Edited version of private advice

Authorisation Number: 1051738631052

Date of advice: 14 August 2020

Ruling

Subject: Contracts for difference (CFD) gains and losses

Question 1

Are the gains or losses made from your Contracts for difference (CFD) trading assessed under sections 15-15 and 25-40 of the ITAA 1997 and treated as profits or losses made from an undertaking or scheme?

Answer

Yes.

Question 2

Are the gains or losses made from your CFD trading assessed under sections 6-5 and 8-1 of the ITAA 97, and treated as profits or losses made from carrying on a business of CFD trading?

Answer

No.

Question 3

Are the losses from CFD trading subject to section 35-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

You commenced trading in Contracts for difference (CFD) towards the end of the 2019 calendar year, where you have been trading in CFD's, Forex pairs and Indices products (where you have not taken ownership of the underlying assets involved in each trade).

On average you have placed more than 10 trades each week.

You undertook your CFD trading activities alongside your regular full-time employment in the finance sector, where you worked over 40 hours per week.

You invested over $20,000 in the activity over the 2019-20 financial year.

Your CFD trading activities are completed via an Australian on-line platform where you use a trading account to undertake the trades yourself.

You have a basic financial knowledge of the financial markets, trading CFD's, Forex, indices which was acquired when studying a Masters degree and through studying the materials available on the trading platform website. You have not taken any other steps towards entering into CFD trading.

During the 2019-20 financial year you completed several hundred closed out CFD transactions, and of these transactions most of the trades were profitable, returning an amount of over $20,000. The remaining trades returned a loss of over $50,000. As such you calculate your net trading position to be an overall moderate loss.

The reasons for the high number of trades are due to the following:

-       When you trade, you tend to place trades separately into smaller trades.

-       Some of the trades were for testing purposes only.

You spent less than 10 hours each week in total trading CFDs along with formulating trading strategies and studying stock chart patterns. You did not do daily market analysis, however you estimate that you spent a couple of hours in total each week on research and market analysis in addition to the hours spent actually trading in CFD's.

You have adopted the following trading strategy:

-       Using daily charts to identify trading opportunities. When it is at the higher end of the band, you consider sell trades, and when it is at the lower end of the band you consider buy trades.

-       Using moving average and daily chart to identify whether the market is in up-trend or down trend. You are more likely to enter into a buy trade in an up- trend when the price hits the lower end of the band and you are more likely to enter into a sell trade in a down trend when the price hits the higher end of the band.

-       Trading based on the news on major and minor economic events.

You used your personal phone and laptop to do research and trade.

You did not establish a business plan.

You have not set up a home office to conduct your CFD trading activities from.

However, the underlying motive of all of the above mentioned actions was to make a profit or gain of at least half of your current salary income.

Your income from other sources did not exceed $250,000 during the income year ended 30 June 2020.

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

Income Tax Assessment Act 1997 division 35

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Tax treatment of CFD trading

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15) outlines the taxation treatment of CFD's. A CFD is a form of cash settled derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

TR 2005/15 states where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be assessed under sections 6-5 and 8-1 of the ITAA 97.

Otherwise, TR 2005/15 states the trading activities will be regarded as the carrying out of a profit- making undertaking and a net gain or a net loss from trading will be accounted for under either section 15-15 or 25-40 of the ITAA 1997.

In any case, the gains and losses resulting from a CFD transaction will be of an income nature.

Carrying on a business of CFD trading

Section 995-1 of the ITAA 1997 defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether or not particular activities constitute a business is a question of fact and degree. A process is undertaken where all the facts of a situation are applied to the relevant indicators, taking into account the weight and influence of the facts within the context of that particular situation.

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR 97/11). The ruling lists the following indicators as being relevant when determining whether or not a business is being carried on:

·       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.

The bar for CFD trading is quite high, with the most significant factors usually the volume of trading and conducting operations in a business-like manner.

Deferral of losses from non-commercial business activities

A non-commercial business activity is a business activity where the expenses in the year exceed income.

Division 35 of ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year that the loss is incurred. The loss is deferred.

It sets out a series of tests to determine whether a business activity is treated as being non-commercial.

The deferred losses may be offset in later years against profits from the activity or, if one of the tests is satisfied or the Commissioner exercises a discretion, against other income.

The Division only applies to losses from business activities and does not apply to losses arising from mere passive activities. To be able to offset a business loss against other income, you and your business need to meet a number of requirements.

Income requirement

Your income for non-commercial loss purposes must be less than $250,000. It includes your:

·       taxable income (ignoring any business losses)

·       total reportable fringe benefits amount

·       reportable superannuation contributions

·       total net investment loss.

