources, growth ratios, funding and debt ratios, profit forecasts and recommendations.

You spend a significant number of hours per week on your CFD activities. You have a home office which you use exclusively for your CFD activities. You use your personal laptop, with wireless internet connection and printer, dedicated for usage in relation to your CFD activities.

The amount of capital employed in the activity is not a determinative factor and must be considered in line with the others. An example is provided by Case X86 90 ATC 961 where the taxpayer invested $100,000 and was found not to be carrying on a business, whilst in Case W8 89 ATC 171 the taxpayer invested $1,300 and was found to be carrying on a business. However, the larger the amount of capital that is invested, the more likely it is that the person is carrying on a business.

Conclusion

It is considered that the balance of the above factors indicate that you were carrying on a business of trading in CFDs in the 2010-11 income year. As a trader, the losses you have made from your CFD activities are deductible under section 8-1 of the ITAA 1997. The loss will be included as non-primary production losses in your income tax return.

As it has been determined that you are carrying on a business in CFD trading, the non-commercial loss legislation must be considered in relation to your circumstances.

In your case, your net profit from your CFD activities is greater than $20,000. Therefore, you are able to meet one of the four NCL tests listed above for eligibility for the NCL. However, as outlined above, you must first meet the income requirements of having received income of less than $250,000 in the 2010-11 income year before you can apply the NCL tests.

If you meet the income requirements test, Division 35 of the ITAA 1997 will not apply to defer your losses to a future income year and you will be able to include the losses in the income year in which they arose.

If you do not meet the income requirements, the loss you made on your CFD activities will be deferred to a future income year when you meet the income requirements.

ISSUE 2

THE LAW

Deductions - Expenses incurred to attend company AGM and to inspect a site owned by a company in which you are a shareholder

Subsection 8-1(1) of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of producing assessable income. Subsection 8-1(2) of the ITAA 1997 however, excludes a loss or outgoing of a capital, private or domestic nature, or where the loss or outgoing is incurred in gaining or producing exempt income.

For a deduction to be allowed under the first limb of subsection 8-1(1) of the ITAA 1997, the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income. There must be a sufficient connection between the expense and the operations or activities which gain or produce the assessable income.

Taxation Ruling IT 39 (IT 39) considers the deductibility of expenditure incurred in servicing or managing income producing investments. The Commissioner considers that travel expenditure incurred by a taxpayer in servicing or managing their income producing investments by consulting with inter-state stock brokers and by attending an interstate stock exchange are deductible under subsection 51(1) of the ITAA 1936.

In ATO Interpretation Decision ATO ID 2002/948 (ATO ID 2002/948), the Commissioner has also considered the deductibility of travel expenses in circumstances where a taxpayer attends a company AGM.

ATO ID 2002/948 states:

The travel expenses incurred by the taxpayer in attending the company AGM are costs incurred in servicing their investment portfolio. If the travel relates solely for the purpose of attending the AGM, the taxpayer will be entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of that travel.

Therefore, the Commissioner has accepted that travel expenses incurred to attend a company AGM fall within the scope of IT 39 in that the expenses are incurred in servicing or managing an investment portfolio.

Although this ATO ID only considered the deductibility of travel expenses, the legal principal is equally applicable to meal, accommodation and other expenses incurred in connection with travelling to service an investment portfolio.

ATO Interpretation Decision ATO ID 2001/415 (ATO ID 2001/415) provides the Commissioner's view in relation to the deductibility of travel expenses incurred by a trustee to inspect the premises of a company of which the trust was a shareholder.

ATO ID 2011/415 outlines that although the trust was entitled to receive dividends in respect of the shares that it owned, the amount of dividends that the trust would receive from its shareholding would neither increase nor decrease as a result of the trustee undertaking the inspection trip.

Therefore, it was not possible to establish a connection between the dividends included in the assessable income of the trust and the travel expenses incurred and they were not deductible. Furthermore, it was not possible to establish a connection between the travel expenses and the share value of the shares that the trust held.

APPLICATION OF THE LAW TO YOUR FACTS

In this case, you purchased return air fares to attend the AGM of company in which you own shares, Company A. You stayed in rented accommodation from the date of the AGM, and continued staying there for a number of days after the date the AGM was held. You incurred costs during that period for meals, the return taxi fares between the airport and your accommodation.

It was your intention to go on a site inspection on the day after the AGM was held; however, you were advised during the AGM that the site visit had been cancelled due to unsafe weather conditions.

The Commissioner accepts that return air fare expenses you incurred in order to attend the AGM fall within the scope of IT 39 in that the expenses are incurred in servicing or managing an investment portfolio. However, as you spent a number of days away, and the AGM lasted one day, you need to apportion the cost of the air fares. The cost of your accommodation on the date the AGM was held and meal expenses incurred on that date relate to the day in which you were attending the AGM, and will therefore be deductible. The cost of your return tax fare between the airport and the motel will also be deductible.

Your purpose of the inspection of the site related to potential future investment or share trading. As such the purpose of the inspection was to provide you with the required knowledge in order to establish whether or not you would increase the size of your existing investment. Although you were entitled to receive dividends in respect of your Company A shares, the amount of dividends that you would receive would neither increase nor decrease as a result of you undertaking an inspection trip of the site.

Any expenditure relating to the site inspection, such as accommodation for the additional nights after the date of the AGM due to the cancellation of the inspection and a lack of cheap air flights at an earlier date, and meal expenses incurred in the additional days, will not have the essential character of expenditure incurred in gaining or producing assessable income.

Therefore, as outlined above in ATO ID 2000/415, the expenses you incurred in relation to your accommodation for the extra days from the date after the AGM was held, and expenses such as meals for the period of additional days until you flew out, will not be allowable deductions under subsection 8-1(1) of the ITAA 1997.