Edited version of your written advice

Authorisation Number: 1012785701997

Ruling

Subject: Business - am I in Business

Questions and answers

1. Were you carrying on a business of trading contracts for difference?

No.

2. Was your contract for difference activities the carrying out of a profit making undertaking or scheme where your gains would be assessable on revenue account under section 15-15 of the Income Tax Assessment Act 1997?

Yes.

3. Are your losses from your contract for difference activities be an allowable deduction under section 25-40 of the Income Tax Assessment Act 1997 where the transaction is entered into in carrying on or carrying out a profit making undertaking or scheme?

Yes.

4. Are you entitled to a deduction for expenses incurred in the course of trading contracts for difference?

Yes.

5. Are you entitled to a deduction for expenses incurred in the gaining or producing assessable dividend income?

Yes.

This ruling applies for the following period

1 July 2013 to 30 June 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You work full time, X hours per week but occasionally you work more hours.

You commenced trading contract for difference (CFDs)

You have completed education relevant to this activity.

You regularly read subscriptions and publications in order to stay up to date with market developments.

You made your investment decisions based on a combination of recommendations from subscription services, technical indications from your trading software and information about your own current portfolio holdings and the amount of capital you had available to deploy to any particular trade.

Your trading activities are carried out during trading hours when the Australian market closes, if you were not otherwise engaged in client meetings.

Your CFD trades were undertaken with a view to producing a short term gain rather than to generate income from dividends.

You undertook your trading activities with the intention to make a profit.

You maintained records of your trading and used your CFD broker's online records to calculate your profit/loss at the end of the year.

You use two strategies which you refer to as the 'index strategy' and the 'short equities' strategies.

'Index' Strategy

The aim of the 'index' strategy is to profit from short term fluctuations in the prices of CFDs on futures contracts.

Specifically, you traded CFDs in the Australian and overseas.

You injected $xx xx of your own money into the 'Index Strategy'.

Over the course of the financial year you made X trades using the 'index' strategy.

The X trades you made were spread over a total of Y days in the financial year.

The number of trades you made varied each month.

The reason why there were relatively few trades using the 'index strategy' is because this strategy is based on certain market events which are not necessarily day to day occurrences, i.e. the futures prices will tend to increase in the last few days before the futures contract expires as traders buy to cover their short positions. There are only Z contracts each year, therefore only Z opportunities to take advantage of this price movement.

Of the Z contacts available each year, you traded a number of times during various months.

In all of these trades, the position was held for a relatively short period, typically less than a week.

The 'index' strategy performed poorly. Your purchase costs for CFDs exceeded your proceeds from their sale. You also incurred financing costs and order fees; resulting in a gross loss of $xx xx.

'Short equities' strategy

The aim of the 'short equities' strategy is to profit from short term downward movements in the prices of CFDs on the shares of major Australian companies.

You injected $xx xx of your own money into the 'Short equities' Strategy.

Over the course of the financial year you made X trades using the 'Short equities' Strategy.

The X trades you made were spread over a number of days in the financial year.

The number of trades you made varied each month.

Your total trade value was $xx xx of CFDs using the 'short equities' strategy.

Your sales proceeds exceeded your purchase costs for the CFDs by $xx xx. You received financing income and commission and dividend expenses; resulting in a gross profit of $xx xx.

Equities investments

Over the financial year you held approximately $xx xx worth of shares and exchange traded products.

Your investment activity consisted of buying and selling shares and other listed securities traded on the Australian Securities Exchange (ASX).

Your strategy is to attempt to buy undervalued shares and hold them over a long term time frame.

You do not attempt to earn an income by taking advantage of short term price fluctuations in your equity investments.

You will sometimes sell shares if your form an opinion that they have become overvalued.

Over the financial year you received $xx xx worth of dividends from your equity investments and made a net capital gain of $xx xx on sales of shares.

You do not consider your equity investment activity amounts to a business in share trading because your equities investment activity is based on holding the shares over the long term and earning income from periodic dividend distribution.

Risk

To minimise risk you use both stop loss orders and limited orders to control the risk in trade.

The stop loss orders would close your position if the market moved against you by a certain number of points, therefore cutting your losses.

