Edited version of your private ruling

Authorisation Number: 1012493561265

Ruling

Subject: Am I in business trading contracts for difference

Question 1:

For the year ended 30 June 2012, were you carrying on a business of share trading contracts for difference (CFD's)?

Answer 1:

Yes.

Question 2:

For the year ended 30 June 2012, did you pass the non commercial business loss rules, so that you can offset your CFD business loss in the current year, (year ended 30 June 2012) against your other income?

Answer 2:

Yes.

This ruling applies for the following period

Year ended 30 June 2012.

The scheme commences on

1 July 2008.

Relevant facts and circumstances

You began studying CFD trading prior to starting your CFD activity.

You have been trading in CFD's for a number of years.

You have a CFD trading account in your name only, with a broker.

You purchase CFD's of indices, foreign currencies, commodities and shares. Each contract is held for a period ranging from minutes to weeks for speculative trading.

You have undertaken training courses provided by a certain firm and you have also been a subscriber and user of their software.

You initially invested a certain capital amount in your CFD activity. You currently have a larger amount invested. The source of this capital is from a personal loan taken out by you and from savings.

You carry out forward planning and budgeting, you have a trading strategy and a written formal business plan.

You spend about 35 hours per week carrying out your CFD trading and approximately 55 hours on your other income producing activities.

For the year ended 30 June 2012 you closed out many hundreds of CFD trades.

You made gains from profitable trades of over $20,000 and made losses of a higher amount. You made a net business loss for the year ended 30 June 2012.

You meet the non commercial business loss rules, income requirement for the year ended 30 June 2012, because the sum of the following is less than $250,000.

· Taxable income

· Total reportable fringe benefits

· Reportable superannuation contributions

· Total net investment losses

· Net rental property loss

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

· Completed share trading questionnaire signed and dated by you.

· Broker account statement for your CFD trading account in your name, titled 'summary of activity for the period 1 July 2011 to 30 June 2012'.

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,

Income Tax Assessment Act 1997 Section 36-10 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

For the year ended 30 June 2012, you were carrying on a business of share trading contracts for difference (CFD's). The losses from your business of CFD trading will be deductible on revenue account in the current year (year ended 30 June 2012), because you pass the non commercial business loss rules.

Detailed reasoning

Contracts for difference

CFD's 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.

Unlike share trading, the non-margin amount of a CFD position is merely a deposit. When a transaction is made, the deposit is not included in the calculation of gross receipts.

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 Income Tax Assessment Act 1997 (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. 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.

However, a gain or loss from CFD trading entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 nor be deductible under section 8-1 of the ITAA 1997 or section 25-40 of the ITAA 1997. Further, a capital gain or capital loss from a financial CFD entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

In your case, your CFD trading allowed you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

Regarding the matter of whether you were carrying on a business of CFD trading 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 opened and closed many hundreds of CFD positions; and

· Turnover was high.

In regard to the non commercial business loss rules you firstly meet the income requirement because the sum total of the following is less than $250,000.

· Taxable income

· Total reportable fringe benefits

· Reportable superannuation contributions

· Total net investment losses

· Net rental property loss

You meet the assessable income test because the total of your profitable trades for the year ended 30 June 2012 is greater than $20,000.

Consequently for the year ended 30 June 2012, the losses from your business of CFD trading will be deductible on revenue account in the current year.