A few words about trading considerations for Australian tax residents. The following text is copied from June IGMarkets PDS. The latest PDS can be found here. The reading will be interesting for all of you doing trading, since it's tax time.
Introduction
The following is a summary of the Australian taxation implications of dealing in a Margin Trading Product known as Contracts for Diferences (CFDs), and is based on the taxation laws as at the date of this PDS, and in particular Public Ruling TR2005/15 issued by the ATO on 31 August 2005 under Part IVAAA of the Taxation Administration Act 1953.
It is important to note that the ultimate tax implications to you will depend on your personal circumstances and, as such, you should consult an independent taxation advisor. Further, this PDS represents our understanding of the current view of the taxation laws and our interpretation of Public Ruling TR2005/15. It is important to note that our views have not been endorsed by the ATO and that tax laws and their interpretation are always subject to change.
The following summary represents our view of the current taxation treatment of gains and losses arising from trading CFDs as an Australian Tax Resident as at the date of this PDS. Taxation treatment will depend on your circumstances, and we strongly recommend that you consult an independent taxation advisor before deciding to open an account to deal in CFDs.
7.2 Proft or loss on CFDs
Income Tax
An Australian resident taxpayer generally calculates their taxable income by including assessable income and after allowing for losses incurred in gaining or producing assessable income.
CFDs can be characterised as cash settled Over-the-Counter (OTC) derivative products, in that your dealings with us under the Customer Agreement do not provide for a party to make or accept delivery of the underlying instrument. The ATO takes the view that CFDs are in law categorised as contracts of gaming and wagering, however this alone is not determinative of the tax treatment of gains and losses.
Gains
The ATO has taken the view that gains from trading CFDs will be assessable income-
(i) where the CFD is entered into as an ordinary incident of carrying on a business;
(ii) where the proft was obtained in a business operation;
(iii) where the proft was obtained in a commercial transaction for the purpose of proft making; or
(iv) where the proft is made in carrying on or out a proft making scheme.
Further, the ATO has taken the view that even an isolated CFD transaction can be considered to produce assessable income for the taxpayer. It should be noted that the ATO’s interpretation of what would fall within these parameters is very broad and appears likely to include all CFD trading, whether frequent or not.
However the Ruling also contemplates that a gain from a CFD entered into for the purpose of recreation by gambling (and not for a proft-making purpose) will not be assessable as income (or capital gain). The Ruling acknowledges that a taxpayer who enters into a CFD only once, or very occasionally, who has no expertise in the price of the underlying by which the gain or loss of the CFD will be calculated, does not engage in any income producing activities of a character bearing some association or connection with the CFD or its underlying, and in particular who gambles in the ordinary recreational way and who has entered into the CFD in circumstances such that the CFD may be seen to be part of that recreation, may establish that the gain or loss is a product of recreational gambling (and not the result of a proft making endeavour).
Losses
The Ruling also concludes that a loss from a CFD transaction where the gain would have been assessable is an allowable deduction.
Capital Gains Tax
While gains or losses would most often be on revenue account because it is
expected that the CFD is usually entered into for a proft-making purpose, where it can be said that there was never any such purpose, then in that event (unless it is for recreational gambling – see above), the gain or loss would be an assessable capital gain.
The ATO’s view is that a CFD contract falls within the defnition of a capital gains tax asset (a CGT asset) under section 108-5 ITAA 1997. However, pursuant to section 118-20 ITA 1997, to the extent a non-CGT provision includes an amount in the taxpayer’s assessable income as a result of a CGT event, a capital gain arising from a CGT event is reduced. This means that, to the extent that profts made from trading CFDs are included in your assessable income, you will not be required to include the amount of the transaction in the calculation of any capital gains tax liability.
The ATO has also expressed the view that losses incurred in trading CFDs can be regarded as capital losses for the purposes of capital gains tax to the extent that they are not otherwise excluded by law. Accordingly, such losses can be set of against any capital gains tax liabilities. However pursuant to subsection 110-55(4) of the ITAA 1997, to the extent that a loss of a CFD is deductible under section 8-1 or section 25-40, the reduced cost base of the asset is reduced thereby reducing the amount of the capital loss.
