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Ruling

Subject: am I in business as a share trader of contracts for difference in foreign shares and foreign currencies

Question 1: For the year ended 30 June 2011, were you carrying on a business of trading contracts for difference (CFD's) in foreign shares and foreign currencies?

Answer 1: Yes.

Question 2: For the year ended 30 June 2011, will the losses from your business of CFD trading in foreign shares and foreign currency be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2: Yes.

This ruling applies for the following period

Year ended 30 June 2011.

The scheme commenced on

1 July 2010.

Relevant facts

You traded CFD's in foreign shares and foreign currency for the period 1 July 2010 to 30 June 2011.

You commenced trading CFD's in foreign shares and foreign currency to make a profit from current market movements and not for capital gain. You expected to make a profit due to the fact that both your advisors were reputable advisors in the market and you had a reasonable background about such dealings.

Your trading was recommended to you by two professional advisors from different firms.

You established a membership with a broker for the buying and selling of the CFD's.

You contributed and invested a substantial amount of money during the year ended 30 June 2011. This was made in various lump sum payments into your business account. The capital amounts were introduced from your own personal savings.

You have not registered for an Australian Business Number because you were advised that this was not necessary for this kind of trading.

You made a significant amount of trades for the period 1 July 2010 to 30 June 2011. Of this, just under half were profitable trades, for a total profit of well over $20,000 and just over half were losing trades, resulting in an overall loss.

For the year ended 30 June 2011, you met the income requirement because the total of the following amounts was less than $250,000:

§ Taxable income (ignoring business losses);

§ Total reportable fringe benefits;

§ Reportable superannuation contributions; and

§ Total net investment losses - including financial investment losses and rental property losses.

The following documents are to be read with and form part of the scheme for the purpose of this private binding ruling:

§ Broker account - summary of trading activity for the period 1 July 2010 to 30 June 2011; and

§ Your own spreadsheet summary of CFD trades for the period 1 July 2010 to 30 June 2011.

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 35-10,

Income Tax Assessment Act 1997 Section 35-30 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

CFD trading in foreign shares and foreign currency

Contracts for difference (CFD) are a form of cash-settled derivative in that they allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Financial CFD's include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies.

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

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

In your case, your trading in foreign shares and foreign currencies had the characteristics of a CFD. It allowed you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

Question 1: Year ended 30 June 2011 - Am I in business.

Regarding the matter of whether you were carrying on a business of CFD trading in foreign shares and foreign currency in the year ended 30 June 2011, 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, in the year ended 30 June 2011, the factors that gave the overall impression that you were in business are:

§ You traded regularly, you had a substantial number of trades during the period 1 July 2010 to 30 June 2011; and

§ Turnover was quite high

Question 2: Year ended 30 June 2011 - Business losses deductible under section 8-1 of the ITAA 1997.

You will be able to claim your business loss from your CFD trading in foreign shares and foreign currency in the current year, (the year ended 30 June 2011) because you are carrying on a business; and

you firstly met the income requirement, that is the total of the following amounts is less than $250,000:

§ Taxable income (ignoring business losses);

§ Total reportable fringe benefits;

§ Reportable superannuation contributions;

§ Total net investment losses - including financial investment losses and rental property losses; and

then secondly passed the assessable income test.

Note: Paragraph 11, of TR 2005/15 rules that a gain from a CFD trade will be assessable income under section 6-5 of the ITAA 1997, where the transaction is entered into as an ordinary incident of carrying on a business.

In your case, the gains (trading profits) from your CFD trading in foreign shares and foreign currency fit the definition of assessable income under the assessable income test for the non commercial business loss rules.

To pass the assessable income test, assessable income from your business must be at least $20,000 in the income year before you can claim the losses in the current year. In your case, in the year ended 30 June 2011, the gains from your CFD trading were greater than $20,000.