ATO ID 2010/56: Assessable income: derivation of income - spread betting
Date of decision: 3 March 2010
Year of income: Year ended 30 June 2009
Business line: Private Groups and High Wealth Individuals

Issue
Are the gains from financial spread betting assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA 1997.

Facts
The taxpayer is a client of a company which provides the services of financial spread betting for which it holds an Australian Financial Services Licence issued by the Australian Securities and Investment Commission (ASIC) under the Corporations Act 2001 . At the time the transactions were entered into, the taxpayer was a full-time salaried employee of a company which is not connected with the financial services industry. The taxpayer's duties as an employee with the company do not involve financial analysis, observing financial markets or the provision of financial advice. The taxpayer entered into these transactions because they believed that they would enjoy participating in some 'sophisticated, exciting and challenging on-line fun' but understood that they could lose. However, having regard to the taxpayers spread betting activities, a win or loss would not be material in their financial circumstances. The taxpayer did not carry out any formal research and did not use any system or trading techniques but made decisions based on what they knew of financial affairs generally. The taxpayer made a net gain from the spread betting activities in that financial year. The taxpayer contends that the profits made were mainly the result of guesswork.

Reasons for decision
Detailed Reasoning - Section 6-5: Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts. A gain from a financial spread betting activity is 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. It is a question of fact as to whether a taxpayer's activities amount to the carrying on of a business. Income Taxation Ruling TR 97/11: 'Am I Carrying on A Business of Primary Production' discusses the relevant indicators to consider in determining whether a taxpayer's activities amount to the carrying on of a primary production business. These indicators are equally relevant when determining whether a taxpayer is carrying on a business generally. The relevant indicators, which emerge from the case law in this area, to consider are: It is accepted that activities conducted on a small scale and for a short time may nevertheless involve the carrying on of a business. The taxpayer entered into a number of spread betting transactions over a one week period. The proceeds generated from these spread betting activities could be seen as the commencement of a business having regard to the following: Even if the activities do not constitute the carrying on of a business of spread betting, the gains made on each individual contract may still be assessable as ordinary income under section 6-5 of the ITAA 1997 if the profits were obtained in a business operation or commercial transaction entered into with the intention or purpose of making a profit (see Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 87 ATC 4363 and Income Taxation Ruling TR 92/3: 'Income tax: Whether Profits on Isolated Transactions Are Income'). The profit-making purpose and commercial nature of these transactions is borne out by the fact that: These circumstances objectively establish that such contracts are entered into for a commercial purpose and the existence of a profit making intention. Objectively, they are not consistent with a person who is merely in pursuit of a recreational gambling activity. | Detailed Reasoning - Section 15-15: If section 6-5 of the ITAA 1997 does not apply, the gains are nevertheless assessable income under section 15-15 of the ITAA 1997 as the spread betting contracts amount to carrying on or carrying out a profit-making undertaking or plan. This is the case even if there are only isolated transactions entered into by the taxpayer as 'the profit arising from an isolated commercial or business transaction will constitute income if the taxpayer's purpose or intention in entering into the transaction was to make a profit' (See Antlers Pty Ltd (in liq) v. Federal Commissioner of Taxation 97 ATC 4192; 35 ATR 64). What is important is the intention or purpose, determined by a consideration of the objective facts. Spread betting contracts are the purchase of financial risk -something with a significant commercial flavour - by means of a contract productive only of a gain or loss. It is an activity undertaken for the purposes of making a profit. | Detailed Reasoning - Not Gaming or Wagering: Spread betting can be distinguished from gaming and wagering that might take place on a race course or at a casino because, unlike those activities, it is not governed by the various State Gaming and Wagering statutes but by Commonwealth legislation dealing with the conduct of commercial activities. The validity of spread betting contracts - being found in the Corporations Act 2001 , as opposed to gaming legislation - indicates Parliament's intention that they, as a branch of human activity, belong to an order entirely different from gaming or gambling, that is, they are true commercial activities. In addition, transacting with financial spread betting is closer to the skill end of the chance-to-skill spectrum and the commercial end of the private/recreation-to-commercial spectrum than a bet on a horse racing (see Taxation Ruling TR 2005/15: 'Income tax: tax consequences of financial contracts for difference'). Transacting with financial spread betting is essentially a commercial activity of investing in a cash-settled derivative, albeit in the legal form of a contract of gaming and wagering, in relation to an underlying financial risk. The degree of control is also another factor that distinguishes financial spread betting from recreational gambling. The winnings tend to be the rewards for skill and judgement rather than purely betting on chance (See Brajkovich v. Federal Commissioner of Taxation 20 ATR 1570; 89 ATC 5227). | Detailed Reasoning - Treatment of losses: Any losses on the spread betting contracts would be deductible under section 8-1 of the ITAA 1997 where, had a gain been made on the contract, it would have been assessable under 6-5 of the ITAA 1997. Similarly, any losses on the spread betting contracts are deductible under sections 25-40 of the ITAA 1997 where, had a gain been made on the relevant contract, it would have been assessable under section 15-15 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 section 8-1 section 15-15 section 25-40
Case references: Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 18 ATR 693 87 ATC 4363
Related public rulings and determinations: Taxation Ruling TR 92/3 | Taxation Ruling TR 97/11 | Taxation Ruling TR 2005/15
Subject references: Financial derivatives Gambling income