The limited orders would close your position if the market moved favourably by a certain number of points, therefore locking in a profit.

Sometimes you hedged your Australian index trading with orders placed on the overseas index to counteract the price fluctuations in the Australian Index overnight.

Expenses

You purchased a laptop computer and incurred internet access fees.

The computer and internet access were used in the Equities investing and CFDs trading.

You purchased the laptop to install specific software to carry out your activities and because you would not be allowed to install the software on your employer's network.

Your trading activities are carried out during trading hours when the Australian market closes.

The internet access is necessary because your software requires data to be downloaded from the ASX daily.

You use the internet to place equities and CFD orders with your brokers using their online platforms and to access equities research websites.

During the financial year you purchased an annual subscription to an investment website. You use this investment website in your equities investment and 'short equities' strategy. The website collects data on the top listed companies on several different exchanges and presents the information in a manner which is easy for the user to sort.

In a previous financial year you purchased a subscription to an investment newsletter distributed by email. You use this subscription in your equities investment and 'short equities' strategy. The subscription includes daily market commentary and weekly recommendations. You use this subscription in conjunction with the investment website subscription; using both subscriptions in conjunction allows you to narrow down the number of recommendations you act upon.

Early in the current financial year you purchased a subscription which entitled you to receive email bulletins with recommendations for index trades which you can then choose to execute or not. You use this subscription's recommendations as the basis for your 'Index Strategy'. The recommendations differ from those issued by the investment newsletter as these recommendations only relate to the ASX 200 index and the S&P 500 index, they do not relate to any particular share or company. The subscription also entitled you to attend two days of classroom lectures covering practical topics such as how to place orders and position sizing.

Early in the current financial year you purchased investment software; you use this software in your short equities strategy and or your equities investments. The product operates by downloading share price data from the ASX and using that data to display share price charts with a variety of trading indicators. One particular indicator you use in your equities strategy is known as 'EBMI". This indicator measures the level of buying by institutional investors. The theory behind EBMI is that large institutional investors are better informed than individuals, therefore if a particular company is generating a lot of institutional interest this is a positive signal an may lead you to purchase a particular share.

Early in the current financial year you purchase a software product designed to detect potential declines in share prices. It is an add-on to the investment software, that is, it cannot be run on its own. You used this product in your 'Short Equities' Strategy to scan a set of shares daily to identify those which could potentially decline in the short term. You then place short CFD orders on those shares expected to decline.

During the financial year you attended a market briefing. The market briefing featured presentations from a number of market analysts. You used this market briefing to review your equities holdings and to consider whether there were any shares you should add or remove from your portfolio.

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 40

Reasons for decision

Were you carrying on a business of trading contracts for difference?

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (CFD) 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 Income Tax Assessment Act 1997 (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.

The Commissioner is of the view in TR 2005/15 that CFD trading is an act of commerce and that speculation on such contracts will be productive of a gain or a loss. This gives rise to the profit making intention of the activity.

Regarding the matter of carrying on a business, 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 provided indicators as to what would be carrying on a business of share trading including CFD trading. The regularity in the buying and selling of shares and sales turnover is the prominent indicator. Supportive indicators include operating in a business-like manner and the degree of sophistication involved.

Hartley and FCT [2013] AATA 601 provides specific share trading factors, that are also relevant to CFD trading which point against the conduct of a trading business; in particular the AAT expressed the view that

the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an on-going business.

Application to your circumstances

You trade in CFDs using two strategies; 'Index' and 'Short Equities' Strategies. You undertook your trading activities with the intention to make a profit.

To minimise risk you use both stop loss orders and limited orders to control the risk in trade.

You have purchased a number of subscriptions to assist you to analyse the market and determine when to purchase and when to sell CFDs.

Using the 'Index' Strategy, you injected $xx xx of your own money and you made X trades over a twelve month period. You state that the number of trades was low because there are only Z contracts each year. Your records show that you traded a number of times in September 20XX and Z times in December 20XX, however you only traded X in March 20ZZ and Y times in June 20ZZ, but in April 20ZZ you traded Z times, which is not one of the contract months.

