Edited version of private ruling

Authorisation Number: 1011571574703

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Ruling

Subject: CFD trading

Are you entitled to a deduction for losses incurred in trading contracts for differences (CFD)?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You invest in shares in which you trade only a few times a year. You do not consider yourself a share trader.

During the income year ended 30 June 2010 you began trading in CFDs.

You commenced trading in CFDs with the intention of making profits in a relatively short period of time.

Over a six month period you entered into less than 10 trades. These trades were open for an average of about 20 days.

You generally made a loss on the CFDs in terms of price movements and then also incurred costs such as guaranteed stop losses, interest expense and trading fees.

Due to your professional qualifications, you have a good understanding of CFDs, how they work and the risks involved.

You do not carry out any forward planning or budgeting in relation to your CFD or share activities.

Other than reading newspapers and magazines, you received no advice or assistance in setting up your activities.

Your professional qualifications are useful in understanding businesses and their financial position. You do not hold any other qualifications or possess any other expertise relative to buying and selling shares and CFDs.

The source of the capital you invested was borrowed funds, using the equity in your home. You have no other facilities to access additional capital.

Your strategy for CFDs is to make a profit in a short period of time by taking advantage of market volatility.

You aim to hold only one or two CFDs at a time. Your decision to buy depends on what you think is an appropriate entry price. Your decision to sell depends on price action over the short term.

You do not use any analytical models. You research a company's financial statements before committing to buy.

You do not conduct market analysis or research before making decisions.

You use guaranteed stop losses on all CFD trades.

You have sought no external expert advice in relation to your activities.

You use a laptop to conduct your activities.

You do not generally keep extra records of your activities as your online brokers provide enough information for you to track your portfolio, trades and cash transactions. You keep any correspondence you receive in relation to your activities.

All of your CFD and share activities are in your name and in your spouse's name. All of your results are split equally for income tax purposes. Your line of credit is also in both of your names.

You spend 15 to 30 minutes per week on your CFD activities.

You spend one to two hours per week on your share activities.

You are a full-time employee. You spend 40 to 50 hours per week in this employment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 15-15.

Income Tax Assessment Act 1997 Section 25-40.

Reasons for decision

The Commissioner's view on the deductibility of losses associated with financial CFDs is set out in Taxation Ruling TR 2005/15.

Deductibility of CFD losses under section 8-1 of the ITAA 1997

TR 2005/15 states that a loss from a financial contract for differences is deductible under section 8-1 of the Income Tax Assessment Act 1997 (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.

Whether a taxpayer is carrying on a business must be determined on the basis of the facts of each particular case. There is no statutory definition or test of 'carrying on a business', other than the exclusion that a business does not include the occupation as an employee (section 995-1 of the ITAA 1997).

The question of whether you are considered to be carrying on a business will be determined by weighing up all the relevant facts of your case.

Taxation Ruling TR 97/11 discusses the general factors to be considered when determining if a business is being carried on.

Specifically the decision in Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86) identifies the relevant factors to consider when determining if a taxpayer is carrying on a business as a share trader.

The factors listed in Case X86 are as follows (at 629): 

· an intention to engage in trade regularly, routinely or systematically

· the nature of the activities and whether they have a profit making purpose

· the complexity and magnitude of the undertaking

· operating in a business-like manner and the degree of sophistication involved

· whether any profit/loss is regarded as arising from a discernible pattern of trading, and

· the volume of the taxpayer's operations and the amount of capital employed by him.

In your case, you are not carrying on the business of CFD trading for the following reasons:

· you only spend 15 to 30 minutes a week on your activities

· you are engaged in full-time employment working 40 to 50 hours a week

· you only made a small number of transactions in the income year ended 30 June 2010

· you do not have a detailed business plan

· you do not carry out any forward planning or budgeting, and

· you did not receive any advice or assistance when setting up your activities.

As you are not carrying on a business of CFD trading, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the losses you incurred from your CFD activities.

Deductibility of CFD losses under section 25-40 of the ITAA 1997

TR 2005/15 states that a loss from a financial contract for differences where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997, relating to losses from profit-making undertakings or plans.

In relation to deductibility under section 25-40 of the ITAA 1997, TR 2005/15 states at paragraph 37:

What is important is the taxpayer's actual purpose, determined by a consideration of the objective facts. Part of the objective factual matrix is that the transactions are the purchase of financial risk - something with a significant commercial flavour - by means of a contract productive only of a gain or a loss. The statements of a taxpayer's subjective intention are also relevant.

TR 2005/15 then states at paragraph 45:

…the terms of the financial contract for differences are such as to tend to stamp it as an act of commerce. However, a taxpayer who enters into a financial contract for differences only once, or very occasionally, who has no expertise in the price of the underlying by which the gain or loss of the financial contract for differences will be calculated, does not engage in any income-producing activities of a character bearing some association or connection with the financial contract for differences or its underlying, and in particular, who gambles in the ordinary recreational way and who has entered into the financial contract for differences in circumstances such that the financial contract for differences may be seen to be part of that recreation may establish that he gain or loss is the product of gambling…

Taking into account the factors discussed in TR 2005/15, you have shown that you had a profit making intention in relation to your CFD activities, based on the following facts:

· you have some knowledge of CFDs due to your professional qualifications

· your professional background also gives you a good understanding of businesses and their financial positions

· you research a company's financial statements before committing to buy

· you use guaranteed stop losses on all CFD trades, and

· your intention when entering into your CFD activities was to make profits in a relatively short period of time, and your strategy to do so was to take advantage of market volatility.

As you had a profit making intention in relation to your CFD activities, you are entitled to a deduction under section 25-40 of the ITAA 1997 for the losses you incurred in relation to these activities.

Please note, however, in the future, if you make a gain on your CFD activities, they will be assessable income to you under section 15-15 of the ITAA 1997.

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