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ATO Interpretative Decision

ATO ID 2010/56

Income Tax
Assessable income: derivation of income - spread betting

FOI status: may be released

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as
a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be
used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different
from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay
any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed
credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to
your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not
been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional
adviser.

Issue
Whether the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the
Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA
1997.

Facts
The taxpayer is a client of a company which provides the services of financial spread betting for which it holds an
Australian Financial Services Licence issued by the Australian Securities and Investment Commission (ASIC) under
the Corporations Act 2001 .

At the time the transactions were entered into, the taxpayer was a full-time salaried employee of a company which is
not connected with the financial services industry. The taxpayer's duties as an employee with the company do not
involve financial analysis, observing financial markets or the provision of financial advice.

The taxpayer entered into these transactions because they believed that they would enjoy participating in some
'sophisticated, exciting and challenging on-line fun' but understood that they could lose. However, having regard to the
taxpayers spread betting activities, a win or loss would not be material in their financial circumstances. The taxpayer
did not carry out any formal research and did not use any system or trading techniques but made decisions based on
what they knew of financial affairs generally.

The taxpayer made a net gain from the spread betting activities in that financial year. The taxpayer contends that the
profits made were mainly the result of guesswork.

Reasons for Decision

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Section 6-5

Section 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to
ordinary concepts. A gain from a financial spread betting activity is assessable income under section 6-5 of the ITAA
1997 where the transaction is entered into as an ordinary incident of carrying on a business.

It is a question of fact as to whether a taxpayer's activities amount to the carrying on of a business. Income Taxation
Ruling TR 97/11: 'Am I Carrying on A Business of Primary Production' discusses the relevant indicators to consider in
determining whether a taxpayer's activities amount to the carrying on of a primary production business. These
indicators are equally relevant when determining whether a taxpayer is carrying on a business generally.

The relevant indicators, which emerge from the case law in this area, to consider are:

·
whether the activity has a significant commercial purpose or character;

·
whether the taxpayer has more than just an intention to engage in business;

·
whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

·
whether there is repetition and regularity of the activity;

·
whether the activity is of the same kind and carried on in a similar manner to that of the
ordinary trade in that line of business;

·
whether the activity is planned, organised and carried on in a businesslike manner, such that
it is directed at making a profit;

·
the size, scale and permanency of the activity;

·
whether the activity is better described as a hobby, a form of recreation or a sporting
activity.

It is accepted that activities conducted on a small scale and for a short time may nevertheless involve the carrying on
of a business.

The taxpayer entered into a number of spread betting transactions over a one week period. The proceeds generated
from these spread betting activities could be seen as the commencement of a business having regard to the
following:

·
the significant commercial purpose or character of the activities,

·
the profit-making purpose and the prospect of making a profit, and,

·
the repetition and regularity of the activity (albeit over a short period).

Even if the activities do not constitute the carrying on of a business of spread betting, the gains made on each
individual contract may still be assessable as ordinary income under section 6-5 of the ITAA 1997 if the profits were
obtained in a business operation or commercial transaction entered into with the intention or purpose of making a
profit (see Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 87
ATC 4363 and Income Taxation Ruling TR 92/3: 'Income tax: Whether Profits on Isolated Transactions Are Income').

The profit-making purpose and commercial nature of these transactions is borne out by the fact that:

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such contracts are, by their nature, only short term and are not capable of generating a
separate income stream but result in a gain or a loss under each contract,

·
the contracts are open for a relatively short period of time, compared to long term contracts
which are more likely to be of a capital nature,

·
the subject matter of the underlying assets which influence the movement in the financial
market or index,

·
spread betting contracts have a unique feature of stop-loss which requires considerable
thought about the level of exposure and the calculated risks.

These circumstances objectively establish that such contracts are entered into for a commercial purpose and the
existence of a profit making intention. Objectively, they are not consistent with a person who is merely in pursuit of a
recreational gambling activity.

Section 15-15

If section 6-5 of the ITAA 1997 does not apply, the gains are nevertheless assessable income under section 15-15 of
the ITAA 1997 as the spread betting contracts amount to carrying on or carrying out a profit-making undertaking or
plan.

This is the case even if there are only isolated transactions entered into by the taxpayer as 'the profit arising from an
isolated commercial or business transaction will constitute income if the taxpayer's purpose or intention in entering
into the transaction was to make a profit' (See Antlers Pty Ltd (in liq) v. Federal Commissioner of Taxation 97 ATC
4192; 35 ATR 64). What is important is the intention or purpose, determined by a consideration of the objective facts.
Spread betting contracts are the purchase of financial risk -something with a significant commercial flavour - by
means of a contract productive only of a gain or loss. It is an activity undertaken for the purposes of making a profit.

Not Gaming or Wagering

Spread betting can be distinguished from gaming and wagering that might take place on a race course or at a casino
because, unlike those activities, it is not governed by the various State Gaming and Wagering statutes but by
Commonwealth legislation dealing with the conduct of commercial activities.

The validity of spread betting contracts - being found in the Corporations Act 2001 , as opposed to gaming legislation
- indicates 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.

In addition, transacting with financial spread betting 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 a horse racing (see Taxation Ruling
TR 2005/15: 'Income tax: tax consequences of financial contracts for difference'). Transacting with financial spread
betting is essentially a commercial activity of investing in a cash-settled derivative, albeit in the legal form of a
contract of gaming and wagering, in relation to an underlying financial risk.

The degree of control is also another factor that distinguishes financial spread betting from recreational gambling. The
winnings tend to be the rewards for skill and judgement rather than purely betting on chance (See Brajkovich v.
Federal Commissioner of Taxation 20 ATR 1570; 89 ATC 5227).

Treatment of losses

Any losses on the spread betting contracts would be deductible under section 8-1 of the ITAA 1997 where, had a
gain been made on the contract, it would have been assessable under 6-5 of the ITAA 1997. Similarly, any losses on
the spread betting contracts are deductible under sections 25-40 of the ITAA 1997 where, had a gain been made on
the relevant contract, it would have been assessable under section 15-15 of the ITAA 1997.

Date of decision: 3 March 2010

Year of income: Year ended 30 June 2009

Legislative References:
Income Tax Assessment Act 1997

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section 6-5
section 8-1
section 15-15
section 25-40

Case References:
Federal Commissioner of Taxation v. The Myer Emporium Ltd
(1987) 163 CLR 199
18 ATR 693
87 ATC 4363

Antlers Pty Ltd (in liq) v. Federal Commissioner of Taxation

97 ATC 4192
35 ATR 64

Brajkovich v. Federal Commissioner of Taxation

20 ATR 1570
89 ATC 5227

Related Public Rulings (including Determinations)

Taxation Ruling TR 92/3
Taxation Ruling TR 97/11
Taxation Ruling TR 2005/15

Keywords
Financial derivatives
Gambling income

Date of publication: 12 March 2010

ISSN: 1445 - 2782

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