Private ruling: Treatment of gains and losses from futures trading
Date of advice: 29 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you in the business of futures trading? | A1: No. | Q2: Are the gains or losses that resulted from your futures trading activity assessable as ordinary income? | A2: No. | Q3: Are the gains or losses that resulted from your futures trading activity assessable as statutory income? | A3: Yes.

Relevant facts and circumstances: You have worked in the investment community for many years and have relevant education. You and your spouse deposited savings into a trading account at a brokerage firm Entity ABC. The funds were deposited into this account for the purpose of daily trading in futures contacts in equity indices, commodities and fixed income (trading activity). The trading account was managed by Entity XYZ on behalf of Entity ABC. The way in which your trading activity was managed is as follows: ● A brokerage account was established with Entity ABC and funded with by savings. ● In order to manage this activity you looked at a number of investment managers before choosing XYZ. ● An Investment Management Agreement was signed with Entity XYZ to perform trading activity via your account (agreement included as a fact of this ruling). ● Entity XYZ employs the relevant expertise to perform the trading function. ● All market analysis and research is conducted by Entity XYZ. ● You do not determine which futures are bought and sold. ● Entity XYZ determines which futures are bought and sold (in equity indices, commodities and fixed income) on your behalf though this brokerage account. Each day, both XYZ and Entity ABC detail the trades performed. ● Positions in any futures contract are not held for more than one day. You do not have a business plan or trading strategy overview. You do not make participate in the decision making process of whether to buy, hold or sell or on the amount you invest each time. On average you spend one hour per week reviewing the performance of Entity XYZ, and fifty hours per week on other income producing activities. You had recorded gains in one year followed by losses in the next. After a number of years you instructed Entity XYZ. You have maintained trading records that you receive from Entity XYZ.

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 70-10 and | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: There are two possible scenarios as to how gains and losses from your futures trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows: | Detailed Reasoning - 1. Business Income: In this scenario your trading activities would be considered to constitute the carrying on of a business. Your investment would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), while your expenses would be deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - 2. Investment Income: In this situation your trading activities would be regarded as investing. Your investments would be considered capital gains tax (CGT) assets. Any gains resulting from this activity would be income as a capital gain, while any losses sustained would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10 of the ITAA 1997. To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your trading activities amount to the carrying on of a business. Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view on what indicators are used to determine whether a business of primary production is being carried on. Although Taxation Ruling TR 97/11 discusses primary production, the same principles can be applied to other income earning activities. TR 97/11, identifies the following indicators as relevant in determining if a business is being carried on: ● whether the activity has a significant commercial purpose or character, ● whether the taxpayer has more than an intention to engage in business, ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity, ● whether there is repetition and regularity of the activity, ● whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business, ● whether the activity is planned, organised and carried out in a business-like manner, ● the size, scale and permanency of the activity, ● whether the activity is better described as a hobby, a form of recreation or a sporting activity. TR 97/11 provides that the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive ( Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). Applying the relevant indicators to your circumstances In your case, your trading activity lacks a significant commercial purpose or character and there is no stated indication of an intention to engage in business. Although there is a purpose of profit making and regularity of trades, the regularity stem from the actions of others who were managing the trading activity. You did not carry on the activities in a similar manner to that of ordinary traders in the business of financial investments, nor did you plan, organise or carry out the activities in a systematic or businesslike manner. Further you played no part in the decision making in relation to the trading activity. | Detailed Reasoning - Business Income: After weighing up the relative business indicators and objective facts surrounding your case it is considered that your trading activities are not regarded as a business for taxation purposes. Therefore any gains are not assessable under section 6-5 of the ITAA 1997, while any losses are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Investment Income: Your trading activities are more in keeping with an investor who has invested an amount of capital with an investment advisor who conducts research and conducts appropriate trades. While the trader may take you risk profile into consideration when determining what futures will be traded, your input into the trading activity is limited to reviewing the performance of Entity XYZ. Further the relationship between you, Entity ABC and Entity XYZ is not one of employer/employee, but rather you pay a fee to Entity ABC and Entity XYZ for the management of your trading activity. Accordingly any gains or losses from your trading activity will be assessable by way of the capital gains tax provisions under Part 3-1 of the ITAA 1997.