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Ruling

Subject: Taxation of Financial Arrangements - Contracts for Difference

Question 1

Will a gain from the contract for difference ('CFD') entered into between Company X and its sole director be assessable under subsection 230-15(1) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

Yes, a gain from the CFD entered into between Company X and its sole director will be assessable under subsection 230-15(1) of the ITAA 1997.

Question 2

Will a loss from the contract for difference entered into between Company X and its sole director be deductible under subsection 230-15(2) of the ITAA 1997?

Answer

Yes, a loss from the CFD entered into between Company X and its sole director will be deductible under subsection 230-15(2) of the ITAA 1997.

Question 3

Will a gain or loss from the CFD entered into between Company X and its sole director be brought to account using the realisation method under section 230-180 of the ITAA 1997?

Answer

Gains or losses from the CFD entered into between Company X and its sole director will be brought to account using both the accruals and realisation methods under Subdivision 230-B of the ITAA 1997.

Question 4

When are gains or losses made which arise from the contract for difference entered into between Company X and its sole director for the purposes of subsections 230-15(1) and 230-15(2) of the ITAA 1997?

Answer

Gains and or losses in relation to the CFD will be made at the time provided for in Subdivision 230-B of the ITAA 1997.

Question 5

Are the gains or losses which arise from the contract for difference entered into between Company X and its sole director made or incurred at the time a payment is made under clauses 4 and/or 5 (as the case requires) of that contract? If not at that time, when should those gains and losses be brought to account under subsections 230-15(1) and 230-15(2) of the ITAA 1997?

Answer

The gains or losses which arise from the contract for difference entered into between Company X and its sole director are not necessarily made at the time a payment is made under clauses 4 and/or 5 of that contract. The gains or losses will be brought to account at the time provided for in Subdivision 230-B of the ITAA 1997.

This ruling applies for the following periods:

1 July 2011 to 30 June 2015

Assumptions

Company X is required to apply the taxation of financial arrangements rules in Division 230 of the ITAA 1997.

Company X has not made, and will not make, a tax-timing method election under Division 230 of the ITAA 1997.

Relevant facts and circumstances

Background

Company X is an Australian private limited company, controlled by a sole director.

Company X is developing a business plan to acquire an Australian Financial Services Licence and provide Contracts for Difference (CFD) within the Australian market place. Company X's business model is to earn a margin over its costs.

Company X has entered into a CFD with its sole director.

The CFD entered into between Company X and its sole director is a financial arrangement for the purposes of section 230-45 of the ITAA 1997.

Company X CFD

The legal and equitable rights and obligations under the terms of the CFD can broadly be separated into:

· primary rights and obligations representing the fundamental terms which are the reason each party has entered into the CFD; and

· supplementary rights and obligations, reflecting those terms of the CFD which facilitate or support the fundamental terms.

Under clause 3.3 of the terms of the CFD, an investor may offer to enter into a new CFD by placing an order with ASF. This may be to either open a new CFD or close-out an existing CFD. The investor may be either the Long Party (notionally purchasing the underlying) or the Short Party (notionally selling the underlying). The order can be of a number of varieties (set out in clauses 3.8 to 3.11).

For administrative purposes, each investor maintains a 'Company X account' in which the investor deposits funds. This account has a number of sub-accounts such as the 'Collateral Sub-account' and the 'Blocked Funds Sub-account'.

Primary rights and obligations

The CFD constitutes an obligation of the investor to pay Company X:

· any interest on an open CFD if the investor is the Long Party;

· any Shortfall on the close-out date;

· any Dividend Amounts if the investor is the Short Party; and

· any Trading Fees;

(clause 3.1(c)).

The 'Shortfall', if the investor is the Long Party, means the greater of:

· the Initial CFD Face Value less the Close-out CFD Face Value; and

· nil.

The 'Shortfall', if the investor is the Short Party, means the greater of:

· the Close-out CFD Face Value less the Initial CFD Face Value; and

· nil.

The CFD constitutes an obligation of Company X to pay the investor:

· any interest on an open CFD if Company X is the Long Party;

· any Surplus on the close out date; and

· any Dividend Amounts if Company X is the Short Party;

(clause 3.1(b)).

