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Ruling

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

Question 1

Were you carrying on a business of trading in CFDs?

Answer 1

No.

Question 2

Are the gains or losses made from your CFD trading treated as profits or losses made from a profit making undertaking or scheme, and assessed under sections 15-15 and 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

Sometime during the income year ended 30 June 2011 you commenced trading options through your on-line broker, Broker A. Your Broker A account was held jointly between yourself and your spouse.

During the income year ended 30 June 2012 you completed one sale transaction through Broker A, a sale of shares that you had held since sometime during the income year ended 30 June 2011. This was your only transaction through Broker A that was completed during the income year ended 30 June 2012. You made a loss on that transaction.

Towards the end of the financial year ended 30 June 2011, you commenced trading CFDs through your on-line broker, Broker B. Your Broker B account was held in your name only.

During the income year ended 30 June 2012, you made a certain number of successful trades, and made a gain. During this period you also made a certain number of unsuccessful trades, resulting in a loss.

Your profit and loss from these trades ranged from a profit of around $Z to a loss of around $W. Your average gain on your profitable trades was less than $X. Your average loss on your unprofitable trades was around $Y. Of your total, a majority had a result of less than $X.

You do not have a business plan and you do not carry out any forward planning or budgeting. You have used funds made available to you by your spouse, as well as funds from your mortgage offset account.

Your share trading strategy was to trade according to recommendations from trading companies and brokers. You review information provided by trading companies and brokers when making your trading decisions. You also use charting software.

You use stop losses on certain trades, but also rely on your close monitoring of the market to decide when to close out your positions.

You have attended a number of seminars, and consult various journals. You practiced trading using virtual trading software before entering the market.

You conduct your trading from your home office.

You retain trading result records and statements provided by your broker.

You have now ceased your trading activities. However, when you were trading you were spending a substantial amount of time each week on your trading activities.

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 70

Reasons for decision

Tax treatment of CFDs

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR2005/15) outlines the Commissioner's view on the taxation treatment of CFDs. A CFD is a form of cash settled derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

TR 2005/15 states where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be accounted for under sections 6-5 and 8-1 of the ITAA 1997.

Otherwise, TR 2005/15 states the trading activities will be regarded as part of the carrying out of a profit making undertaking and gains from CFD trading will be accounted for under section 15-15 of the ITAA 1997, while losses are deductible under section 25-40 of the ITAA 1997.

Either way, the gains and losses resulting from a CFD transaction will be of an income nature.

Carrying on a business of CFD trading

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR 97/11). TR 97/11 lists the following indicators as relevant in determining if a business is being carried on:

· Whether the activity has a significant commercial purpose or character;

· Whether the taxpayer has more than an intention to engage in business;

· Whether a 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 that is carried on in a similar manner to that of the ordinary trade in that line of business;

· Whether the activity is planned, organised and carried out in a business like manner;

· The size, scale and permanency of the activity;

· Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

TR 97/11 states that in determining whether an entity is carrying on a business, all of the above indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether the particular activity has commercial flavour or character.

Application to your circumstances

In your case, for the income year ended 30 June 2012, you were not carrying on a business of CFD trading for the following reasons:

During the two month period in which you traded CFDs, you displayed some regularity and repetition in your trading in that you completed a certain number of trades in a two month period, which is a favourable indicator of carrying on a business. The amount of capital you initially invested is also considered to be a substantial amount in your circumstances.

However, your transactions were not commercially significant, with the majority of your trades returning a result of $X or less. The average amount of your profitable trades was less than $X, and the average amount of your loss trades was just over $Y.

As you were not operating to a plan, and you had no trading strategy in place it would be considered that you were not operating in a business like manner, and the degree of sophistication involved in your activities was not high. As you only traded at a significant level during a single month your trading activities lack the permanency of sustained operations that would be expected when a business is being carried on.

Although you do have some indicators that support that you are carrying on a business of CFD trading, the overall impression gained is that your activity does not amount to the carrying on of a business.

Conclusion

For the income year ended 30 June 2012, you were not carrying on a business of CFD trading. However, TR 2005/15 states where a business is not carried on, a gain or loss from CFD trading will be accounted for as isolated transactions that were a profit making undertaking or scheme. Any gains are assessable under section 15-15 of the ITAA 1997, and losses are deductible under section 25-40 of the ITAA 1997.

Similarly, your single share transaction completed during the income year ended 30 June 2012, would be considered to be an isolated transaction that was a profit making undertaking or scheme. Therefore your loss would be included as part of your ordinary income.

As you are not carrying on a business you cannot treat the shares purchased in this transaction as trading stock as per division 70 of the ITAA 1997. Your profit or loss from each transaction needs to be calculated from the historical purchase price and the historical sale price of each share purchased and sold, and is only included in your assessable income when you dispose of the shares.

As a profit making undertaking or scheme any gains from your transactions would be assessable as ordinary income, and would be included in your tax return as other income. Any losses would be deductions, and would be included in your tax return as other deductions.

You must include a revenue gain or loss in your tax return in the year that it is incurred. If you have incurred a loss in a previous financial year you will need to amend your tax return for the relevant year to include your loss.

You cannot claim your expenses as deductions, unless they can be directly attributable to a particular transaction. This means that you can claim brokerage, as that relates specifically to a particular transaction, however you cannot claim deductions for data fees, internet, trading courses or other similar expenses.