Paragraph 118-37(1)(c) of the ITAA 1997 provides that capital gains and capital losses arising from “gambling, a game or a competition from prizes” are to be disregarded.
The ATO’s position is that capital gains and capital losses from trading CFDs do not qualify for this or any other exemption in the ITAA 1997.
7.3 Notional interest and dividend adjustments
A share CFD is an agreement between two parties where one party pays to the other party an amount equal to the notional fnancial performance of a share between the time the CFD is opened and the time the CFD is closed. Any dividends paid in respect of the underlying share are notionally credited or debited as the case may be to each party in determining the notional fnancial performance of the share. At no time will you have an interest in the underlying share. An adjustment is also made representing the notional interest on funding of the underlying share position.
Any interest and dividend adjustments are notional amounts, which are unlikely to be characterised as dividends or interest for tax purposes. Instead, these notional adjustments will be taken into account in determining the overall proft or loss on the CFD. The taxation of the overall proft or loss on the CFD is set out at 6.2 above.
7.4 Commissions and other charges
As profts or losses are assessable or deductible by you, any commissions, interest or other fees that you pay to us will be deductible.
7.5 GST
According to the GST Determination GSTD2005/3 issued on 22 June 2005, the
provision, acquisition or disposal of a CFD is a fnancial supply under the provisions of the A New Tax System (Goods and Services) Tax 1999 (“GST Act”) and the GST Regulations and is input taxed, with no GST imposed. Further the supply of interests in CFDs does not constitute gambling supplies, as defned in section 126-35 of the GST Act. A CFD does not therefore in the view of the ATO represent a gambling event.
The commission paid to us at the time of entering the CFD would constitute
additional consideration for an input taxed fnancial supply. This would also apply to any premium for Limited Risk Protection on the basis that this charge is additional consideration for a variation to the ordinary CFD and, therefore, no GST is imposed.
Introduction
The following is a summary of the Australian taxation implications of dealing in a Margin Trading Product known as Contracts for Diferences (CFDs), and is based on the taxation laws as at the date of this PDS, and in particular Public Ruling TR2005/15 issued by the ATO on 31 August 2005 under Part IVAAA of the Taxation Administration Act 1953.
It is important to note that the ultimate tax implications to you will depend on your personal circumstances and, as such, you should consult an independent taxation advisor. Further, this PDS represents our understanding of the current view of the taxation laws and our interpretation of Public Ruling TR2005/15. It is important to note that our views have not been endorsed by the ATO and that tax laws and their interpretation are always subject to change.
The following summary represents our view of the current taxation treatment of gains and losses arising from trading CFDs as an Australian Tax Resident as at the date of this PDS. Taxation treatment will depend on your circumstances, and we strongly recommend that you consult an independent taxation advisor before deciding to open an account to deal in CFDs.
7.2 Proft or loss on CFDs
Income Tax
An Australian resident taxpayer generally calculates their taxable income by including assessable income and after allowing for losses incurred in gaining or producing assessable income.
CFDs can be characterised as cash settled Over-the-Counter (OTC) derivative products, in that your dealings with us under the Customer Agreement do not provide for a party to make or accept delivery of the underlying instrument. The ATO takes the view that CFDs are in law categorised as contracts of gaming and wagering, however this alone is not determinative of the tax treatment of gains and losses.
Gains
The ATO has taken the view that gains from trading CFDs will be assessable income-
(i) where the CFD is entered into as an ordinary incident of carrying on a business;
(ii) where the proft was obtained in a business operation;
(iii) where the proft was obtained in a commercial transaction for the purpose of proft making; or
(iv) where the proft is made in carrying on or out a proft making scheme.
Further, the ATO has taken the view that even an isolated CFD transaction can be considered to produce assessable income for the taxpayer. It should be noted that the ATO’s interpretation of what would fall within these parameters is very broad and appears likely to include all CFD trading, whether frequent or not.