The 'Surplus', if the investor is the Long Party, means the greater of:

· the Close-out CFD Face Value less the Initial CFD Face Value; and

· nil.

The 'Surplus', if the investor is the Short Party, means the greater of:

· the Initial CFD Face Value less the Close-out CFD Face Value; and

· nil.

The 'Dividend Amount' means an amount equivalent to the payment of any dividends paid on the Reference Security - this may include an amount reflecting franking credits where Company X is the Long Party (clause 4.3).

The Dividend Amount applies to any CFD open at the close of the last day where the Reference Security is traded on a 'cum-dividend' basis, and the payment is made on the first day that the security is traded on an 'ex-dividend' payment (clause 4.3(a).

The CFD Face Value is determined by Company X by reference to the market value of the Reference Security (clauses 3.2 and 4.1). This is done at each Valuation Time (clause 4.1).

The interest is calculated by applying the relevant rate to the CFD Face Value as it is at the time the interest is payable (clause 5).

Interest is calculated on each business day, using the applicable interest rate divided by three hundred and sixty five multiplied by the applicable interest period (clause 5.1(a))

Interest payments shall be in arrears and shall be credited to or debited from the Company X account (clause 5.1(c))

Where a CFD is open at an interest payment time, interest must be paid by the Long Party to the Short Party (clauses 5.2(a) and (b))

Any interest payable under clause 5.2(a) or (b) must be paid on the Business Day following the Interest Payment Time (clause 5.2(d))

'Interest Payment Time' means the Closing Time one year after a CFD position was opened or, if Company X elects, the Closing Time on any Business Day or the Closing Time on the last day of any month

Each party may also be required to make 'Mark-To-Market Payments':

· if, at any Valuation Time the CFD Face Value is greater than the previous value, the Short Party must pay the Long Party the excess;

· vice versa, if the CFD Face Value is less, the Long Party must pay the Short Party the excess;

· any Mark-To-Market Payment, where paid by Company X, will be treated as a refund of any prepaid Shortfall and where paid by the investor will be treated as a refund of any prepaid Surplus; and

· to the extent the Mark-To-Market Payment exceeds any prepaid Shortfall or Surplus respectively, it will be treated as a prepayment of the Shortfall or Surplus respectively;

(clause 4.2).

Company X has sole discretion to charge fees and charges from time to time (clause 4.8).

In addition to the payments set out above, Company X may also charge - as an independent obligation - the investor default interest where the investor fails to make a payment on the due date (Annexure A, clause 4).

Supplementary rights and obligations

In addition to the primary rights and obligations set out above, the following supplementary rights and obligations, which are essentially administrative in nature, are set out under the terms of the CFD:

· Company X has the discretion to reject an order, to determine which Reference Securities the CFD may relate to, to determine the market value of the Reference Securities and other administrative functions under the CFD.

· Company X has powers to set-off the various accounts of the investor (Annexure A clause 2.1).

· The investor indemnifies Company X for all costs (including taxes) incurred by the investor in association with the Company X Account and transaction documents, as well as law suits etc. (Annexure A clauses 5 and 6).

· Each party is required to comply with obligations in relation to deduction and remitting tax from payments made to or from the other party (Annexure A clause 6).

· Company X may assign its rights and obligations under the CFD (Annexure A clause 16.2).

There are also a number of rights and obligations setting out the security interest arrangements the investor is expected to provide:

· The investor must maintain in its Company X Account and the sub-accounts sufficient cash or collateral (including Reference Securities themselves) to discharge the investor's obligation under the CFD (clause 6). If the investor allows the margin (cash or collateral) to dip below the required level, this is an Event of Default and the shortfall is a debt owing to Company X (clause 6(f) and (i)).

· The collateral is subject to a mortgage and other security requirements, including investor's being obliged to maintain the amount of collateral (or margin) in the account - if there is an Event of Default, Company X may have recourse to the collateral (i.e. sell or deal with for cash) or cash margin to discharge the obligations of the investor (clause 9).

