Edited version of private advice

Authorisation Number: 1051892726314

Date of advice: 15 October 2021

Ruling

Subject: Financial contracts for difference 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.

You do not meet the relevant criteria to be considered carrying on a business contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?.

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.

The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences have been applied, which provides the Commissioner's view on the income tax consequences of entering into financial CFDs.

As you are not carrying on a business but rather entered into a financial CFD's as a profit-making undertaking or scheme, the CFD gain will be assessable under section 15-15 of the ITAA 1997.

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 periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 February 20XX

Relevant facts and circumstances

You commenced your trading activities when the global markets plunged deeply and suddenly after undertaking three months of education on CFD trading. The changes in the market prompted you to begin trading with the intention of deriving profits. However, the market volatility caused by COVID-19 resulted in you incurring significant losses in the years ending 30 June 20XX and 30 June 20YY.

You undertook XX-YY hours per week on trading activities, including time spent on weekends for the markets that were open then. Your trading activities were conducted online, where you decided to use a broker, as it offered access to many different markets, and provides good leverage ratios and requires low margin requirements to access such markets.

You invested your own money.

You conducted the trades yourself, relying on your CFD education, and seven different trading training and advisory publications. The first three publications were purely educational, using current markets at the time as the context for patterns-based market analysis. Your trading strategy was founded upon this patterns-based technical analysis.

To minimise the risks associated with your trading activities, you included a stop loss for your shorter duration trading products. You followed the advice from your training, which recommended a specific risk reward ratio and profit target set accordingly. However, many of the trades failed to be profitable. Further, your training product has well defined exit point to set stop loss and incorporate Fibonacci projection as potential profit target. You followed both as guidelines.

You ceased your trading activities in the year ending 30 June 20XX, as you had exhausted most of your pre-determined funds allocated to your trading activities and since you now feel that your skill level was not adequate to make profit from CFD trading.

You completed XXX CFD transactions during the period 1 July 20XX and 30 June 20YY, and YYY CFD transactions during the period 1 July 20YY and 30 June 20ZZ. In the year ended 30 June 20YY, your trades generated a loss of $XX,XXX. Further, in the year ended 30 June 20ZZ, your trades also generated a loss of $YY,YYY.

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 decision

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 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 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 15-15 of the ITAA 1997 and treated as profits made from an undertaking or scheme.

•         Losses incurred from your CFD trading are deductable under section 25-40 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. This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

In your case you completed XXX CFD transactions during the first financial year, and YYY CFD transactions during the second financial year.

The trading of CFD's is an activity that does have a potential for profit. However, in the first financial year, your trades generated a loss of $XX,XXX. Further, in the second financial year, your trades also generated a loss of $YY,YYY.

Despite the short-term nature of the activity, you made a high number of transactions in the twenty-four-month period. It is also accepted that you intended to make profit from the CFD trading. However, as your CFD trading activities were not at any point commercially viable due to the high level of losses sustained, it is not possible to conclude that your trading activities had a significant commercial purpose or character.

Whether the taxpayer has more than an intention to engage in business

You had an intention to engage in your activities and have completed share purchases and sales.

Whether there is repetition and regularity of the activity

In the case of share trading, repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

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. This is considered to be a level of activity that is indicative of a business being carried on being on average more than 1 trade per day.

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 both income years was a significant loss. Your settlement amounts varied significantly between $X and $Y,YYY. The size of your CFD trading activities were not always substantial, and as stated above you conducted a high quantity of CFD trades.

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

Activities are more likely to be part of carrying on a business when they are carried on in a similar manner to other businesses in the industry.

Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be:

•         mitigation of risk through short holding periods and strict adherence to taking gains at a certain level and cutting losses at a certain level,

•         a high turnover of shares,

•         a share trading strategy in place,

•         substantial levels of repetition and regularity of share sales,

•         high value of share transactions to take advantage of small movements in price.

In your case, you had a low turnover of shares, there was only a limited share trading strategy, no share trading business plan in place and the value of the shares traded varied significantly. These factors outweigh the high level of repetition and regularity of share sales.

From this information it indicates that you are not carrying out your activities in a similar manner to others in this industry.

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 reached this limit during the second financial year. You also included a stop loss for your shorter duration trading products and followed a risk reward ratio of and profit target set accordingly per the education you received.

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.

Whether the activity would be better described as a hobby, recreational or sporting activity

Your share transactions would not be better described as a hobby, recreational, or sporting activity. They are considered investment income.

Conclusion

In weighing up of the relevant factors 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 both income years.

However, following the principles set out in TR 2005/15, the gains you have made from your CFD activities are considered a profit-making undertaking and 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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