Edited version of private advice

Authorisation Number: 1051933600135

Date of advice: 22 December 2021

Ruling

Subject: Contracts for difference trading losses

Question 1

Are the gains or losses made from your Contracts for Difference (CFD) trading considered as profits or losses made from an undertaking or scheme?

Answer

Yes.

Question 2

Are the gains or losses made from your CFD trading considered profits or losses made from carrying on a business of CFD trading?

Answer

No.

Question 3

Are the losses made from your CFD trading subject to non-commercial loss provisions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

XX August 20XX

Relevant facts and circumstances

You commenced trading in CFD in the year ended 30 June 20XX, for approximately 3 months of the financial year.

You undertook your CFD trading activities alongside your regular full-time employment as a warehouse manager, where you worked 38 hours a week.

Your CFD trading was done outside your employment hours, generally late in the evening, early in the morning and on the weekends.

In addition to your full-time employment and your CFD trading activities you also worked as a ride share driver on an adhoc basis.

You invested your own funds into the activity during the 2020-21 financial year.

Your CFD trading activities are completed via an on-line platform, Plus500, where you undertook the trades yourself with the assistance of a professional investor.

You had never previously invested in CFD.

The only steps that you have taken towards entering CFD trading was:

•         Researching for 4 months prior to placing your first CFD trade;

•         You used the book "Candle Stick Bible" to assist you with your CFD trading activities;

•         Training was completed via website www.tradingview.com

Your CFD trades were placed conducting the following steps:

•         You checked the news release on www.dailyfx.com regarding the stock market;

•         You and your professional investor would draft the graph on the Plus500 app and on the trading view webpages based on 1 hour, 4 hours and 1 day trends to invest;

•         You would either hold the market for short term (15 minutes) to turn over a profit or hold it longer term (up to 30 days) it the market is volatile and if a profit can be made;

You spent approximately 28 hours each week trading CFDs along with formulating trading strategies and studying stock chart patterns.

You did not produce a formal business plan and you relied on advice from professional investors with the goal of making profitable trades.

However, the underlying motive of all of the abovementioned actions was to make a profit or gain.

Your income from other sources did not exceed $250,000 during the income year ended 30 June 2021.

The reason you ceased trading in CFDs was because:

•         You could not afford the loss anymore;

•         Due to COVID-19 the CFD market became unpredictable, and the market crashed.

You attempted to main your capital and limit your losses by checking the market trend based on graphs and updated news. If the graph was against your favour and the percentage of losses was higher than you could manage then your only option was to sell it before you faced significant higher losses. You could estimate it directly via the trading view graph.

You opened a CFD trading account with Plus500 with the intention of investing in CFD's to make a profit. The trades were primarily carried out on separate days for part of the financial year and were for varying amounts, with majority of the days being consecutive.

During the trading period you deposited a specified amount into the Plus500 account.

You conducted a number of trades of CFD's with some being profitable, but more incurring losses.

The net loss over this period was a specified amount.

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 1997Section 25-40

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997Section 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.

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' 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 out 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 profit 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 art businesses. If an exception applies, you can offset a business loss again 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 all you to offset your loss if:

•         special circumstances occurred that were outside your control, or

•         due to the nature of the activity, there is:

•         a lead time before the business will make a profit

•         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 1997

•         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 facts, 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 1,150 transactions during a 3 month period.

Whether there is repetition and regularity of the activity

As you have a significant number of CFD transactions during your trading period of approximately 3 months, 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 an average of 12 trades per day.

Considering the short-term nature of the activity, 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.

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 a profit, and a number of yours 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 a significant number of 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 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 your investing a significant amount of funds into the activity, you did not complete a business plan and you did not have a plan in place on how you would preserve your capital and limit your losses.

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 did not set anything in place to minimise your losses while trading CFD's and how you would preserve your capital. 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.

In your case your net trading position to date for the income year ended 30 June 2021 is a moderate loss. In addition, your CFD transactions were largely small net values (for example under $50).

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 2021. 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-commerical loss legislation has not application in relation to your circumstances.

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