· Until there is an Event of Default, the investor retains the usual rights of an owner of property in respect of the collateral (clause 9.13). If there is an Event of Default, Company X may deal with the collateral as needed (clause 9.14).

· The investor must not create a security interest over the collateral which ranks ahead of Company X's interest (clause 9.11).

· Company X has wide powers to close out the investor's CFD, as well as to terminate the investor's rights to trade, where circumstances require it and there has been an Event of Default (clause 7). In such circumstances any accrued interest, Surplus, Shortfall and Mark-To-Market payments become payable and Company X may have recourse to the margin or collateral.

· Company X may appoint a Receiver upon an Event of Default (clause 9.15).

The investor is required to take all reasonable steps to avoid an Event of Default, and to inform Company X of any Events of Default (clause 9.2). Events of Default include essentially anything which could jeopardise the investor's ability to discharge its obligations under the CFD and include, among other things:

· an inability to pay an amount due under the terms of the CFD;

· granting a security interest over the collateral which ranks in front of Company X's security interest; and

· any other failure to perform obligations which have a material impact on Company X's rights or interest under the CFD.

Relevant legislative provisions

Income Tax Assessment Act 1997

Division 230 of the ITAA 1997

Section 230-15 of the ITAA 1997

Subsection 230-15(1) of the ITAA 1997

Subsection 230-15(2) of the ITAA 1997

Section 230-45 of the ITAA 1997

Section 230-70 of the ITAA 1997

Section 230-75 of the ITAA 1997

Subdivision 230-B of the ITAA 1997

Subsection 230-100(2) of the ITAA 1997

Subsection 230-100(3) of the ITAA 1997

Subsection 230-100(5) of the ITAA 1997

Section 230-105 of the ITAA 1997

Subsection 230-105(2) of the ITAA 1997

Section 230-115 of the ITAA 1997

Subsection 230-115(1) of the ITAA 1997

Subsection 230-115(2) of the ITAA 1997

Section 230-120 of the ITAA 1997

Subsection 230-120(1) of the ITAA 1997

Subparagraph 230-120(1)(a)(i) of the ITAA 1997

Subparagraph 230-120(1)(a)(ii) of the ITAA 1997

Paragraph 230-120(1)(b) of the ITAA 1997

Paragraph 230-120(1)(c) of the ITAA 1997

Subsection 230-120(2) of the ITAA 1997

Subsection 230-120(3) of the ITAA 1997

Subsection 230-130(1) of the ITAA 1997

Subsection 230-130(3) of the ITAA 1997

Section 230-135 of the ITAA 1997

Subsection 230-135(2) of the ITAA 1997

Subsection 230-135(4) of the ITAA 1997

Subsection 230-135(8) of the ITAA 1997

Section 230-180 of the ITAA 1997

Subsection 230-180(2) of the ITAA 1997

Reasons for decision

Question 1

Summary

Yes, a gain from the CFD entered into between Company X and its sole director will be assessable under subsection 230-15(1) of the ITAA 1997.

Detailed reasoning

The CFD entered into between Company X and its sole director is a financial arrangement for the purposes of Division 230 of the ITAA 1997.

Gains and losses from Division 230 financial arrangements must be calculated and brought to account under Division 230 of the ITAA 1997.

Relevantly, subsection 230-15(1) of the ITAA 1997 states:

"Your assessable income includes a gain you make from a financial arrangement"

Accordingly, a gain made from the CFD will be a gain made from a financial arrangement, and will be assessable income under subsection 230-15(1) of the ITAA 1997.

Question 2

Summary

Yes, a loss from the CFD entered into between Company X and its sole director will be deductible under subsection 230-15(2) of the ITAA 1997.

Detailed reasoning

The CFD entered into between Company X and its sole director is a financial arrangement for the purposes of Division 230 of the ITAA 1997.

Gains and losses from Division 230 financial arrangements must be calculated and brought to account under Division 230 of the ITAA 1997.

Relevantly, subsection 230-15(2) of the ITAA 1997 states:

"You can deduct a loss you make from a 'financial arrangement', but only to the extent that:

(a) you make it in gaining or producing your assessable income; or

(b) you necessarily make it in carrying on a business for the purpose of gaining or producing your assessable income."