Using the 'Short Equities' Strategy, you injected $xx xx of your own money and you made less than 100 trades over a twelve month period. You did not trade in July or August 20XX. Your trading activity between September 20XX and June 20ZZ varied.

Further analysis of your trading shows that you traded multiple times on some days and under both strategies; therefore out of the total trades you made, you traded less than 80 days in the financial year.

You work full time, X hours per week but occasionally you work more hours.

Your trading activities are carried out during trading hours when the Australian market closes; if you were not otherwise engaged in client meetings.

Consequently, your trading activity under the 'Index' Strategy and 'Short Equities' Strategy does not show a pattern of repetition or regularity which is consistent with an activity that has the commercial character of a business.

Accordingly, it is not considered you have been carrying on a business in CFD trading.

Was your contract for difference activities the carrying out of a profit making undertaking or scheme where your profits are assessable and your losses are deductible?

Paragraph 13 of TR 2005/15 rules that a gain from a CFD trade will be assessable income under section 15-15 of the ITAA 1997 where the transaction is entered into in carrying on or carrying out a profit making undertaking or scheme.

Paragraph 14 of TR 2005/15 rules that a loss from a CFD trade will be an allowable deduction under section 25-40 of the ITAA 1997 where the transaction is entered into in carrying on or carrying out a profit making undertaking or scheme.

Any credit interest earned from your CFD account will be assessable income; any debit interest incurred in you CFD account will be an allowable deduction.

Application to your circumstances

You have made profits and losses in your CFD trading; accordingly, your profits are assessable and your losses can be deducted.

Your profit or loss from each transaction needs to be calculated from the historical purchase price and the historical sale price of each CFD purchased and sold, and is only included in your assessable income when you dispose of the CFD.

Are you entitled to a deduction for expenses incurred in the course of trading contracts for difference and in the gaining or producing assessable dividend income?

A deduction can be claimed under section 8-1 of the ITAA 1997 for a loss or outgoing incurred in gaining or producing assessable income. However, a loss or outgoing cannot be deducted to the extent that it is of a capital, private or domestic nature.

To be deductible under section 8-1 of the ITAA 1997, a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income.

Application to your circumstances

Deductions

Internet connection fee

Expenses associated with the initial installation of an internet environment are not deductible because they are capital expenditure. However, the periodic (e.g. monthly) fees paid to internet service providers to maintain access to the internet are deductible if there is sufficient nexus with your income earning activities.

In this instance, as you conduct CFD trading online, the monthly access fees are deductible under section 8-1 of the ITAA 1997 to the extent of that use.

If the internet connection is used for private purposes, CFD trading and your Equities Investments; then the expense should be apportioned accordingly.

Subscriptions

You paid for an annual subscription to an investment website and a site which provides emailed bulletins recommending index trades. These subscriptions are incurred in producing your assessable income; therefore you can claim a deduction.

However, you will need to apportion the expense between your CFD trading and Equities Investments.

In relation to the subscription which provided the emailed bulletins and included a training course; no deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity. This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

The subscription to the site which provides emailed bulletins was purchased prior to you commencing trading.

Consequently the portion of the subscription allocated to the training course cannot be claimed as a deduction because it is at a point to soon.

Your subscription for the investment newsletter was purchased in a previous financial year therefore you will not be able to claim a deduction.

Self-Education expenses

Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

At the beginning of the financial year you held a number of shares in your Equities Investment Portfolio. You attended a market briefing in October 20XX. Attendance at the seminar should lead to an increase in your assessable income from the purchasing and selling of shares activities in the future. Consequently you can claim a deduction.

Capital Allowances (Depreciation)

Under Division 40 of the ITAA 1997 you may depreciate computer hardware and software used for the purpose of producing assessable income.

Computer

The cost of the computer may be allocated over its useful life and allowed as a deduction each year, if you are the owner of the computer.

The amount of depreciation deduction each year will have to be apportioned if the computer is used for non-income producing purposes.

Software

You purchased investor software and a product designed to detect potential declines in share prices software. The software is used exclusively for the purpose of producing assessable income. As the software is a depreciable item you are entitled to deduction for depreciation.