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Ruling

Subject: Am I in business trading contracts for difference in foreign currency

Question 1: For the year ended 30 June 2012, were you carrying on a business of share trading contracts for difference (CFD's) in Foreign Exchange (Forex)?

Answer 1: Yes.

Question 2: For the year ended 30 June 2012, did the gains made from your CFD trading in Forex meet the definition of assessable income under the assessable income test for the non commercial business loss rules?

Answer 2: Yes.

Question 3: For the year ended 30 June 2012, will the losses from your business of CFD trading in Forex be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 3: Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on

1 July 2011.

Relevant facts

You commenced trading in foreign currency using margins in the second half of the 2011 calendar year.

You traded regularly with the intention of making a profit.

For the year ended 30 June 2012, you made a very high number of trades, recording an overall small loss.

You work as a business analyst.

You attended a training course on trading in foreign currency using a margin product.

You purchased trading software for a short period of time before deciding it was not an effective tool.

For the year ended 30 June 2012, you meet the income requirement because 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.

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

Broker statement for your account for a certain period in the year ended 30 June 2012, including a trading summary;

Broker statement for your account for a certain period in the year ended 30 June 2012, including a trading summary.

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 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 Forex

Contracts for differences (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 forex margin product 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 2012 - Am I in business.

Regarding the matter of whether you were carrying on a business of CFD trading in Forex in the year ended 30 June 2012, 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 2012, the factors that gave the overall impression that you were in business are:

· You traded regularly, you made a high number of trades; and

· Turnover was quite high, you made gains of well over $20,000 for the year.

Question 2: Year ended 30 June 2012 - Assessable income and CFD Forex trading.

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 Forex trading 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 2012, the gains from your CFD Forex trading are greater than $20,000.

Question 3: Year ended 30 June 2012 - Business losses deductible under section 8-1 of the ITAA 1997.

As you first 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

· Second you pass the assessable income test, you will be able to claim your business loss from CFD Forex trading in the current year, being the year ended 30 June 2012.