Private ruling: whether carrying on a business of trading in contracts for difference in foreign currencies
Published: May 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 January 2012

Ruling: Questions and Answers: | 1. Are you considered to be carrying on a business of trading contracts for difference (CFD's) in Foreign Exchange (Forex)? | Yes. | Will the provisions in Division 35 of the ITAA 1997 apply to losses from your business activity of trading in Forex CFD's? | Yes.


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: Summary: Taxation Ruling TR 2005/15 is about the taxation treatment of contracts for differences (CFDs). A CFD is a form of cash settled derivative that allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. 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 accounted for under 8-1 of the ITAA 1997. Otherwise, TR 2005/15 provides the CFD trading will be regarded as part of the carrying out of a profit making undertaking and a net loss from CFD trading will be accounted for 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 less than $250,000. Regarding the matter of carrying on a business, Administration Appeals Tribunal Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 ( AAT Case X86 ) listed the following indicators as those to be considered for carrying on a business of share trading: 2. the nature of the activities and whether they have the purpose of profit-making; 3. the complexity and magnitude of the undertaking; 4. an intention to engage in trade regularly, routinely or systematically; 5. operating in a business-like manner and the degree of sophistication involved; 6. whether any profit or loss is regarded as arising from a discernible pattern of trading; 7. the volume of the taxpayer's operation and the amount of capital employed by him; and more particularly in respect of share traders: (g) repetition and regularity in the buying and selling of shares; (h) turnover; (i) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records; (j) maintenance of an office; (k) accounting for the share transactions on a gross receipts basis; (l) whether the taxpayer is engaged in another full time occupation. For example, in the Administration Appeals Tribunal Case of Damien Patch and Li-anne Grew v. Commissioner of Taxation [2005] AATA 240 ( Patch & Grew ), the taxpayers undertook twenty-seven buy and thirty-seven sell transactions over a period of three months. Although there was a remarkable lack of sophistication and planning about the trading, the Tribunal concluded, on balance, the taxpayers were carrying on a business. Here, the Tribunal had regard to the amount of capital involved, the repetition and regularity of the activity and the profit making purpose, coupled with the fact the taxpayers had no other real occupation. The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11 . It includes the general indicators of business as listed in AAT Case X86 (above). Similar to the determination in Patch & Grew , TR 97/11 states in determining whether an entity is carrying on a business, all of the indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. TR 97/11 also states experimental or pilot activities do not amount to a business. In your case, your foreign exchange trading exhibited most of the indicators of a business, namely, the purpose of profit-making; complexity and magnitude; repetition and regularity in the buying and selling of contracts; and volume of operations and capital employed. Your trading activity went beyond that of experimental or pilot activities because the size of your bets increased over time and you have continued for another three years. The general impression is that you are carrying on a business with your trading activity. It follows your losses are deductible under section 8-1 of the ITAA 1997, for which Division 35 of the ITAA 1997 must be considered, (and are not deductible under section 25-40, where Division 35 of the ITAA 1997 does not need to be considered). If you meet the income requirement under subsection 35-10(2E) of the ITAA 1997 that is, your other income for NCL purposes was less than $250,000, you can then consider whether you meet the assessable income test ($20,000). If you can meet this test, Division 35 of the ITAA 1997 will not act to prohibit an immediate deduction for your losses under section 8-1 of the ITAA 1997. For the purposes of this test, it is the amount of the profitable trades each financial year that are taken into account to calculate assessable income. Since your foreign exchange contracts are a form of cash settled derivative that allow you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying, they are not trading stock (refer to the principles in ATO ID 2004/526 ). | Detailed Reasoning - Additional information: It follows, when you complete the business schedule in your tax return, the sum of your profits on your profitable trades are to be included in your 'total business income' and the sum of the losses on your loss trades are to be included as your 'purchases and other costs' (at label P8). Your opening stock and closing stock will be zero.

Relevant facts: You have conducted a Forex trading activity for a number of years. | You trade through a platform provided by a commercial company. | You have provided a copy of your Business Plan, Profit and Loss Summaries and the Trade Account Statements from the inception of your activity. | You have an office set up in your home with a couple of computers and spend about 1-2 hours almost every day on the activity. | You check: index futures to see if they are flat trending up/down or mixed; see if any key economic reports are due to be released and at what time or any news pertinent to the country's currency that may affect their fluctuation; see if any key personnel are due to make announcements/speeches and at what time. | You have deposited a substantial amount in these forex accounts and completed a large number of trades and are continuing to trade. | You have purchased a number of business publications, finance/investment magazines and newspapers and have done a lot of research online about forex trading and share trading.