So, you're looking to trade
or are already trading Futures. No doubt like everyone else, you see
the Futures Markets as being another way to invest your hard earned
dollars and reap the rewards. Some will view the Futures Markets similar
to the Share Markets BUT with the higher risks and associated rewards
that go with these risks. However, just like everyone else you talk
to (including the majority of accountants), you maybe ignorant to
the taxation implications that can arise.
When the current taxation laws were drafted, there were no specific
provisions written that related to Futures. The current provisions
were drafted at a time the Futures Markets were primarily used by
professionals (ie: large corporations) to hedge their specific exposures.
Over time, the Income Tax Assessment Act ("the Act") has been amended
to include Share Trading on the Stock Markets (see Capital Gains
below), but to date there is no clear evidence that "the Act" has
been amended to clearly capture trading in Futures.
The information that follows has been provided with the view that
the YTE reader is trading Futures under their own name (or individual
names if a joint account). The implications can be different if
the reader is conducting their trading under a Company or Trust
name.
General
The taxation treatment of futures trading has been taken from
the general principles with "the Act". Also, a comparison has been
made between the gains and losses generated by futures trading and
that from trading in foreign exchange. However, whilst this comparison
has been widely accepted for some time, it is not known whether
this has been tested before the courts at this stage. Recognising
the significant growth of Futures, the Australian Taxation Office
(ATO) issued an income tax ruling a few years ago which provides
for the appropriate treatment in certain circumstances. The adoption
of a different approach would certainly be disputed by the ATO.
Timing of gains & losses for tax
purposes.
Generally, the ATO will not recognise gains or losses for tax
purposes until such time as the Futures trade (position) has been
closed out or settles. Therefore, one could argue that this reflects
the actual cash movements that occur on your trading Account that
directly relate to trading positions.
However, this would not include the "Mark-to-Market" movements
that can occur and affect your cash balances, and as such should
be excluded from any calculations made when determining the gains
or losses made. Similarily, any funds that you lodge (or withdraw)
to your trading account should be excluded. These will reflect your
"Capital" that will be required by your Broker to either establish
and/or maintain positions, or will reflect the top-up of your account
following losses actually incurred.
There should also be a different treatment adopted depending on
whether the realisation of the gain or the loss relates purely to
trading (speculative) or hedging.
Speculative Trading
This refers to when the trader has entered into the Futures trade
(position) purely with the view to generate profits from an opportunity
they see or from trading a particular system or recommendation from
their Broker/friends. Any such realised gains or losses will be
assessable under Section 25(1) or deductible under Section 51(1)
of "the Act" as income or expense of the taxpayers usual business
activities in the taxation year that the activity occurs. The catch
here is the determination of "general business activities" of the
taxpayer.
For those YTE readers that are trading futures for the "rush"
it can give and will only trade a few transactions each month or
year providing modest returns, it is doubtful if the ATO will recognise
the activity. (In much the same way that having a "punt/flutter"
on the horses on the weekend is not recognised).
However, for the serious trader that has decided that at some
stage they intend to establish their trading as being a significant
portion of their yearly income, they will need to be able to establish
this intent during the early stages (not defined) of their trading.
This can really only be determined by the establishment (justification)
of the volume and/or frequency of their trades, whether being daily
in small volumes or weekly/monthly in large volumes.
(Caution: If the YTE reader falls under the earlier scenario of
not intending to establish their trading a forming part of their
"general business activities", it is still possible for gains to
be assessable, as the ATO may view the activity as forming the basis
of a profit-making scheme. In this case, the losses incurred may
be allowable without falling under the "hold over" that is attached
to losses incurred that fall within the Capital Gains Tax provisions).
Hedging
If you undertake the trade/position purely to protect a portfolio/position
that you have elsewhere, (ie: SPI/Share Futures trade against actual
shares held or farmers/producers protecting the price of their crop/produce)
(the underlying transaction), the gain or loss will need to be offset
against and coincide with the gain or loss of the actual positions
being protected.
However, where the underlying transaction is of a revenue nature,
then any gains or losses could be assessable/allowable on the same
basis as Speculative Trading.
(It is doubtful whether many YTE readers would fall within this
category).
Capital Gains Tax
Most individuals trading Shares on the Stock Markets will be caught
by the Capital Gains Tax provisions of "the Act" which clearly defines
that Profits and Losses on trading Shares will be treated not as
speculative but Capital gains. Generally Shares represent the "Capital"
of a listed company and any movements in the share value reflect
the increase or decrease in the value of the "issued capital" of
the particular company that the shares have been issued on.
As such, the ATO will treat any net gains as assessable in the
year they are realized but net losses will not be allowable. Net
losses will need to be "carried over" until such time as they can
be offset against a capital gain realized at some stage in the future
(there are no time restrictions that apply).
Associated costs/expenses or income
When determining your total assessable gains and losses, you will
need to also consider the associated gains or losses that go hand
in hand with the trading component.
These will include:-
- Income (Gains) (Interest Earnt, Refunds received,
etc.);
- Expenses (Losses) (Interest paid, withholding
tax paid, brokerage paid (commissions, fees, etc),
The information above is not to be construed as being of any specific
advice and should be strictly treated as being of general information
for YTE readers. Traders/Investors should always seek specific advice
from a qualified and practicing Taxation Accountant when preparing
their returns.
