Private ruling: Superannuation fund: taxation of futures contracts, CFDS and loss on debentures
Published: April 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Questions and Answers: | Are your gains or losses for futures contracts to be calculated as capital gains tax (CGT) gains and losses irrespective of the number of transactions? | Yes. | Are your gains or losses for contracts for differences (CFD's) to be calculated as CGT gains and losses irrespective of the number of transactions? | Yes. | Is your loss on debenture loans to be calculated as a CGT loss? | 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 are a self managed superannuation fund. You are not carrying on any businesses. You have entered futures contracts (around 120 per annum). You may enter into CFDs transactions. You incurred a loss on debenture stock and notes were passive investments for earning interest income. You purchased the debentures in two transactions during the 2006-07 year of income. A liquidator declared in writing the debentures to be worthless approximately two years later.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-85 | Income Tax Assessment Act 1997 Section 104-145

Reasons for decision: Summary: The provisions relating to the taxation of complying superannuation funds (including self managed super funds) are contained in Division 295 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 295-85 of the ITAA 1997 makes the CGT rules the primary code for determining the tax treatment of the gains or losses generated on the disposal of an asset by a complying superannuation fund. Paragraph 295-85(2)(a) of the ITAA 1997 modifies the normal CGT rules so that a CGT event happening to a CGT asset of a complying superannuation fund is not affected by the following provisions (the general provisions): · section 6-5 of the ITAA 1997 (ordinary income) · section 8-1 of the ITAA 1997 (amounts you can deduct) · sections 15-15 and 25-40 of the ITAA 1997 (profit-making undertakings or plans). | Detailed Reasoning - Exceptions to this rule: There are two exceptions to this rule. The first exception is contained in paragraph 295-85(3)(b) of the ITAA 1997 for CGT assets that are: · debenture stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security · a deposit with a bank, building society or other financial institution · a loan (secured or not), · some other contract under which an entity is liable to pay an amount (whether the liability is secured or not). The other exception to this treatment is contained in paragraph 295-85(4) of the ITAA 1997 where a capital gain or loss is disregarded by certain provisions: relevantly in this instance, for CGT assets that are trading stock. Importantly, where either exception applies, this does not necessarily mean that an amount will or must be assessable income or allowable as a deduction under the general provisions. The normal criteria for those provisions must still be applied. Therefore, unless an exception applies, the CGT provisions will be the only provisions to apply to the taxation of your gains or losses made. | Detailed Reasoning - Futures contracts and CFDs: ATO ID 2010/7 states a futures contract is not a deposit, loan or one of the other listed instruments in paragraph 295-85(3)(b) of the ITAA 1997, nor is a futures contract trading stock. Therefore, neither of the exceptions detailed above will apply to futures contracts. The same tax treatment applies to CFDs. Similar to futures contracts, CFDs are a form of cash settled derivative which allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. They are not considered a deposit, loan or on of the other listed instruments in paragraph 295-85(3)(b) of the ITAA 1997. Where there is no ownership of an underlying that can be used for 'sale' or 'exchange', the definition of 'trading stock' found in 70-10 of the ITAA 1997 will not be satisfied (see ATO ID 2004/526). Therefore, neither of the exceptions detailed above will apply to futures contracts or CFDs. The number of transactions made in an arrangement is not a consideration required by or relevant to section 295-85 of the ITAA 1997. | Detailed Reasoning - Debentures: As stated above, where either exception applies, this does not necessarily mean that an amount will or must be assessable income or allowable as a deduction under the general provisions. The normal criteria for those general provisions must still be applied. Sections 15-15 and 25-40 of the ITAA 1997 only apply to gains or losses upon the sale of property acquired prior to 20 September 1985 and are not relevant to this arrangement. Generally, debentures are considered CGT assets (section 108-5 of the ITAA 1997) and the gains or losses are determined under the CGT provisions. However, in the instances of carrying on a business of debenture trading, the debentures would be regarded as trading stock and any income and expenses are dealt with on a revenue basis under sections 6-5 and 8-1 of the ITAA 1997. Taxation Ruling 97/11 provides guidance on the indicators of where a business is being carried on and includes, relevant to this arrangement, a requirement there is an intention to engage in trade regularly, routinely or systematically. In your situation, you have stated you are not in business and given a consideration of your two debenture acquisitions and subsequent holding of them as passive investments, you are not considered to be in business. | Detailed Reasoning - Conclusion: In your case, the modification rule in section 295-85 of the ITAA 1997 will apply and your gains or losses will be determined according to the CGT provisions as neither of the exceptions apply. Similarly, while the exemption in paragraph 295-85(3)(b) of the ITAA 1997 may apply, to your debentures, they are considered CGT assets and are capital in nature. Accordingly your losses in respect of the debentures will be determined by reference to the CGT provisions. That is, the capital loss on your debentures will be accounted for under section 104-145 of the ITAA 1997 CGT event G3. To conclude, the gains and losses from the disposal of your futures contracts, CFDs and debentures will be calculated using CGT as the primary code.

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.