Edited version of your written advice

Authorisation Number: 1013140280767

Date of advice: 19 December 2016

Ruling

Subject: Losses from share trading and contract for difference trading

Issue 1

Deductibility of losses related to CFD activities.

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses you have incurred in relation to your trading in contract for difference (CFD) activities?

Answer

Yes.

Question 2

Are you entitled to a deduction under section 8-1 of the ITAA 1997 for your interest expenses in relation to your CFD activities?

Answer

Yes.

Issue 2

Losses from overseas share trading activities.

Question 1

Are you entitled to use deferred non-commercial losses (NCL) from foreign share trading activities against local future activities?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 20ZZ.

The scheme commences on

1 July 20YY

Relevant facts and circumstances

You participated in approximately XXX CFD transactions in the 20YY-ZZ income year.

You have kept accurate records of your CFD trades.

Your CFD trading activities returned assessable income of over $20,000 but resulted in an ultimate trading loss of over $20,000.

You own a small single holding in overseas share trading activities which you anticipate you will exit.

In 20XX and 20YY you made a loss on the sale of shares of over $1,500, apportioned interest of $2,500, and an unrealised exchange gain of over $1,500, resulting in a total loss of over $2,500 as at the end of 20YY.

You made a capital gain of over $50 on foreign shares investments sold and remitted.

You have developed a trading plan for both your share trading and CFD trading activities.

You registered as an independent business owner in March 20ZZ.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 35

Reasons for decision

Issue 1

Question 1

Summary

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences provides that a loss from a financial contract for differences will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.

As outlined in your previous ruling, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view of the indicators that are taken into account when determining when a taxpayer is carrying on a business of primary production. These indicators are not confined to primary production activities but also are applied to all manner of business activities including CFD trading.

Upon consideration of the relevant factors, it was determined that your CFD trading activities were carried out on a scale and in a manner such that they constitute the carrying on of a business. Accordingly the Commissioner was satisfied that you were carrying on a business of share trading and CFD trading in the 20VV-WW income year.

There has been no considerable change to your CFD trading activities since this ruling and in turn, you are considered to have continued carrying on a business of CFD trading for the 20YY-ZZ income year.

As outlined in your previous ruling, Division 35 of the ITAA 1997 applies to losses from certain business activities for the 2000-01 income year and subsequent years.

In your case, it has been determined that you were carrying on a business of share trading and CFD trading in the year ended 30 June 20ZZ and the losses you made from your activities were business losses and as such, the non-commercial loss (NCL) rules must be considered.

However, if you meet the income requirement in section 35-10(2E) of the ITAA 1997 while you have an assessable income of more than $20,000 from your business activities in CFD trading, the NCL rules will not apply and you are entitled to deduct your losses in the 20YY-ZZ income year.

Question 2

Summary

You are entitled to a deduction under section 8-1 of the ITAA 1997 for interest expenses incurred in relation to your CFD activities.

Detailed reasoning

Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.

In your case, as the interest has been incurred in funding for your CFD activities by way of loans and credit cards. Therefore, as the interest expense has been incurred in gaining or producing assessable income, you are entitled to claim the relevant portion of interest expenses as a deduction under section 8-1 if the ITAA 1997.

Issue 2

Question 1

Summary

Use of deferred non-commercial losses (NCL) from foreign share trading activities can only be used against an activity 'of the same kind' or 'of a similar kind'.

Detailed reasoning

Under the rule in subsection 35-10(2) of the ITAA 1997, a 'loss' made by an individual from a business activity will not be taken into account in an income year unless:

● the 'Exception' in subsection 35-10(4) of the ITAA 1997 applies - where taxpayers carry on a professional arts business or a business of primary production. Taxpayers in these categories may offset a business loss against their other income if their other income for that year is $40,000 or less, or

● you meet the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the four tests in section 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 is met, or

● the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Section 35-10 of the ITAA 1997 includes an income requirement that must be met (along with certain other tests) in order to include losses from a business activity in the taxable income calculation for the 2009-10 and later income years.

You meet the income requirement if the total of your following income was less than $250,000 for the relevant income year:

● taxable income (ignoring any business losses)

● total reportable fringe benefits

● reportable superannuation contributions

● total net investment losses - including financial investment losses and rental property losses.

As outlined above, when the income requirement has been met, taxpayers must also pass one of the four following tests:

● you have assessable income from the business of at least $20,000;

● you have made a profit from the business in three out of the last five years;

● you use real property or an interest in real property worth at least $500,000 (excluding private dwellings) on a continuing basis in the business; or

● you use other assets worth at least $100,000 (excluding motor vehicles) on a continuing basis in the business.

Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses provides that any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the business activity that gave rise to this amount, or one 'of a similar kind', is carried on in that subsequent year. If the activity, or one 'of a similar kind', is never carried on again, the entitlement to deduct the amount will be lost.

Business activities which are of a similar kind are those which inherently have the same nature or character. The activities must be similar; they do not need to be identical.

What will be a business activity 'of a similar kind' to another business activity is very much a question of fact and degree. The question will involve a comparison of the relevant characteristics of each, for example:

● the location(s) where they are carried on;

● the type(s) of goods and/or services provided;

● the market(s) conditions in which those goods and/or services are traded;

● the type(s) of assets employed in each; and

● any other features affecting the manner in which they are conducted.

An overall comparison of the separate business activities will be called for, weighing up the extent of the characteristics which are the same or similar against those where there are significant differences.

In your case, you have single holding in overseas share trading activities in overseas. You had previously incurred losses in the 20XX and 20YY income years of $2,974 from this overseas share trading activity. A local share trading activity would not be considered to be 'of a similar kind'. In consideration of the above factors, your loss from your overseas share trading activities cannot be deductable in a subsequent year against a local activity such as your independent business activities.

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