However the Ruling also contemplates that a gain from a CFD entered into for the purpose of recreation by gambling (and not for a proft-making purpose) will not be assessable as income (or capital gain). The Ruling acknowledges that a taxpayer who enters into a CFD only once, or very occasionally, who has no expertise in the price of the underlying by which the gain or loss of the CFD will be calculated, does not engage in any income producing activities of a character bearing some association or connection with the CFD or its underlying, and in particular who gambles in the ordinary recreational way and who has entered into the CFD in circumstances such that the CFD may be seen to be part of that recreation, may establish that the gain or loss is a product of recreational gambling (and not the result of a proft making endeavour).
Losses
The Ruling also concludes that a loss from a CFD transaction where the gain would have been assessable is an allowable deduction.
Capital Gains Tax
While gains or losses would most often be on revenue account because it is
expected that the CFD is usually entered into for a proft-making purpose, where it can be said that there was never any such purpose, then in that event (unless it is for recreational gambling – see above), the gain or loss would be an assessable capital gain.
The ATO’s view is that a CFD contract falls within the defnition of a capital gains tax asset (a CGT asset) under section 108-5 ITAA 1997. However, pursuant to section 118-20 ITA 1997, to the extent a non-CGT provision includes an amount in the taxpayer’s assessable income as a result of a CGT event, a capital gain arising from a CGT event is reduced. This means that, to the extent that profts made from trading CFDs are included in your assessable income, you will not be required to include the amount of the transaction in the calculation of any capital gains tax liability.
The ATO has also expressed the view that losses incurred in trading CFDs can be regarded as capital losses for the purposes of capital gains tax to the extent that they are not otherwise excluded by law. Accordingly, such losses can be set of against any capital gains tax liabilities. However pursuant to subsection 110-55(4) of the ITAA 1997, to the extent that a loss of a CFD is deductible under section 8-1 or section 25-40, the reduced cost base of the asset is reduced thereby reducing the amount of the capital loss.
Paragraph 118-37(1)(c) of the ITAA 1997 provides that capital gains and capital losses arising from “gambling, a game or a competition from prizes” are to be disregarded.
The ATO’s position is that capital gains and capital losses from trading CFDs do not qualify for this or any other exemption in the ITAA 1997.
7.3 Notional interest and dividend adjustments
A share CFD is an agreement between two parties where one party pays to the other party an amount equal to the notional fnancial performance of a share between the time the CFD is opened and the time the CFD is closed. Any dividends paid in respect of the underlying share are notionally credited or debited as the case may be to each party in determining the notional fnancial performance of the share. At no time will you have an interest in the underlying share. An adjustment is also made representing the notional interest on funding of the underlying share position.
Any interest and dividend adjustments are notional amounts, which are unlikely to be characterised as dividends or interest for tax purposes. Instead, these notional adjustments will be taken into account in determining the overall proft or loss on the CFD. The taxation of the overall proft or loss on the CFD is set out at 6.2 above.
7.4 Commissions and other charges
As profts or losses are assessable or deductible by you, any commissions, interest or other fees that you pay to us will be deductible.
7.5 GST
According to the GST Determination GSTD2005/3 issued on 22 June 2005, the
provision, acquisition or disposal of a CFD is a fnancial supply under the provisions of the A New Tax System (Goods and Services) Tax 1999 (“GST Act”) and the GST Regulations and is input taxed, with no GST imposed. Further the supply of interests in CFDs does not constitute gambling supplies, as defned in section 126-35 of the GST Act. A CFD does not therefore in the view of the ATO represent a gambling event.
The commission paid to us at the time of entering the CFD would constitute
additional consideration for an input taxed fnancial supply. This would also apply to any premium for Limited Risk Protection on the basis that this charge is additional consideration for a variation to the ordinary CFD and, therefore, no GST is imposed.
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2 comments:
Thanks for the post.
I find that there still is a lack of tax-related information for CFDs on the web.
You're right. There is very little, generally. And the ATO web site is not very helpful, either.
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