Edited version of private advice

Authorisation Number: 1051763255844

Date of advice: 12 October 2020

Ruling

Subject: Business deductions

Question

Are the gains or losses made from your 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

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

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have been trading in Contracts for Difference's (CFD's) during the 20XX financial year.

You undertook your CFD trading activities alongside your regular full-time employment.

You invested $XXXX at the start of the income year with a net loss of -$YYYY.

Your CFD trading activities are completed on-line.

The underlying motive of all the above-mentioned trading was to make a profit.

During the financial year you completed XXX trades that were profitable with an overall profit of $XXX.

During the financial year you completed YYY trades that were not profitable with an overall loss of -$YYY.

You spend 2 to 3 hours per day trading CFD's and researching your trades.

You do not have a formal business plan as your trading is primarily short-term or intraday focused, using purely technical analysis to make trades.

You have established a dedicated work area which is used exclusively for your trading. You use a laptop and a mobile phone in your trading activities.

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 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 1997.

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. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from CFD contracts being assessed or under the capital gains tax provisions.

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, considering the weight and influence of the facts within the context of that 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 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.

Application of the law to your facts

In your case, whether 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 1997.

As stated earlier the determination of whether 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.

The facts of your 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 XXX transactions during the financial year.

However, considering the short-term nature of the activity, this amount of transactions in a 12-month period 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.

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

Whilst you did not have a formal business plan, 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 you did generate a profit over the 12-month period.

Whether there is a repetition and regularity of the activity

As stated above you have completed ZZZ CFD transactions in a 12-month 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 formal detailed business plan and you have not outlined any trading methodology. Despite you taking significant 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 which was unrelated to finance in general.

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 or utilised any methods to minimise your risks while trading CFD's. Whilst you have undertaken your own research, there are no planned-out goals or trading methodology. As such your CFD trading is not conducted in an organised and businesslike manner.

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.

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

It is considered that the balance of the above factors indicate that you were not carrying on a business of trading in CFD's during the 20XX financial year.

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 any losses you have incurred from your CFD activities are deductible under section 25-40 of the ITAA 1997.

Occupancy expenses

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 93/30 outlines the factors that indicate whether or not a home office has the character of a 'place of business'. This is likely to be the case where part of a residence is set aside exclusively for the carrying on of a business by a self-employed person, such as a doctor or dentist with a surgery or consulting rooms at home or a tradesperson with a workshop at home. Another example is where part of the home is used exclusively as the sole base of operation for an employee and no other work location is provided by the employer.

The following factors may indicate whether or not the area set aside has the character of a 'place of business':

·         The area is clearly identifiable as a place of business

·         The area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;

·         The area is used exclusively or almost exclusively for carrying on a business; or

·         The area is used regularly for visits of clients or customers.

Taxpayers who maintain an office or study in their homes where they can do income-producing work, but which does not constitute a place of business cannot claim deductions for occupancy expenses, such as mortgage interest, rates, rent, insurance or repairs referable to their home office. However, they can claim a deduction for additional running costs.

In your case you are not carrying on a business of CFD trading as determined above. As you are not in business you are unable to claim occupancy expenses as a deduction.

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