Private ruling: Am I in business
Date of advice: 13 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017.
Date scheme commenced: 1 July 2016.

Ruling: Q1: Are you carrying on a business during the income year? | A1: Yes

Relevant facts and circumstances: You have formal qualifications and have worked in the relevant industry for over a decade. You have conducted significant personal research on the topic for personal and professional motives but at this stage have no formal business plan written down. You planned to use the profits from this venture as your main source of income and once an audited track record could be obtained you proposed to seek the appropriate licensing to market your strategy to external capital and at this point a formal business plan would have been produced. From the information that you gained in developing a strategy for your employees you formed the basis of the strategy you used. Using this data you then spent up to 30 hours a week updating your knowledge and research prior to launching this strategy and during the initial stages of implementation. The strategy you designed was then saved into online strategy software. You used end of day data and the online strategy software to develop the strategy and generate the entry and exit signals. Data was downloaded daily and signals updated, orders were then entered into your trading platform. Daily position and Profit and Loss (P&L) monitoring were undertaken at the same time. Your decision making process was 100% data driven using the software systems set in place and most post implementation research time was spent on strategy development and refinement rather than ongoing market analysis. You would analyse whether the strategy was performing in real time as predicted by the theoretical model, you would then compare the strategies performance to that of other trend following strategy performances. Your risk was calculated at 1% of account size. This approach was taken in line with industry and academic research on risk management. The strategy was designed using a variety of literature including books, academic/industry research and software. You commenced your trading activity. You initially invested up to $100,000 into your trading account which increased to over $250,000. The source of these funds was from a mixture of savings and the selling assets. This capital was used for margin calls and the market exposure was dependant on the position taken. The classes of Futures you traded included: ● Metals ● Energy ● Equity Indexes ● Foreign Exchange ● Interest Rate Products You traded in a variety of countries. You made a substantial amount of trades. You used your online trading platform on a daily basis to enter your new trades/orders. Once the strategy was implemented you spent up to10 hours a week researching the latest industry techniques. You used your personal laptop, internet connection and a desk in your own house for conducting research and executing the trading strategy. All records are maintained with the online broker as their records are extensive enough for your purposes however you maintain a copy of the electronic records of all transactions and monthly portfolio statements. You currently work a 40 hour week. You ceased your activity due to your strategy not working as expected. You made a loss. You currently have no capital invested in this activity. You have stated in the ruling that you continue to research and refine your strategy.

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

Reasons for decision: Summary: You are considered to have carried on a trading business in the income year. | Detailed Reasoning - Detailed reasoning: Contracts for difference’s (CFDs) 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 CFDs include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies. CFDs and Futures trading are both forms of derivatives trading. A Futures contract is an agreement to buy or sell the underlying asset at a set price at a set date in the future, regardless of how the price changes in the meanwhile. Therefore, CFDs and Futures are treated the same. 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 Income Tax Assessment Act 1997 (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. If a taxpayer's activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business. Taxation Ruling TR 97/11 (Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are: ● 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. 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. There is no one factor that is decisive of whether a particular activity constitutes a business Application to your circumstances In your case, we have made the following observations: ● You have formal qualifications and have worked in the relevant trading industry for over a decade. This experience has allowed you to develop a comprehensive strategy which was designed and saved into some online trading software where you upload market information to generate trading options which you act upon. ● You have set up a separate trading account with online trading broker where you conduct daily trading activities and maintain electronic records of all transactions and monthly portfolio statements. ● Trading in Futures is an activity with a goal of making a profit, which gives the activity a commercial purpose. ● The main reason you commenced trading was to use the profits as your main source of income and once this was established you intended to seek the appropriate licensing to market your strategy to external capital. ● You plan, organise and carry out your activity in a businesslike manner, spending a considerable amount of time conducting research on strategy development and refinement which indicates you have more than an intention to engage in business. ● You have invested a substantial amount of money into your activities; initially investing up to $A100,000 which increased to over $A250,000 The amount of capital utilised gives you a greater chance of maximising your profits but exposes you to a higher level of risk then an ordinary investor. From this you made a loss. ● You made a considerable amount of trades over a ten month period with six months having over 50 trades. This shows a reasonable level of repetition and regularity. ● You conduct your trading activities using your personal laptop, internet connection and a desk in your own house. ● You have chosen to stop trading in light of your strategy not working as expected. ● You have stated in your ruling application that you continue to research and refine your strategy. | Detailed Reasoning - Conclusion: Based on the information and documents supplied we consider that you were carrying on a trading business during the income year. Accordingly any earnings you received from your trading activities are regarded as income and will be accounted for under section 6-5 of the ITAA 1997, while your losses are deductable under section 8-1 of the ITAA 1997.

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