Edited version of private advice

Authorisation Number: 1051607383492

Date of advice: 12 November 2019

Ruling

Subject: Shares and contracts for differences

Question 1

Are you carrying on a business in shares/contracts for differences (CFDs)?

Answer

Yes.

Question 2

Can you include any losses from your share/CFD activities in the calculation of your taxable income for the 20XX-XX income year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Your financial resolution in 20XX was to start a new business and make 15% profit out of it by the end of 20XX and continue to increase the benefit at least 100% by the end of 20XX.

You set up your business plan for share trading.

You started to train yourself on the share market. You did various training programs and courses.

After several months research and study on trading in the Australian share market, you started your share activities.

You set up several strategies for long term and short term trading.

You review various reports on a daily basis. You also review the Australian market and Australian exchange traded funds (ETFs) from official sources.

You have reviewed various ASX Educational Publications in Shares, Equity Options and Listed Funds.

You also frequently read several online sources.

You are a full time employee but you also spend several hours each day on your share/CFD activities.

You registered to receive expert advice from various organisations. You also use the interactive charting tool, company announcements, recommendations data base, news and research platform and company comparison platform.

Based on registered data bases, you achieved acceptable experience to trade shares and assess market sectors and companies. You developed and modified your strategies based on further experience gained from trading.

You started with ordinary share trading, then option trading and subsequently you decided to select CFD trading as your main strategy. You traded on a daily basis.

For your share investment, you usually traded based on set strategies. You did not trade options too much. You started your CFD trading with a similar strategy. You were flexible to choose your strategy for each CFD trading.

You use the following general steps:

1. Monitor and assess existing trades/adjust stops or exit where necessary.
2. Scan for potential trading opportunities.
3. Obtain shortlist from step 2 and select trades.
4. Determine initial stop-loss.
5. Calculate the trade/position size.
6. Execute the trades.

Most of the time you use qualitative analysis reports or data, however several times you applied detailed quantitative assessment on the subjected trades.

You used your savings for your CFDs and shares. You have invested more than $xxx,xxx on your investments, mostly CFD trading.

Due to a sharp rise and fall during one month, you lost $xx,xxx. You changed your CFD strategies to lower risk trading.

For the 20XX-XX income year you had several hundred share and CFD trades.

You incurred an overall loss from these transactions.

Your taxable income for the 20XX-XX income year was over $XYZ.

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 35-10.

Income Tax Assessment Act 1997 Section 35-55.

Reasons for decision

Carrying on a business

Where a person trades in shares and/or CFDs as a business, the associated income is assessable as business income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997). Deductions from carrying on a business are generally deductible under section 8-1 of the ITAA 1997.

However where a person is not in business, the shares will be capital assets and any gains/losses made from the shares would be subject to the capital gains tax provisions.

Therefore it is necessary to consider whether your share and CFD activities are regarded as a business.

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity 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 regularity and repetition of the activity

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

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

·         the size, scale and permanency of the activity, and

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

The fact that a person may be carrying on a business in one income year, does not mean that the subsequent years a business is also being carried out. We need to look at the activities carried on in the relevant year.

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences deals with the tax consequences of financial CFDs. Paragraph 11 in TR 2005/15 explains that gains from a financial CFD will be assessable income under section 6-5 of the ITAA 1997 if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

Likewise, paragraphs 12 in TR 2005/15 explains that losses from a financial CFD will be deductible under section 8-1 of the ITAA 1997 if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

Paragraph 17 of TR 2005/15 states that to determine if a business is being carried on, matters such as whether the transactions are entered into in a systematic, organised and businesslike way; the repetition or regularity of the transactions; the scale of the transactions; whether the transactions are related to or part of other activities of a businesslike character; the purpose of the taxpayer; the degree of skill employed in how you engage in the transactions.

Applying the relevant indicators to your circumstances

Nature of activity and purpose of profit making

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business of shares/CFDs exists, there is usually a business plan of how the activities will be conducted.