If you pass the income requirement, you must also meet one of the business tests, unless you are covered by an exception to the rules or we exercise our discretion to allow you to offset your loss against other income.

Business tests

If you meet the income requirement, you can offset a loss from a business against your income from other sources if the business passes one of these tests:

·       The assessable income test - the business has assessable income of at least $20,000.

·       The profits test - the business had a profit for tax purposes in three out of the past five years (including the current year).

·       The real property test - the value of real property, or of an interest in real property, that you used in the business on a continuing basis was at least $500,000.

·       The other assets test - the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000.

Exceptions for artists, primary producers and tax break deductions

There are exceptions to the non-commercial loss rules for primary producers and professional arts businesses. If an exception applies, you can offset a business loss against other income even if you don't meet the usual requirements.

If you don't meet the income requirement

If you don't meet the income requirement, you can apply for a Commissioner's discretion to allow you to offset your loss if:

·       special circumstances occurred that were outside your control, or

·       due to the nature of the activity, there is

¾      a lead time before the business will make a tax profit

¾      an objective expectation, based on independent evidence, that it will make a profit in a time that is considered commercially viable for that industry.

Application of the law to your facts

In your case, whether or not you are in business is a critical fact that will determine:

·       whether your gains and losses from your CFD trading are assessed under Section 6-5 and 8-1 of the ITAA 1997 or in the alternative under Section 15-15 and 25-40 of the ITAA 97

·       whether the non-commercial loss legislation applies to you.

As stated earlier the determination of whether or not an activity amounts to a business being carried on is a matter of fact, not of law. The determination is a result of the weight and influence of the facts in that situation.

As stated above, the bar for CFD trading is quite high.

The facts of your particular situation are applied to the relevant indicators as listed in TR 97/11 below:

Whether the activity has a significant commercial purpose or character

The trading of CFD's occurs without ownership of the underlying asset being traded.

As such the trading of CFD's is an inherently commercial activity.

In your case you completed several hundred closed out transactions during the period from late in 2019 to 30 June 2020, however you advise that the reason for the high number of trades was due to you tending to place smaller trades along with the fact that some of the trades were for testing purposes only.

Considering the short-term nature of the activity along with the reasons you mention above for the number of transactions undertaken, this amount of transactions in the period you have been trading is not indicative of a commercial purpose and character, and does not represent a significant level of commercial activity.

In addition, you had full-time employment, which meant that the time you spent on the trading of CFD's was limited as a result. In addition you only spent less than 10 hours per week in total on the CFD trading activity including market research and trading strategies.

Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

Whilst you did not have a business plan, it is clear that your goal is to generate income from your CFD trading. This is considered to indicate that you have a profit purpose.

The trading of CFD's is an activity that does have a potential for profit, and most of your trades did generate a profit over the period you have been trading.

Whether there is a repetition and regularity of the activity

As stated above you have completed several hundred CFD transactions in the abovementioned period.

This would indicate that there is repetition and regularity, however this is not considered to be a level of activity that is indicative of a business of this type being carried on.

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.

Despite you investing a significant amount of funds into the activity, you did not complete a business plan and despite you taking steps towards increasing your knowledge of CFD's, your level of knowledge and preparation is limited and not as sophisticated as that of a person who would be in the business of trading CFD's.

In addition, you had outside full-time employment.

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

You have not advised that you set any budgets while trading CFD's. Whilst you have undertaken your own research, and you have adopted a trading strategy, overall, we do not consider that your CFD trading is conducted in the same organised and businesslike manner as that of a of a business of this type being carried on.

The size, scale and permanency of the activity

As there is no ownership of the underlying asset when trading CFD's the size of your profit and loss can help to determine the size and scale of your trading activities.

In your case your net trading position to date for the income year ended 30 June 2020 is an overall moderate loss. In addition, you advise that the reason for the high number of trades was due to you tending to place smaller trades along with the fact that some of the trades were for testing purposes only.

The size of your CFD trading activities are not substantial, and as stated above the quantity of CFD trades made are not considered to be at a commercial level.

It is then considered that your operations do not have the scale that would indicate that you are carrying on a business of CFD trading.

Conclusion

The balance of the above factors show that you were not carrying on a business of trading in CFD's during the income year ended 30 June 2020. As such, and following the principles set out in TR 2005/15, the gains you have made from your CFD activities are assessable under section 15-15 of the ITAA 1997, and the losses you have incurred from your CFD activities are deductible under section 25-40 of the ITAA 1997.

As you are not carrying on a business in CFD trading, the non-commercial loss legislation has no application in relation to your circumstances.

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