Private ruling: Am in business as a trader of foreign currency using margins and non commercial loss rules
Published: December 2011
Ruling period: Year ended 30 June 2010. | Year ended 30 June 2011.
Date scheme commenced: 1 July 2009.

Ruling: Q1:  | A1:  | Q2:  | A2:  | Q3:  | A3:  | Q4:  | A4:  | Q5:  | A5: 

Relevant facts and circumstances: You trade in foreign currency using margins almost three days on average per week, with the intention of making a profit. For the year ended 30 June 2010, you made a significant number of trades over a very short period of time, recording an overall loss. For the year ended 30 June 2011, you made a far greater number of trades than in the year ended 30 June 2010, recording an overall loss. You have qualifications in marketing and business. You work for a firm that buys and sells currencies, therefore you research the market everyday. You conduct analysis and assessment of the Forex market, including predictions from Easy Forex and Oxforex. You have an office and your resources include the internet and Forex currency investment magazines. You are motivated to know a currency and whether it will increase or decrease, know the foreign currency exchange rate and to make profits. You have registered for an ABN in your own name. For the year ended 30 June 2011, you meet the income requirement because the total of the following amounts is less than $250,000: Taxable income (ignoring business losses); Total reportable fringe benefits; Reportable superannuation contributions; Total net investment losses - including financial investment losses and rental property losses. The following documents are to be read with and form part of the scheme for the purpose of this private binding ruling: o Easy Forex day trading - closed positions list covering the period 1 July 2009 to 30 June 2010. o Easy Forex day trading - closed positions list for the period 1 July 2010 to 30 June 2011.

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 Section 35-10, | Income Tax Assessment Act 1997 Section 35-30 and | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Detailed Reasoning - CFD Trading in Forex: Contracts for differences (CFD) 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. 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 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 and treated as ordinary income. 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. In your case, your forex margin product had the characteristics of a CFD. It allowed you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Question 1: Year ended 30 June 2011 - Am I in business. Regarding the matter of whether you were carrying on a business of CFD trading in Forex in the year ended 30 June 2011, 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 2011, the factors that gave the overall impression that you were in business are: o You traded regularly, particularly during certain months of the financial year; and o Turnover was quite high, you made gains of more than $20,000 for the year. Question 2: Year ended 30 June 2011 - Assessable income and CFD Forex trading. Paragraph 11, of Taxation Ruling TR 2005/15 rules that a gain from a CFD trade will be 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. In your case, the gains (trading profits) from your CFD Forex trading fit the definition of assessable income under the assessable income test for the non commercial business loss rules. To pass the assessable income test, assessable income from your business must be at least $20,000 in the income year before you can claim the losses in the current year. In your case, in the year ended 30 June 2011, the gains from your CFD Forex trading are greater than $20,000. | Detailed Reasoning - Question 3: Year ended 30 June 2011 - Business losses deductible under section 8-1 of the ITAA 1997.: As you first met the income requirement, that is the total of the following amounts is less than $250,000: o Taxable income (ignoring business losses); o Total reportable fringe benefits; o Reportable superannuation contributions; o Total net investment losses - including financial investment losses and rental property losses; and o Second you pass the assessable income test, you will be able to claim your business loss from CFD Forex trading in the current year, being the year ended 30 June 2011. Question 4 and Question 5: Year ended 30 June 2010 - Profit making undertaking - gains and losses. For the year ended 30 June 2010, whilst your activity showed repetition & regularity in the trading of Forex margins on a daily basis, you only traded for a very short period of time. As a result, the impression gained is you were not carrying on a business but, instead, you made an experimental and speculative foray into Forex margin trading for a very short period of time. Also, your turnover was not large. Turnover is reflected by the profits made on margin transactions. Unlike share trading, the non-margin amount of a Forex position is merely a deposit. When a transaction is made, the deposit is not included in the calculation of gross receipts. Your turnover (gains) was quite low. Using Division 35 of the ITAA 1997 as a mere guide, a turnover of at least $20,000 is considered to be a commercial amount. Further, an impression gained is you lacked experience and a sophisticated businesslike method. Whilst your profitable transactions exceeded your loss transactions, you made some comparatively significant larger losses toward the end of the period that you traded. This gives the impression of a lack of business plan and possibly of inexperience. To conclude, you were not carrying on a business of Forex margin trading for the year ended 30 June 2010. However, because the Commissioner in general regards CFD trading as 'an act of commerce', your gains will be assessable income under section 15-15 of the ITAA 1997 and your losses deductible under section 25-40 of the ITAA 1997. You may offset your trading loss against your ordinary employment income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: Am in business as a trader of foreign currency using margins and non commercial loss rules: Question 1: For the year ended 30 June 2011, were you carrying on a business of share trading contracts for difference (CFD's) in Foreign Exchange (Forex)? | Question 2: For the year ended 30 June 2011, did the gains made from your CFD trading in Forex meet the definition of assessable income under the assessable income test for the non commercial business loss rules? | Question 3: For the year ended 30 June 2011, will the losses from your business of CFD trading in Forex be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question 4: For the year ended 30 June 2010, were your CFD trades in Forex, the carrying out of a profit making undertaking? | Question 5: For the year ended 30 June 2010, will the gains from your CFD trades in Forex be assessable income under section 15-15 of the ITAA 1997 and your losses be deductible under section 25-40 of the ITAA 1997?