Private ruling: Losses from share trading, contract for difference trading and deductibility of business registration costs
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses you have incurred in relation to your share trading activities? | A1: Yes. | Q2: Are you entitled to a deduction under section 8-1 of the ITAA 1997 for losses you have incurred in relation to your trading in contract for difference (CFD) activities? | A2: Yes.

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 and your spouse had a joint bank account from which you purchased shares and deposited the proceeds of the sale of shares. You and your spouse participated in a significant number of share transactions in the relevant income year. The transactions were completed through various organisations. You and your spouse kept accurate records of your share trades. You and your spouse only held the shares that you purchased for a short period of time. You and your spouse's share trading activities returned assessable income of over $20,000 but resulted in an ultimate trading loss. You also trade in CFD's separately and solely in your name. You have participated in a significant number of transactions in the relevant income year. You kept accurate records of your CFD trades. You only held the CFDs for short periods of time. Your CFD trading activities returned assessable income of over $20,000 but resulted in an ultimate trading loss. You have developed a trading plan for both your share trading and CFD trading activities. Some time, during the relevant income year, you registered a new online retail business. You are the sole shareholder of the online retail business. You incurred costs to register the business and the domain prior to registration.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1, | Income Tax Assessment Act 1997 Section 35-10, | Income Tax Assessment Act 1997 Section 35-30, | Income Tax Assessment Act 1997 Section 35-35, | Income Tax Assessment Act 1997 Section 35-40, | Income Tax Assessment Act 1997 Section 35-45, | Income Tax Assessment Act 1997 Section 35-55 and | Income Tax Assessment Act 1997 Section 40-880.

Reasons for decision: Detailed Reasoning - Issue 1: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. | Detailed Reasoning - Share trading and CFD trading: A loss from shares or CFD trading will be an allowable deduction where the transaction, or transactions, is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making. Whether activities undertaken constitute the carrying on of a business is essentially a question of fact. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Taxation Ruling TR 97/11 provides the Commissioners view of the indicators that are taken into account when determining when a taxpayer is carrying on a business of primary production. The principles provided in TR 97/11 are not confined to primary production activities are applied to all manner of business activities including share and CFD trading. Paragraph 13 of TR 97/11 provides that the courts have held that the following indicators are relevant: · whether the activity has a significant commercial purpose or character; · whether the taxpayer has more than just an intention to engage in business; · whether the taxpayer has a purpose or 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 and 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 on in a businesslike manner such that it is directed at making a profit; · the size, scale and permanency of the activity; and · whether the activity is better described as a hobby, a form of recreation or a sporting activity. We have considered the relevant factors and have determined that your share trading and CFD trading activities were carried out on a scale and in a manner such that they constitute the carrying on of a business. Accordingly the Commissioner is satisfied that you were carrying on a business of share trading and CFD trading in the relevant income year. | Detailed Reasoning - Non-commercial loss rules (NCL): Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years. Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual from a business activity will not be taken into account in an income year unless: · the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies - where taxpayers carry on a professional arts business or a business of primary production. Taxpayers in these categories may offset a business loss against their other income if their other income for that year is $40,000 or less, or · you meet the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the four tests in section 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or · the Commissioner exercises the discretion in section 35-55 of the ITAA 1997. Section 35-10 of the ITAA 1997 includes an income requirement that must be met (along with certain other tests) in order to include losses from a business activity in the taxable income calculation for the 2009-10 and later income years. You meet the income requirement if the total of your following income was less than $250,000 for the 2009-10 and later income years: · taxable income (ignoring any business losses) · total reportable fringe benefits · reportable superannuation contributions · total net investment losses - including financial investment losses and rental property losses. As outlined above, when the income requirement has been met, taxpayers must also pass one of the four following tests: · you have assessable income from the business of at least $20,000; · you have made a profit from the business in three out of the last five years; · you use real property or an interest in real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business; or · you use other assets worth at least $100,000 (excluding motor vehicles) on a continuing basis in the business. In your case, it has been determined that you were carrying on a business of share trading and CFD trading in the relevant year and the losses you made from your activities were business losses and as such, the NCL rules must be considered. However, as you meet the income requirement and you also have assessable income of over $20,000 from both your business in share trading and your business in CFD trading, the NCL rules will not apply and you are entitled to deduct your losses in the relevant ncome year. | Detailed Reasoning - Registration of online retail business: Generally, expenses connected with the acquisition, establishment and enlargement of a business or with the acquisition of fixed capital assets are not deductible under section 8-1 of the ITAA 1997. Cost incurred in establishing a business are not considered to be costs of carrying on the business for the purpose of gaining or producing assessable income. This is supported by the comments of Menzies J in John Fairfax & Sons Pty Ltd v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 11 ATD 510; (1959) 7 AITR 346: To make a payment to acquire or to defend the acquisition of a favourable position from which to earn income or to enter into arrangements that will yield income is not in general an outlay incurred either in gaining or carrying on business for the purpose of gaining assessable income; such a payment in the case of a trading company, occurs at a stage too remote from the receipt of income to be so regarded. To be deductible an outlay must be part of the cost of trading operations to produce income, i.e, it must have the character of a working expense. Expenses associated with the establishment or purchase of a business, are incurred at a point too soon to be regarded as being incurred in carrying on the business. Furthermore, establishment costs are of a capital nature. Section 40-880 of the ITAA 1997 provides a deduction for capital expenditure incurred by a taxpayer in establishing the business structure through which they will carry on their business. The deductions are claimed over five years. You claim 20 per cent of the expense in the year you incur it and the balance over the next four years. In your situation, the costs that you incurred in registering your online business, are not deductible under section 8-1 of the ITAA 1997 as it was incurred at a point to soon to be considered to be incurred in gaining or producing assessable income and it is also a capital expense. However, section 40-880 provided that you are able to deduct 20 per cent in the relevant income year and the balance over the next four years as the capital expense was incurred in establishing a business structure through which you will earn assessable income.

Question 1: Are you entitled to a deduction for the whole amount of the costs that you incurred in registering your online retail business?