Edited version of your private ruling

Authorisation Number: 1012060625263

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Ruling

Subject: CFD Trading

Question

Is the income that you derive from carrying on business as a trader in financial contracts for differences (CFDs) assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commences on:

30 June 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a non-resident of Australia for taxation purposes.

You and your family left Australia in 2002.

You and your family permanently reside in Country x

You do not earn any other income in Australia besides your CFD trading.

Your main source of income is from being a software developer in Country X.

Your CFD broker is an Australian resident and the CFDs are Australian.

You used the services of a company based in Melbourne Australia when undertaking your buying and selling CFD activities and they are an independent broker.

Your intention in trading CFDs is to buy and then sell CFDs to make a profit as soon as your 3% profit margin has been reached. In some cases, you are required to hold a CFT position for an extended period of time as the 3% sell condition has not been met, and in those situations a dividend may be paid within this extended period.

You use a systematic trading strategy called 'averaging down' combined with a technical indicator, Slow Stochastic oscillator, and the Moving Average Convergence/Divergance. Using the strategy you traded on a regular basis and exited trades once a profit margin of 3%, after brokerage fees and interest, was reached.

You carried out daily analysis of the market, following financial online news websites, technical analysis theory, data mining and technical stock profiling.

You used your own private funds to undertake your CFD activities.

You made a loss on your CFD activities during the 2009-10 income year.

You have made a profit on your CFDs during the 2010-11 income year which has been derived from both profits from selling your CFDs and dividends received from holding some CFDs for extended periods of time.

You make the decisions in trading (e.g. you conclude the contracts).

Your business is mainly conducted on the internet and your server is located in Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3).

International Tax Agreements Act 1953 Schedule SchX.

International Tax Agreements Act 1953 SchX-Art7.

International Tax Agreements Act 1953 Paragraph SchX-Art5(1).

International Tax Agreements Act 1953 Paragraph SchX-Art5(2).

International Tax Agreements Act 1953 Paragraph SchX-Art5(5).

International Tax Agreements Act 1953 Section 4

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident of Australia includes ordinary income derived directly or indirectly from all Australian sources during the income year, as well as other ordinary income included by a provision on a basis other than having an Australian source.

In order to determine whether income from trading in CFDs is assessable under subsection 6-5(3) of the ITAA 1997 it is necessary to establish whether the income is ordinary income from Australian 'sources'.

The term 'source' is not defined in Australia's income tax laws. Other than certain rules prescribed for statutory income (for example, royalties, interest), Australia's income tax laws rely on the common law 'source' rules.

Various court cases have held that 'source' is generally the place where the duties or services are performed.

One rule deducible from the decided cases is that where the essence of the business ordinarily consist in making certain classes of contracts and in carrying those contracts into operation with a view to profit or income, the business is carried on within the locality where such contracts are habitually made which is the source of the profit or income.

In this case the activities undertaken are the buying and selling of CFDs over the internet and the relevant processes which contribute to the earning of the profit are the making of contracts for the purchase and sale of CFDs.

The purchase and sale of CFDs normally involves entering into contracts and the contract is formed where the final act regarded as completing the contract occurs (Tallerman and Co Pty Ltd v. Nathan's Merchandise (Vic) Pty Ltd (1957 98 CLR 93). Thus, where the postal acceptance rule applies, the contract is considered to be made in the place where the acceptance is posted, and in other cases the contract is made at the place where acceptance is communicated to the offeror. As you enter into a contract to buy and sell CFDs over the internet, the contract is made by instantaneous communication through your computer server in Country X. The contract is completed only when acceptance is communicated to the offeror, (Entores Ltd v. Miles Far East Corp [1955] 2 QB 327) this being your computer server in Country X. Therefore, it is considered that the source of the income is where the acceptance is communicated to the offeror, that is, your computer server in Copuntry X.

When the process of purchase and sale of CFDs is examined, weighting needs to be given to the following factors in determining the source of the income:

· the essence of your activities: (regularly entering into contracts for the purchase or sale of CFDs)

· activities that actually realise the profit: (buying and selling of CFDs)

· place where the contracts for purchase or sale of CFDs are concluded: (contracts are concluded via your computer server in Country X)

· location of the stockbroker who concludes the buy or sell order: (Australia)

· location of the entities whose CFDs are traded: (Australia)

Although you make the decision as to when to purchase or sell the CFDs, this has minimal weighting in determining the source of income. The source is determined by where the profits are made. It is the buying and selling of the CFDs undertaken via your computer server in Country X, it follows that the source of the profit is in Country X.

Tax treaty

In determining liability to Australian tax on Australian sourced income derived by a foreign resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Schedule 9 to the Agreements Act contains the tax treaty between Australia and Country X (the Country X Agreement). The Country X Agreement operates to avoid the double taxation of income received by Australian and Country X residents.

Under Article 7 of the Country X Agreement, the business profits of a Country X enterprise shall be taxable only in Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term permanent establishment is defined in paragraph (1) of Article 5 of the Country X Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Paragraph (2) of Article 5 of the Country X Agreement contains a list of examples, each of which can be regarded as constituting a permanent establishment, such as a place of management, an office, a branch, a factory or a workshop.

Paragraph (5) of Article 5 of the Country X Agreement provides that a permanent establishment will be deemed to exist if a Country X enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia.

You have no fixed place of business in Australia for the purpose of paragraph (1) of Article 5 of the Country X Agreement.

You do not have a place of management, a branch, an office, a factory or a workshop in Australia for the purposes of paragraph (2) of Article 5 of the Country X Agreement.

You do not have a dependent agent who has authority to conclude contracts on your behalf in Australia for the purposes of paragraph (5) of Article 5 of the Country X Agreement.

Your Australian CFD broker is an agent of an independent status under paragraph (5) of Article 5 of the Country X Agreement, and therefore will not constitute a permanent establishment.

Therefore, your profits from carrying on a business as a trader in Australian CFDs are not taxable in Australia pursuant to Article 7 of the Country X Agreement as you are not carrying on a business through a permanent establishment in Australia. The income is consequently not assessable under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article 7 of the Country X Agreement.