Edited version of private advice

Authorisation Number: 1051821320468

Date of advice: 1 April 2021

Ruling

Subject: CFD trading - gains and losses

Question 1

Are the gains made from your CFD trading assessed under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and treated as profits made from carrying on a business of CFD trading?

Answer

No

Question 2

Are the losses incurred from your CFD trading treated as losses made from carrying on a business of CFD trading and are the losses deductible under section 8-1 of the ITAA 1997?

Answer

No

Question 3

Are the gains made from your CFD trading assessed under section 15-15 of the ITAA 1997, and treated as profits made from an undertaking or scheme?

Answer

Yes

Question 4

Are the losses made from your CFD trading deductible under section 25-40 of the ITAA 1997, and treated as losses made from an undertaking or scheme?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20VV

Relevant facts and circumstances

You commenced trading in CFD's in the year ended 30 June 20AA.

You undertook your share trading activities outside of your regular full-time employment that is unrelated to the finance industry.

You invested a significant amount of your own funds into the activity over the year ended 30 June 20XX.

Your trading activities are completed online.

Your qualifications, skills and training relevant to buying and selling shares have been as a result of:

•         Partial completion of a Bachelor of Finance/Economics

•         Taking an on-line course.

You have numerous subscriptions relevant to buying and selling shares that have provided you with information in relation to your CFD trading.

You trade a consistent mechanical system that you designed yourself as part of your business strategy.

You have a regular trading pattern that coincides with the opening and closing of various markets.

You spend on average MM hours per week on your share trading activity.

Your average holding period is one day and a single holding is never held over ten days. You had a total trading volume of over $XXX with an average trade position of $YYY for the year ended 30 June 20ZZ.

You trade a handful of assets and buy and sell on a regular basis.

You have an online broker that provides you with daily profit and loss records.

You have set up a home office exclusively to conduct share trading activities online.

Your income from other sources did not exceed $XXX during the income year ended 30 June 20XX.

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 35

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 995-1

Reasons for Decisions

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15) outlines the taxation treatment of CFD's.

TR 2005/15 states:

A gain from a financial contract for differences will be assessable income under section 6-5 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 where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

A loss from a financial contract for differences will be an allowable deduction under section 8-1 of the 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.

A gain from a financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme, and the gain from it is not assessable under section 6-5 of the ITAA 1997.

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.

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, 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 CFR trading is quite high and the most significant factors are usually the volume of trading and conducting operations in a businesslike manner.

The bar for CFD trading is quite high and the most significant factors are usually the volume of trading and conducting operations in a businesslike manner.

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:

•         gains from your CFD trading are assessed under section 6-5 of the ITAA 1997 and are treated as profits from carrying on a business of CFD trading

•         Losses incurred from your CFD trading are treated as losses in carrying on of a business of CFD trading and the losses are deductable under section 8-1 of the ITAA 1997

•         Gains made from your CFD trading are assessable under section 15-15of the ITAA 1997 and treated as profits made from an undertaking or scheme.

•         Losses incurred from your CFD trading are deductable under section25-40 of the ITAA 1997.

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 occur without ownership of the underlying asset being traded. As such the trading of CFD's are inherently a commercial activity.

In your case you completed AAA CFD transactions during the period 1 July 20XX and 30 June 20XX.

However, considering the short-term nature of the activity, this amount of transactions in a twelve-month period is not indicative of a commercial purpose and character and does not represent a significant level of commercial activity.

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

You have not specifically indicated that you have a business plan. The trading strategic brief while not specifically a business plan does show you have a trading strategy to your activity. It is clear that your goal is to generate income from your CFD trading. This is considered to indicate that you have a profit-making purpose.

The trading of CFD's is an activity that does have a potential for profit.

In the year ended 30 June 20XX, AAA of your trades generated a profit that returned an amount of $ZZZ

Whether there is repetition and regularity of the activity

As you have a significant number of closed out CFD transactions in a twelve-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 type being carried on being on average less than 1 trade per day.

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

You invested your own funds into your trading activity and limited your trading to the foreign currency markets, gold and indices.

Your strategic brief outlines your protection cut off, risk and trade value limits conducive of a trading methodology.

Your level of trading and limiting your trading to foreign currency markets, gold and indices is not as substantial as that of a person who would be in the business of trading these and other 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 business-like manner such that it is directed at making a profit.

You set a budget to minimise your risks while trading CFD's. You do not risk more than C-D% of your funds when trading. Your strategic brief for the 20XX-20YY period shows a protection cut off of AA% and a risk to value per trade of B%.

While this explains your CFD trading strategy, it does not reflect a business plan that has some form of forward planning to take account of contingencies and market fluctuations, retaining and pursuing profitable activities and discontinuing unprofitable activities.

Overall it is not considered that your CFD trading activities are carried out in a manner that supports that a business of CFD trading is 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 for the income year ended 30 June 20XX was a moderate loss. Your settlement amounts were generally below $YYY. 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 therefore 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 income year ending 30 June 20XX.

As such, 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.

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