Accordingly, a loss made from a financial arrangement will be deductible where it is made in gaining or producing assessable income, or where it is necessarily made in carrying on a business for the purpose of gaining or producing assessable income.

Company X's business model includes the issuing of CFD into the market, in order to achieve a margin over its costs (that is, assessable income).

A loss made from the CFD is considered necessarily made in carrying on a business for the purpose of gaining or producing assessable income.

Accordingly, a loss made from the CFD will be deductible under subsection 230-15(2) of the ITAA 1997.

Question 3

Summary

Gains or losses from the CFD entered into between Company X and its sole director will be brought to account using both the accruals and realisation methods under Subdivision 230-B of the ITAA 1997.

Detailed reasoning

Under Division 230 of the ITAA 1997, the time when gains from financial arrangements are included in assessable income depends on the particular tax-timing method used to calculate the gains and losses. In the absence of any tax-timing method elections, the time at which the gains are included in assessable income is determined by reference to Subdivision 230-B of the ITAA 1997.

Subdivision 230-B of the ITAA 1997 contains the default TOFA tax-timing methods, being the accruals and realisation methods.

Notional principal arrangements

Section 230-120 of the ITAA 1997 provides special rules for determining the timing of gains and losses for TOFA purposes from financial arrangements which involve notional principals.

Relevantly, subsection 230-120(1) of the ITAA 1997 provides:

"This section applies to a financial arrangement that you have if, in substance or effect, and having regard to the pricing, terms and conditions of the arrangement:

(a) the arrangement consists of these things:

(i) a leg, the financial benefits to be provided or received in respect of which are calculated by reference to, or are reasonably related to, a notional principal;

(ii) another leg, the financial benefits to be provided or received in respect of which also are calculated by reference to, or are reasonably related to, a notional principal;

(iii) if the arrangement includes one or more other things - those things; and

(a) when you start to have the arrangement, the value of the notional principal in relation to one leg is equal to the value of the notional principal in relation to the other leg; and

(b) all or part of the notional principal in relation to each leg is provided or received at a time, regardless of whether that time is different in relation to each leg."

It is considered that section 230-120 of the ITAA 1997 will apply to the CFD entered into between ASF and its sole director, as the requirements of subsection 230-120(1) of the ITAA 1997 are met.

One leg of the arrangement is the 'financing leg', which involves the notional borrowing of the principal amount and payment of interest. The second leg of the arrangement is the 'futures leg', which involves the notional acquisition of the underlying securities, the mark to market payments (including surplus/shortfall payments) and dividend payments.

In addition to the two 'legs' of the arrangement, the arrangement also includes the right to receive or obligation to provide fees and charges. These are considered 'things' for the purposes of section 230-120 of the ITAA 1997.

The payments to be made under the CFD are made by reference to the notional value of the underlying securities of the CFD. Amounts such as interest, shortfall or surplus amounts and dividend amounts are calculated by reference to, or are reasonably related to, the face value of the CFD, with this face value set by the value of the underlying securities. In this regard, paragraphs 230-120(1)(a)(i) and (ii) of the ITAA 1997 are met, as the arrangement consists of two legs calculated by reference to a notional principal.

Further, paragraph 230-120(1)(b) of the ITAA 1997 is also met, as the notional principal is the same in relation to each leg. Paragraph 230-120(1)(c) of the ITAA 1997 is clarified by subsection 230-120(2) of the ITAA 1997, which notes that the notional principal need not actually be provided or received.

Paragraph 230-120(1)(c) of the ITAA 1997 requires that the notional principal is 'notionally' provided or received. That is, that the relevant financial benefits to be received and provided are calculated as if the notional principals were actually transferred, even if they are not actually transferred.

This paragraph is satisfied in relation to the current financial arrangement. The CFD arrangement, in substance, allows an investor to participate in the costs and benefits of ownership of an underlying security without actual purchase of that security. One party will pay interest on the CFD as if they had borrowed the funds to purchase the underlying securities. Accordingly, in substance, the notional principals are exchanged, even though this doesn't occur, in a factual sense, under the contract.

