Edited version of your private ruling

Authorisation Number: 1012534130155

Ruling

Subject: Forex trading losses

Questions and Answers:

1. For the year ended 30 June 2013, is your loss from foreign exchange trading tax deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. For the year ended 30 June 2013, is your loss from foreign exchange trading tax deductible under section 25-40 of the ITAA 1997?

No.

3. For the year ended 30 June 2013, do the provisions in Division 35 of the ITAA 1997 require you to defer your loss from foreign exchange trading?

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

30 June 2012

Relevant facts and circumstances

During the year ended 30 June 2013, you traded foreign exchange derivative contracts and made a loss for the income year. From a total of around 1,000 trades, the sum of the losses on your loss trades amounted to around $X and the sum of your profits on your profitable trades amounted to around $Y.

Your income requirement under subsection 35-10(2E) of the ITAA 1997 was less than $250,000.

You continued to trade after 30 June 2013, where, up the dd/mm/yyyy, your accounts show you made a $Z loss from X trades.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-40

Income Tax Assessment Act 1997 Section 35-10

Income Tax Assessment Act 1997 Section 35-30

Reasons for decision

Taxation Ruling TR 2005/15 is about the taxation treatment of contracts for differences (CFDs). A CFD is 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.

CFDs 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.

TR 2005/15 provides where CFD trading is part of the carrying on of a business, a loss incurred will be accounted for under 8-1 of the ITAA 1997.

Otherwise, TR 2005/15 provides the CFD trading will be regarded as part of the carrying out of a profit making undertaking and a net loss from CFD trading will be accounted for under section 25-40 of the ITAA 1997.

Either way, the gains and losses from CFD trading are accounted for on revenue account and treated as ordinary income. The anti-overlap provision in section 118-20 of the ITAA 1997 prevent gains and losses from CFD trading to be accounted for under the capital gains tax (CGT) provisions.

However, where CFD trading is part of the carrying on of a business, the non-commercial business activities rules in Division 35 of the ITAA 1997 must be considered, to ensure a trading loss is deductible in the income year it is incurred (rather than having to be deferred under section 35-10).

Included in its rules, Division 35 of the ITAA 1997 will allow an immediate deduction for a business loss when the assessable income from the business, for an income year, is $20,000 or more (section 35-35) and when the income requirement under subsection 35-10(2E) is less than $250,000.

Regarding the matter of carrying on a business, Administration Appeals Tribunal Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (AAT Case X86) listed the following indicators as those to be considered for carrying on a business of share trading:

(a) the nature of the activities and whether they have the purpose of profit-making;

(b) the complexity and magnitude of the undertaking;

(c) an intention to engage in trade regularly, routinely or systematically;

(d) operating in a business-like manner and the degree of sophistication involved;

(e) whether any profit or loss is regarded as arising from a discernible pattern of trading;

(f) 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.

For example, in the Administration Appeals Tribunal Case of Damien Patch and Li-anne Grew v. Commissioner of Taxation [2005] AATA 240 (Patch & Grew), the taxpayers undertook twenty-seven buy and thirty-seven sell transactions over a period of three months. Although there was a remarkable lack of sophistication and planning about the trading, the Tribunal concluded, on balance, the taxpayers were carrying on a business. Here, the Tribunal had regard to the amount of capital involved, the repetition and regularity of the activity and the profit making purpose, coupled with the fact the taxpayers had no other real occupation.

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11. It includes the general indicators of business as listed in AAT Case X86 (above). Similar to the determination in Patch & Grew, TR 97/11 states in determining whether an entity is carrying on a business, all of the indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character.

TR 97/11 also states experimental or pilot activities do not amount to a business.

In your case, your foreign exchange trading exhibited most of the indicators of a business, namely, the purpose of profit-making; complexity and magnitude; repetition and regularity in the buying and selling of contracts; and volume of operations and capital employed. Your trading activity went beyond that of experimental or pilot activities because the size of your bets increased over time, including in the next financial year. Although we do not have information about your trading method and degree of sophistication employed, as provided for in TR 97/11 and in Patch & Grew, the other indicators of a business provide sufficient weighting that you were carrying on a business.

It follows your losses are deductible under section 8-1 of the ITAA 1997, for which Division 35 of the ITAA 1997 must be considered, (and are not deductible under section 25-40, where Division 35 of the ITAA 1997 does not need to be considered).

Since your income requirement under subsection 35-10(2E) of the ITAA 1997 was less than $250,000 and since your assessable income from your trading activity exceeded $20,000, Division 35 of the ITAA 1997 will not act to prohibit an immediate deduction for your losses under section 8-1 of the ITAA 1997.

Additional information

Since your foreign exchange contracts are a form of cash settled derivative that allow you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying, they are not trading stock (refer to the principles in ATO ID 2004/526).

It follows, when you complete the business schedule in your tax return, the sum of your profits on your profitable trades are to be included in your 'total business income' and the sum of the losses on your loss trades are to be included as your 'purchases and other costs' (at label P8). Your opening stock and closing stock will be zero.

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