Private ruling: Tax Treatment of Futures Contracts
Published: June 2012
Ruling period: XX/XX/XXXX to XX/XX/XXXX
Date scheme commenced: XX/XX/XXXX

Ruling: Q1: Are futures contracts over equity indices held by a complying superannuation entity taxed under Part 3-1 and 3-3 (CGT provisions) of the Income Tax Assessment Act 1997 ('ITAA 1997')? | A1: 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. Background Superannuation Fund B ('the Fund') is licensed under the Corporations Act 2001 and the Superannuation Industry (Supervision) Act 1993 (SISA). The Fund is a complying superannuation funds under the SISA. Arrangement The Fund buys and sells index futures 'on market'. Trading index futures allows the Fund to trade movements in the index in a single transaction allowing exposure to companies on the index without having to buy and sell every company in the index. On XX/XX/XXXX, the Fund bought ten index futures contracts ('the Index Futures') for $ XXXX (or XXXX index points). The Index Futures were valued at $ XXXX per index point. The contracts mature in 90 days. On establishment of the Index Futures, the Fund paid a small margin cash outlay of $ XXXX. The margin paid by the Fund was held by the exchange as security for the futures contracts. On the twentieth day, the Index Futures price increased by 200 points to XXXX points and the value of the exposure increased to $ XXXX from $ XXXX. On that day, the Fund entered into a contract to sell the index futures contracts. In the above transaction, the Fund made $XXXX. Settlement date for the Index Futures is the first business day after expiry. The exchange publishes the final settlement price of the contracts. On the second business day after expiry the exchange settles the cash flows as a result of the settlement price for the futures contracts and nets this amount against the proceeds from the sale of the XXXX index points. This amount takes into consideration the margin payments already made. The total amount received by the Fund is equal to the margin payments made ($XXXX) plus the gain on the Index Futures ($XXXX), resulting in a total cash inflow of $XXXX. Therefore, the Fund makes a gain of $XXXX on the index futures contracts.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1, | Income Tax Assessment Act 1997 Part 3-3, | Income Tax Assessment Act 1997 Division 295, | Income Tax Assessment Act 1997 section 295-85, | Income Tax Assessment Act 1997 subsection 295-85(2), | Income Tax Assessment Act 1997 subsection 295-85(3), | Income Tax Assessment Act 1997 paragraph 295-85(3)(b), | Income Tax Assessment Act 1997 subparagraph 295-85(3)(b)(i) and | Income Tax Assessment Act 1997 subsection 295-85(4).

Reasons for decision: Summary: Yes. Futures contracts over equity indices are taxed under the CGT provisions because section 295-85 of the ITAA 1997 applies to CGT events relating to the futures contracts and the exceptions under subsection 295-85(2) of the ITAA 1997 do not apply to CGT events on the Index Futures. | Detailed Reasoning - Detailed reasoning: Complying superannuation funds are subject to the CGT provisions in Part 3-1 and 3-3 of the ITAA 1997 subject to the modifications contained in Division 295 of the ITAA 1997. Section 295-85 of the ITAA 1997 provides that the CGT rules are 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. Subsection 295-85(2) of the ITAA 1997 provides that, if a CGT event happens involving a CGT asset owned by a complying superannuation entity just before the time of the CGT event then the following provisions do not apply to the CGT event. Subsection 295-85(2) of the ITAA 1997 states that: These provisions do not apply to the CGT event: (a) sections 6-5 (about ordinary income), 8-1 (about amounts you can deduct), and 15-15 and 25-40 (about profit-making undertakings or plans); (aa) section 230-15 (about financial arrangements); (b) sections 25A and 52 of the Income Tax Assessment Act 1936 (about profit-making undertakings or schemes). Paragraph 295-85(3)(b) of the ITAA 1997 provides a list of CGT assets excluded from subsection 295-85(2) of the ITAA 1997. Subsection 295-85(3) of the ITAA 1997 states that: The provisions referred to in subsection (2) can apply to the CGT event if: (a) any capital gain or capital loss from the event is attributable to currency exchange rate fluctuations; or (b) the *CGT asset is one of these: debenture stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security; (ii) a deposit with a bank, building society or other financial institution; (iii) a loan (secured or not); (iv) some other contract under which an entity is liable to pay an amount (whether the liability is secured or not). Relevantly, the phrase 'other security' in subparagraph 295-85(3)(b)(i) of the ITAA 1997 only covers securities that are generally recognised as debt instruments (Taxation Ruling TR 96/14). The listed instruments in subparagraph 295-85(3)(b)(i) of the ITAA 1997 are securities that are generally recognised as debt instruments issued by a particular entity and represent a debtor/creditor relationship between that entity and another entity or entities. By contrast, a futures contact is an agreement to buy or sell a specified quantity of something at a specified price on a specified future delivery date. An Index futures contact is an agreement to buy or sell the underlying index at maturity. A futures contract is not a deposit or a loan and does not satisfy any of the types of assets listed in paragraph 295-85(3)(b) of the ITAA 1997. It is considered that while futures contracts are legally binding agreements creating contractual obligations for both parties; those obligations are not 'debt-like' as required by Taxation Ruling TR 96/14. Therefore, index futures contracts do not fall under any of the exclusions in paragraph 295-85(3)(b) of the ITAA 1997. None of the exceptions in subsection 295-85(3) or 295-85(4) of the ITAA 1997 apply. Accordingly, gains and losses made on the Index Futures held by Superannuation Fund B, as a complying superannuation fund, are taxed under Parts 3-1 and 3-3 of the ITAA 1997.

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