As subsection 230-120(1) of the ITAA 1997 is satisfied, subsection 230-120(3) of the ITAA 1997 applies to provide special rules for calculating gains and losses from the arrangement.

Broadly, subsection 230-120(3) of the ITAA 1997 requires that gains and losses from each leg of the arrangement (and any thing which is not a leg under the definition in section 230-120 of the ITAA 1997) are worked out separately. This is particularly relevant in determining 'sufficient certainty' for the purposes of Subdivision 230-B of the ITAA 1997

Sufficiently certain gain or loss

Where a gain or loss is sufficiently certain pursuant to Subdivision 230-B of the ITAA 1997, subsection 230-100(2) and (3) of the ITAA 1997 requires a taxpayer to calculate gains and losses for the relevant 'leg' or 'thing' in accordance with the accruals method. Where the financial arrangement does not give rise to a gain or loss which is sufficiently certain, subsection 230-100(5) of the ITAA 1997 requires a taxpayer to calculate gains and losses for the relevant 'leg' or 'thing' in accordance with the realisation method.

Accordingly, a gain or loss from a 'leg' or 'thing' relating to the CFD, which is a financial arrangement under section 230-45 of the ITAA 1997 will be brought to account using the realisation method where the financial arrangement does not give rise to a gain or loss which is sufficiently certain.

Sections 230-105 to 230-115 of the ITAA 1997 outline when a gain or loss will be taken to be 'sufficiently certain' for the purposes of Division 230 of the ITAA 1997. As provided for in subsection 230-115(1) of the ITAA 1997, when considering whether a gain or loss is sufficiently certain, regard must only be had to financial benefits which a taxpayer is sufficiently certain to receive or provide.

Relevantly, subsection 230-115(2) of the ITAA 1997 provides:

"A financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if:

(a) it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the financial arrangement for the rest of its life); and

(b) at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy."

In relation to the CFD financial arrangement, subsection 230-115(2) must be considered for each of the finance leg, the futures leg, and the 'thing' being the fees and charges.

Finance Leg

The finance leg is comprised of the obligation to provide or right to receive interest payments. In accordance with the terms of the CFD, interest is calculated on each business day, and is paid on the day following the Interest Payment Date (as defined in the CFD glossary).

Following the calculation of the interest on each business day, the amount of interest which is required to be paid in relation to that business day is known. Further, it is reasonably expected that the interest will be paid or received, assuming the CFD is held for the rest of its life. Accordingly, a sufficiently certain particular gain or loss will arise on each business day.

As the obligation to provide or right to receive interest gives rise to a sufficiently certain particular gain or loss, pursuant to subsection 230-100(3) of the ITAA 1997, the amount of gains and losses from the interest payments will be determined in accordance with the accruals method in Subdivision 230-B of the ITAA 1997.

Futures Leg

The futures leg is comprised of the obligation to provide or right to receive mark to market payments (including shortfall/surplus), and the obligation to provide or right to receive dividend amounts.

The value of the mark to market payments which are required to be received or provided are dependent on the value of the underlying securities. These securities are expected to fluctuate in value over the life of the CFD. However, the amount of any mark to market payment is unknown, until the time it is required to be paid. Accordingly, the mark to market payments do not represent a sufficiently certain financial benefit.

As the obligation to provide or right to receive mark to market payments does not give rise to a sufficiently certain gain or loss, pursuant to subsection 230-100(5) of the ITAA 1997, gains and losses will be calculated under the realisation method in Subdivision 230-B of the ITAA 1997.

In relation to the dividend amounts, once a dividend is declared in relation to the underlying securities, the amount of the dividend payment will be a known amount. Further, it is reasonably expected that the amounts will be provided or received under the CFD. Accordingly, the declaration of a dividend would give rise to a sufficiently certain particular gain or loss at the time the declaration was made.

