Edited version of your written advice

Authorisation Number: 1013086124242

Date of advice: 8 September 2016

Ruling

Subject: Am I in business - trading contracts for difference

Question 1:

For the year ended 30 June 20YY, did you carry on a business of trading contracts for differences (CFDs)?

Answer 1:

No

Question 2:

For the year ended 30 June 20YY, did you either carry out:

• commercial CFD trading with a profit making purpose; and/or

• a profit making undertaking of CFD trading?

Answer 2:

Yes.

Question 3:

Will the gains made from closing out your CFD's be included as income under either section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997); and the losses be deductible under either section 8-1 or section 25-40 of the ITAA 1997?

Answer 3:

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

During the 20YY income year you were employed on a full time basis. Your role was time consuming and timeline driven. At the same time you and your spouse were looking after a young child. As a result there was large amounts of time when you were not able to carry out your CFD trading, it was secondary to your work and family commitments and only conducted when time permitted, for example late at night or on an ad hoc basis.

You have a Masters degree however you have no special qualifications in the field.

You began trading CFD's via an online trading account toward the end of the 20XX income year, you continued trading during the 20YY income year and ceased trading in CFD's early in the 20ZZ income year.

You decided to trade in CFD's because in the late half of the 20XX income year you became aware of volatility in the share market. You were aware that CFD's were a leveraged product and you thought that profits could be increased through the use of borrowings. You felt that the use of leverage provided you with an opportunity to make profits from a volatile market, so you decided to 'try it out'.

Prior to commencing your CFD trading you had little knowledge of how they worked, you had no previous experience and had undertaken no formal or professional training. You relied on information resources available publicly or on the internet or via the online trading platform.

All CFD transactions were entered into with the purpose of closing out the CFD in a short time. You entered into CFD trades with the purpose of making a profit.

You did not apply any set methodology or pattern to your CFD trading. When you had time available from your work and family commitments and saw an opportunity you entered into CFD transactions.

You did not have a budget or business plan and you did not apply a pre-determined methodology based on a pattern or trading system. You did not account for your transactions other than with the online trading platform records.

During the year there were long periods with no transactions, and short periods when a lot of transactions were entered into. You closed out all CFDs before entering into periods of inactivity.

The CFD transactions were funded with your own money and borrowings. All transactions were geared with borrowings.

You identified trading opportunities through watching business news, an information service and a subscription trading service. You limit your trading to CFDs in blue chip stocks.

You made losses in the 20YY income year and ceased trading CFDs early in the 20ZZ year because you decided the transactions were too complex.

You spent on average a few hours a week on your CFD trading activities; the majority of this time was spent watching the business news. Given that you spent time watching the business news prior to engaging in CFD trading and regardless of whether you were trading in CFD's at the time, this time isn't considered critical in determining actual time spent in relation to carrying out your CFD trading.

Typically because you were time poor it was not always possible for you to review the buy and sell recommendations available on information service prior to enter into a CFD trade, so from time to time you would skip this step, or fail to act on your interest in a company. At times you were simply too busy to keep track of companies that you had an interest. You kept no written notes. In summary there were times when you forgot to act or the opportunity lapsed.

Whether you had a winning or losing streak did not materially change or impact on your CFD trading. You felt that the market was highly volatile and reactive to world events which made it difficult for you to predict whether a price would go up or down. You felt that some world events had already been factored into a price and others not, so you found it was not possible to improve the way you entered the CFD transactions based on what had worked or not worked in the past.

You felt that your CFD trading involved a high level of chance or unpredictability.

You have made an overall loss from your CFD trading for the 20YY income year.

You had a separate portfolio of direct investment shares that you held for investment purposes.

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 15-5

Income Tax Assessment Act 1997, Section 25-40

Income Tax Assessment Act 1997, paragraph 118-37(1)(c)

Reasons for decision

Summary

You are not carrying on a business of CFD trading in the year ended 30 June 20YY. However, you were either carrying out:

• commercial CFD trading with a profit making purpose; and/or

• a profit making undertaking of CFD trading.

The proceeds of your CFD trading are not proceeds from recreational gambling.

Detailed reasoning

The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences (TR 2005/15) have been applied.

