Edited version of your private ruling

Authorisation Number: 1012304065212

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Ruling

Subject: Am I in business as a contracts for differences (CFD's) trader?

Question 1

For the year ended 30 June 2010, were you in the business of trading CFD's?

Answer:

Yes.

Question 2

For the year ended 30 June 2010, was your CFD activity the carrying out of a profit making undertaking or scheme?

Answer

No.

Question 3

For the year ended 30 June 2011, were you in the business of trading CFD's?

Answer

Yes.

Question 4

For the year ended 30 June 2011, was your CFD activity the carrying out of a profit making undertaking or scheme?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 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.

During the income year ended 30 June 2010 you traded CFD's in foreign currency.

During this period you made around 100 closed out trades (bought and sold within the same period).

Overall, for the income year ended 30 June 2010 you made a profit from your CFD trading.

During the income year ended 30 June 2011 you continued to trade in CFD's in foreign currency.

During this period you made around 400 closed out trades.

Overall, for the income year ended 30 June 2011 you made a loss from your CFD trading.

For the period commencing 1 July 2009 to 30 June 2011 you invested around $X in your CFD trading.

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 118-20

Reasons for decision

Losses from CFDs

CFDs 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.

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.

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 being accounted for under the capital gains tax (CGT) provisions.

Carrying on a business of CFD trading

Regarding the matter of carrying on a business, 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.

Application Of The Law To Your Facts

You have made a substantial amount of CFD trades in the income year ended 30 June 2010 and the income year ended 30 June 2011. This is considered to be a commercial amount of transactions, and shows a high level repetition and regularity.

You have also invested a substantial amount of money into your activities. This is considered to be an investment of a commercial level.

In your case, you were carrying on a business of CFD trading because your activity exhibited strong regularity in trading CFD's and a high sales turnover.

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 2009-10 income tax return.

NOTE:- 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.