As there is a sufficiently certain gain or loss, the amount of gains and losses from the financial arrangement will be determined in accordance with the accruals method in Subdivision 230-B of the ITAA 1997

Fees and charges

The fees and charges which may be levied by Company X under the CFD arrangement do not meet the definition of a 'leg' in section 230-120 of the ITAA 1997. Accordingly, they are considered a 'thing', and gains and losses are calculated separately from the gains and losses from the legs.

Fees and charges levied by Company X on inception of the arrangement will represent a known amount, and will be a sufficiently certain overall gain to Company X.

Fees and charges levied by Company X from time to time throughout the arrangement will represent a sufficiently certain particular gain to Company X.

As the amounts are sufficiently certain, the accruals method in Subdivision 230-B of the ITAA 1997 will apply, and the amounts must be spread over the period to which they relate pursuant to section 230-130 of the ITAA 1997.

Question 4

Summary

Gains and or losses in relation to the CFD will be made at the time provided for in Subdivision 230-B of the ITAA 1997.

Detailed reasoning

As explained in the response to questions 1 and 2, gains and losses made from the financial arrangement will be included in assessable income or allowed as a deduction under section 230-15 of the ITAA 1997. As explained in the response to question 3, the gains and losses from the financial arrangement will be calculated under both the accruals and realisation method in Subdivision 230-B of the ITAA 1997.

Finance Leg

As explained in the response to question 3, gains and losses from the finance leg of the arrangement will be sufficiently certain particular gains and losses, and must be calculated under the accruals method in Subdivision 230-B of the ITAA 1997.

Subsection 230-130(3) of the ITAA 1997 requires that a sufficiently certain particular gain or loss is to be spread over the period to which it relates. In this instance, the interest will relate to the relevant Interest Period (as defined in the CFD glossary).

Pursuant to section 230-135 of the ITAA 1997, the gains or losses must be spread using a compounding accruals method, or a method whose results approximate the compounding accruals method.

Subsection 230-135(4) of the ITAA 1997 sets out the periods to which a gain or loss is allocated. These intervals must not exceed 12 months, and be of the same length (but for the first and last payments). Further, subsection 230-135(8) of the ITAA 1997 requires that regard must be had to the financial benefits which are provided or received in each of those intervals.

In practical effect, where the Interest Period is wholly within one financial year, it is expected that the amount of gain or loss (the interest) would be attributed to that financial year.

However, for the purposes of determining amounts of gains or losses for any interest that has accrued but which is not yet paid, and which straddles more than one income year, the interest must be accrued across the period, and allocated to the income year to which it relates.

Futures Leg

As explained in the response to question 3, gains and losses from the futures leg of the arrangement will be brought to account under the accruals and realisation methods in Subdivision 230-B of the ITAA 1997.

Relevantly in relation to the mark to market payments, section 230-180 of the ITAA 1997 provides:

"(1) If a gain or loss is to be taken into account using the realisation method, you are taken, for the purposes of section 230-15, to make the gain or loss for the income year in which the gain or loss occurs.

For the purposes of subsection (1), a gain or loss from a financial arrangement is taken to occur at the time at which the last of the financial benefits taken into account in determining the amount of the gain or loss:

is provided; or

if the financial benefit is not provided at the time when it is due to be provided under the arrangement and it is reasonable to expect that the financial benefit will be provided - is due to be provided.

…"

When determining the financial benefits which should be taken into account in determining the amount of the gain or loss under subsection 230-180(2) of the ITAA 1997, regard must be had to section 230-70 and 230-75 of the ITAA 1997. These sections provide that regard must be had to which financial benefits are 'reasonably attributable' to a financial benefit received or provided to determine whether a gain or loss is made.

In the current circumstances, each mark to market payment is not considered 'reasonably attributable' to each or any other mark to market payment. Based on the terms and conditions on the CFD, interest is charged on the open value of a CFD, which is expected to fluctuate in value in line with the underlying securities. In substance, this represents a notional disposal and acquisition of the security at each mark to market payment date. In light of this, it is considered then that each mark to market payments represent a realised loss, with no financial benefits reasonably attributed to them pursuant to sections 230-70 and 230-75 of the ITAA 1997.

