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Edited version of your private ruling
Authorisation Number: 1012551613980
Ruling
Subject: FX derivatives trading and non-commercial losses
Questions and Answers:
1. For the years ended 30 June 2012 and 2013, must you defer your foreign exchange trading losses?
No.
2. For the years ended 30 June 2012 and 2013, can you deduct your foreign exchange trading losses against your ordinary income?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
During the years ended 30 June 2012 and 2013, you traded foreign exchange derivative contracts, from which you made net losses in each income year.
For each income year you made a large number of trades; the sum of your gross profits on your profitable trades amounted to over $20,000; and you met the income requirement under subsection 35-10(2E) of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-40
Income Tax Assessment Act 1997 Section 35-10
Income Tax Assessment Act 1997 Section 35-30
Reasons for decision
CFDs include those relating to currencies. Therefore, the principles in TR 2005/15 apply to foreign exchange trading when occurring in the form of cash settled derivatives.
TR 2005/15 provides where CFD trading is part of the carrying on of a business, a loss incurred will be deductible under 8-1 of the ITAA 1997.
Otherwise, TR 2005/15 provides the CFD trading will be a profit making undertaking and a net loss from CFD trading will be deductible 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 provision in section 118-20 of the ITAA 1997 prevent gains and losses from CFD trading to be accounted for under the capital gains tax (CGT) provisions.
However, where CFD trading is part of the carrying on of a business, the non-commercial business activities rules in Division 35 of the ITAA 1997 must be considered, to ensure a trading loss is deductible in the income year it is incurred (rather than having to be deferred under section 35-10).
Included in its rules, Division 35 of the ITAA 1997 will allow an immediate deduction for a business loss when the assessable income from the business, for an income year, is $20,000 or more (section 35-35) and when the income requirement under subsection 35-10(2E) is met.
Regarding the matter of carrying on a business, Taxation Ruling TR 97/11 and the general body of case law consider the leading indicator of carrying on a business is that of repetition and regularity in the buying and selling of trading stock.
In your case, your foreign exchange trading exhibited the leading indicator of a business, namely, repetition and regularity of activity. It follows your losses will be deductible under section 8-1 of the ITAA 1997 if the provisions in Division 35 of the ITAA 1997 are satisfied.
Since, for each income year, you met the income requirement under subsection 35-10(2E) of the ITAA 1997 and your gross assessable income from your trading activity exceeded $20,000, Division 35 of the ITAA 1997 will not act to prohibit an immediate deduction for your losses.