A business plan might show, for example:

·         an analysis of potential investments,

·         analysis of the current market value and various segments of the market,

·         research to show when or where a profit may arise, and/or

·         the basis of decisions as to when to hold or to sell investments.

In your case, you have a business plan and aim to make a profit from trading in shares and CFDs. You will use information from various electronic resources to help you in your investment decisions. Your trading in shares/CFDs supplements your income from your full time employment.

Repetition and regularity of the activities

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

In your case you had several hundred share and CFD transactions in the 2018-19 income year. There was regularity to your buying and selling. You spent several hours per day on your share/CFD activities.

Organisation in a business-like manner and the keeping of records

Generally a business would involve study of trends, analysis of relevant material and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. As per Case X86 90 ATC 621, this means having or operating on a particular plan with the main goal of maximising profits. If records of purchases and sales of shares/CFDs were not kept, it would be more difficult for a person to demonstrate that a business was being carried on.

You kept records of your share/CFD transactions and other relevant details. You use online resources to study trends and analyse various material.

Volume of trading

A higher volume of purchases and sales of shares/CFDs is more likely to indicate that a business is being carried on.

You had several hundred share and CFD transactions during the 2018-19 income year.

Amount of capital injected

You invested more than $xxx,xxx on your share/CFD activities.

Conclusion

After weighing up the factors outlined above, it is considered that you are carrying on a business of share/CFD trading. You had a business plan and used various sources of information to help you with your decisions and you have kept adequate records. You have had regular trading activities throughout the year. Your injection of capital into your investments was significant and you had a view to making a profit.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are a share/CFD trader and your activities are regarded as a business for taxation purposes for the 2018-19 income year.

Business losses

Where a person has a business loss, Division 35 of the ITAA 1997 needs to be considered.

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless:

·         the exception in subsection 35-10(4) of the ITAA 1997 applies,

·         you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of four tests in sections 35-30, 35-35, 35-40 or 35-45 of the ITAA 1997 are met, or

·         the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

Exception

The exception in subsection 35-10(4) of the ITAA 1997 applies to a primary production business or a professional arts business and where your assessable income for the income year (except any net capital gain) from other sources not related to that activity, is less than $40,000.

In your case, the exception in subsection 35-10(4) of the ITAA 1997 does not apply.

Subsection 35-10(2E) of the ITAA 1997

The income requirement in subsection 35-10(2E) of the ITAA 1997 applies from 1 July 2009 and will be met where the sum of the following amounts for an income year is less than $250,000:

·         taxable income (ignoring losses subject to the non-commercial loss rules)

·         reportable fringe benefits

·         reportable superannuation contributions

·         net investment losses

You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997.

Commissioner's discretion

The Commissioner may decide that the loss deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity has started to be carried on and:

(i)    because of its nature, it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii)   there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year.

Note: This discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.

That is, due to the nature of some business activities, they will not produce assessable income in the early years and therefore will not be able to produce a profit. However, the nature of shares and CFD trading type activities is that it is possible to derive assessable income from the first day.

There is nothing inherent in the nature of shares/CFD activity that would prevent you from making a profit from the start. It is considered that the fact that your activity did not produce a profit in the 20XX-XX income year is not simply a result of the nature of the activity.

Furthermore, the existence of a volatile market and the associated fluctuations are expected to occur on a regular or recurrent basis when carrying on a share/CFD business. Such ordinary economic and market fluctuations are not regarded as special circumstances under paragraph 35-55(1)(a) of the ITAA 1997.

In your circumstances, the Commissioner would not exercise his discretion to include any losses from the trading in the calculation of your taxable income for the 20XX-XX year. Therefore, the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, although a deduction may be allowed under section 8-1 of the ITAA 1997, it cannot be used against your other income in the 20XX-XX income year.

There is no other discretion that applies in your circumstances. Therefore your business losses cannot be used against your other salary or rental income. That is, Division 35 of the ITAA 1997 prevents your business losses being offset against your other assessable income in the year the loss is incurred. The loss is deferred and may be offset in later years if you meet the requirements in Division 35 to be able to claim the deferred loss in a later year.

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