In relation to the dividend amounts, as explained in the response to question 3, gains and losses from the dividend amounts will be sufficiently certain particular gains and losses, and must be calculated under the accruals method in Subdivision 230-B of the ITAA 1997.

Subsection 230-130(3) of the ITAA 1997 requires that a sufficiently certain particular gain or loss is to be spread over the period to which it relates. In this instance, the dividend amount is required to be spread over the period from when the declaration of dividend is made, until the dividend amount is paid.

Pursuant to section 230-135 of the ITAA 1997, the gains or losses must be spread using a compounding accruals method, or a method whose results approximate the compounding accruals method.

Subsection 230-135(4) of the ITAA 1997 sets out the periods to which a gain or loss is allocated. These intervals must not exceed 12 months, and be of the same length (but for the first and last payments). Further, subsection 230-135(8) of the ITAA 1997 requires that regard must be had to the financial benefits which are provided or received in each of those intervals.

In practical effect, where the dividend is declared, and the dividend is paid wholly within one financial year, the amount of gain or loss (the dividend amount) would be attributed to that financial year.

However, for the purposes of determining amounts of gains or losses for any dividend amounts that has accrued but which are not yet paid, and which straddles more than one income year, the interest must be accrued across the period, and allocated to the income year to which it relates on a reasonable basis.

Fees and charges

As explained in the response to question 3, gains and losses from the fees and charges will be sufficiently certain, and must be calculated under the accruals method in Subdivision 230-B of the ITAA 1997.

Fees and charges levied at the commencement of the arrangement will represent a sufficiently certain overall gain to Company X. Pursuant to subsection 230-130(1) of the ITAA 1997, the gain must be spread over the life of the arrangement.

Subsection 230-135(2) of the ITAA 1997 provides that the gain must be spread using a compounding accruals method, or a method whose results approximate the compounding accruals method. Subsections 230-135(4) to (8) of the ITAA 1997 clarifies the way in which the gain or loss is to be spread.

The precise timing of the gain is dependent on the accrual period to which parts of the gain are allocated under subsection 230-135(4) of the ITAA 1997.

Fees and charges levied from time to time by Company X will represent sufficiently certain particular gains to Company X. Pursuant to subsection 230-130(1) of the ITAA 1997, the gain must be spread over the period to which it relates. Section 230-135 of the ITAA 1997 sets out the time at which the gain will be made.

Question 5

Summary

The gains or losses which arise from the contract for difference entered into between Company X and its sole director are not necessarily made at the time a payment is made under clauses 4 and/or 5 of that contract. The gains or losses will be brought to account at the time provided for in Subdivision 230-B of the ITAA 1997.

Detailed reasoning

As explained in the response to question 4, the time at which gains and losses which arise from the contract for difference between ASF and its sole director will be made will be determined by reference to the accruals and realisation methods in Subdivision 230-B of the ITAA 1997.

Under clause 4 of the CFD, Company X or its sole director may be required to make mark to market or dividend payments, or to make payments for applicable fees and charges. Further, under clause 5 of the CFD, amounts of interest may also be payable.

The mark to market, dividends, fees and charges and interest amounts are financial benefits which need to be taken into account when determining the gain or loss from the financial arrangement.

As explained above, interest payments, dividend amounts and fees and charges will be subject to the accruals method. Gains and losses will be brought to account in accordance with sections 230-130 and 230-135 of the ITAA 1997 (as explained in the response to question 4).

Further, mark to market payments will be subject to the realisation method and brought to account in accordance with section 230-180 of the ITAA 1997.

As per subsection 230-180(2) of the ITAA 1997, a gain or loss from a financial arrangement is taken to be made at the time at which the last of the financial benefits taken into account in determining the amount of the gain or loss is provided (or is due to be provided). This requires regard to be had to the reasonable attribution of financial benefits under sections 230-70 and 230-75 of the ITAA 1997.

As explained in the response to question 4, no financial benefits are reasonably attributable to the financial benefit (mark to market payments) to be received or provided.

Accordingly, a gain or loss would be made, pursuant to section 230-180 of the ITAA 1997, when the mark to market payment is made.