Private ruling: FX trading and gambling
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers: | 1. Were your respective FX Trading profits and losses on revenue account? | Yes. | 2. Were your FX Trading activities considered to be gambling? | No.

Relevant facts and circumstances: You have a history of shares investing. For the years ended 30 June 2010 to 2012, inclusive, you lodged significant capital gains tax losses in your income tax returns, related to shares investments. During the year ended 30 June 2012, you opened and commenced operating an account for CFD trading in shares, which you used for around 6 months, until the end of the financial year. You advised that you undertook the activity with a profit making intention.

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 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 118-37

Reasons for decision: Summary: Taxation Ruling TR 2005/15 is about the tax consequences of financial contracts for differences (CFD). It explains contracts for differences are 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 and 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. However, paragraph 40 of TR 2005/15 explains, whilst gains or losses are expected most often to be on revenue account because it is expected that usually they will be entered into with the purpose of profit-making, it is possible that in some cases the facts will establish that a person entered into the contract for differences for purposes other than to make a profit. In such cases, the gain or loss will not be on revenue account and the question then arises whether the gain or loss will be a capital gain or loss (due to CGT event C2 happening under section 104-25 of the ITAA 1997 on the maturity of the contract) or whether the CGT gambling exemption in paragraph 118-37(1)(c) of the ITAA 1997 will apply to disregard capital gains or capital losses. Paragraph 41 of TR 2005/15 explains, in the Commissioner's view, the word 'gambling' refers to activities involving primarily chance, which have a recreational or sporting character, such as lotteries or games of chance and betting on horse racing. (It is not considered to have the technical legal meaning of wagering or the popular meaning of mere risk-taking.) Therefore, one would not ordinarily expect a financial contract for differences to be entered into as recreation. Paragraph 66 of TR 2005/15 further explains the Tax Office view is that financial contract for differences transactions and horse race betting are different in character. In particular, transacting with a financial contract for differences is closer to the skill end of the chance-to-skill spectrum and the commercial end of the private/recreation-to-commercial spectrum than a bet on horse racing. Paragraphs 67 and 68 of TR 2005/15 explain transacting with financial contracts for differences is essentially a commercial activity and that the validity of such contracts being found in the Corporations Act 2001 (as opposed to gaming legislation) indicates the parliament's intention that they, as a branch of human activity, belong to an order entirely different from gaming or gambling, that is, they are true commercial activities. Paragraph 70 of TR 2005/15 explains the degree of control investors have in determining when to close out a transaction also contributes to distinguishing financial contracts for differences from recreational gambling since it allows skill and judgment to be exercised right up to the termination time. Paragraph 71 of TR 2005/15 points out that a punter, betting upon the on-course totalizator or the TAB, cannot affect the outcome of the race nor can he dictate the odds which he will receive. Where as the trader in futures has some impact on the profit to be derived in the sense of the price upon which he enters into the contract (and also when determining to close out a contract). Paragraph 41 of TR 2005/15 concludes that, although it is not possible to exclude (as a matter of law) the possibility that a financial contract for differences will be entered into for some purpose that is neither profit-making nor recreational, it is (as a matter of fact) considered to be exceedingly unlikely. Paragraph 45 of TR 2005/5 summarises the Tax Office view: We have indicated above that the terms of the financial contract for differences are such as to tend to stamp it as an act of commerce. However, a taxpayer who enters into a financial contract for differences only once, or very occasionally, who has no expertise in the price of the underlying by which the gain or loss of the financial contract for differences will be calculated, does not engage in any income-producing activities of a character bearing some association or connection with the financial contract for differences or its underlying, and, in particular, who gambles in the ordinary recreational way and who has entered into the financial contract for differences in circumstances such that the financial contract for differences may be seen to be part of that recreation may establish that the gain or loss is the product of gambling (and not the result of a profit-making endeavour.) In Administrative Appeals Tribunal (AAT) Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, the following were included as indicators of carrying on a business of share trading: the nature of the activities and whether they have the purpose of profit-making; (a) the complexity and magnitude of the undertaking; (b) an intention to engage in trade regularly, routinely or systematically; (c) operating in a business-like manner and the degree of sophistication involved; (d) whether any profit or loss is regarded as arising from a discernible pattern of trading; (e) 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. In the case of Shields v. Deputy Commissioner of Taxation (Cth) ; Case [1999] AATA 4 (1999) 41 ATR 1042; (1999) 99 ATC 2037, during the period from 6 February 1996 to 4 March 1996, the taxpayer bought shares in Australian banks which were about to pay franked dividends for cum dividend prices and sold shares in the same banks at their ex dividend prices. Applying the factors listed in Case X86, even though the activity was for a short time only, the Tribunal decided the taxpayer was carrying on a business because of the volume of transactions and because the transactions were so carefully and systematically organised and handled. In your case, we consider your FX trading was not gambling because it was not an activity primarily involving chance. That your FX trading was not gambling, i.e., a game of chance, is demonstrated by your profit and loss amounts on each trade that show you were able to quickly close your contracts and thus quickly minimise your losses or quickly lock in your profits. Unlike a gambler that cannot affect the outcome of a race or dictate odds received, you were able to have an impact on the profit or loss made by choosing when to enter and exit a contract in relation to commercial market prices. In short, the fact that your opening and closing of contract positions resulted in such negligible profit and loss amounts shows your activity was carefully and systematically organised and handled, which is an indicator of carrying on a business (as stated in the AAT cases, cited above). Although we consider you were not carrying on a business of FX trading (due to not displaying other essential indicators of carrying on a business), your FX trading activity was so carefully and systematically organised and handled that it avoided the incurring of any significant loss. Also, we consider your FX activity was not gambling because it did not meet the criteria listed in paragraph 45 of TR 2005/5. Your FX plays were more than "very occasionally" and we consider you, as a traveller, stock market investor and CFD user, would have at least some commercial idea about the current market price and the price history of the underlying and understand how to operate your CFD trading platform for trading on price differentials. Although FX is not the same as investing or trading in company shares, we consider FX does have some association with your income-producing activities from share markets because : (i) you were using the same platform used to trade shares CFDs; (ii) similar technical and/or fundamental analysis would be used, however basic; and (iii) as FX can influence share prices for companies that derive export or foreign income, in general, those that invest in shares and/or follow the financial news would be expected to have some basic familiarity with exchange rates and the economic forces affecting them. Lastly, the question of whether your FX trading was neither profit-making nor gambling (which would result in your profits and losses being CGT events) must be addressed. Our opinion is your FX trading was for the purpose of profit-marking because: (i) you deliberately and systematically minimised your losses by exiting your trades quickly; (ii) you had an existing CFD platform and approval from the provider that enabled you to engage in FX trading, which is indicative of an underlying profit making purpose; and (iii) you had a relatively lengthy history of shares investing and a more recent history of trading shares CFDs, giving the impression your FX trading was part of a common and natural progression in exploring different financial products to trade in, for the purpose of profit-making It is possible your FX trading was part of an experimental or preliminary activity, which arguably, could be deemed not for profit-making but, instead, preliminary to profit-making. However, such a purpose would result in your profits and losses being CGT gains and losses (and, again, not gambling). However, given your history of investing and trading in financial markets, we consider your FX trading was connected with your broad profit making motive and interest in trading in financial assets (even if you subsequently decided FX trading was unsuitable or of no interest to you). Either way, your FX trading does not amount to tax exempt gambling.