Participation in CFD trading has been identified as a commercial transaction and seen as speculation on a financial risk as discussed in the ATO view contained in TR 2005/15.

Therefore in adopting the above view, where CFD trading is carried on as a business, the gains from the CFD transactions will be accounted for under section 6-5 of the ITAA 1997 and the losses under section 8-1 of the ITAA 1997.

If the CFD trading is not carried on as a business, but is however carried on as either:

• commercial CFD trading with a profit making purpose; and/or

• a profit making undertaking of CFD trading,

then any profit will be assessable on revenue account as either ordinary income and accounted for under section 6-5 of the ITAA 1997, or the profit will be assessable as a profit making undertaking in accordance with section 15-15 of the ITAA 1997.

A gain or loss from CFD trading entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997, nor be deductible under section 8-1 of the ITAA 1997 or section 25-40 of the ITAA 1997. Further, a capital gain or capital loss from CFD trading entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

In your case the alternatives have been considered and it has been concluded that your CFD trading in the year ended 30 June 20YY are either;

• commercial CFD trading with a profit making purpose; and/or

• a profit making undertaking of CFD trading, and will therefore be assessable on revenue account.

Carrying on a business

In applying factors (a) to (g) from Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) to determine whether you were carrying on a business, it is acknowledged that the activity undertaken by you had the purpose of profit, and was also characterised by some regular and repetitive activity over a period of time. The amount of capital you have invested is also considered to be a significant amount. There were also characteristics of the activity that aligned with the activities being a business, rather than a hobby.

However, as you were not operating to a plan, and you had no trading strategy in place it would be considered that you were not operating in a business-like manner, the degree of sophistication involved in your activities was not high. You did not approach the activity in a consistent way; there was no set methodology or pattern to your trading. You carried out your CFD trading in an ad hoc manner in and around your full time occupation and family commitments, this resulted in random trading and open positions left unmonitored or forgotten about from time to time. There were times when you failed to act on trading opportunities due to the lack of time you allocated to it.

You did not carry on the activities in a similar manner to that of ordinary traders in the business of financial investments, nor did you plan, organise or carry out the activities in a systematic or businesslike manner. Furthermore, you have ceased the activity because you found CFD's to be too complicated and you were unable to adapt or learn from your winnings and losses.

Thus, after consideration all of the relevant indicators and the circumstances of your case, it is considered that you were not carrying on a business of CFD trading.

Commercial CFD trading with a profit making purpose; and/or a profit making undertaking of CFD trading. (Not carrying on a business of CFD trading.)

Section 6-5 states that: 'Your assessable income includes income according to ordinary concepts, which is called ordinary income.' Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business.

The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer), that:

The authorities establish that a profit or gain so made [in an isolated transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides the ATO view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5.

The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers'.

Paragraph 16 of TR 92/3 states that:

If a taxpayer who is not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

For example, paragraph 19 of TR 2005/15 confirms the principles established in Myer and TR 92/3 are applicable to financial contracts for differences where the profit or loss was made in either a business operation or a commercial transaction for the purpose of profit making.

TR 2005/15 states at paragraph 23 that:

…speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets.

In concluding that speculation on a financial risk can be characterised as being commercial, TR 2005/15 bases that conclusion on the following attributes of a financial contract for differences:

• it cannot be assigned;

• it does not provide ownership of the underlying asset;

• they are essentially contracts of speculation productive of a gain or a loss stemming from exposure to a short term financial risk; and

• the risks assumed are all the basic subject matter of the financial services industry.

CFD trading are seen as commercial transactions, this combined with the fact that you had a profit making purpose, means that your gains from the venture / activity in the year ended 30 June 20YY would be assessable as either ordinary income under section 6-5 of the ITAA 1997, or assessable under section 15-15 of the ITAA 1997 as a profit making undertaking. Consequently it also means that your losses from the venture / activity in the year ended 30 June 20YY are deductible under either section 8-1 of the ITAA 1997 or section 25-40 of the ITAA 1997. You may offset your overall net trading loss against your other income.

Your CFD trading loss should be included at label D15 of your income tax return supplementary section. Note there is no trading stock equation, CFD's are not trading stock, you do not own the underlying asset.

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