Edited version of private advice

Authorisation Number: 1052154095364

Date of advice: 15 August 2023

Ruling

Subject: Income tax- contracts for differences trading

Question 1

Are you carrying on a business in respect of your contract for difference trading activities, with gains assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income derived from carrying on a business and losses deductible under the second positive limb of section 8-1 of the ITAA 1997 as amounts necessarily incurred in carrying on a business?

Answer

No.

Question 2

If the answer to question 1 is no, were the contract for difference trading activities isolated transactions imbued with a commercial purpose such that the gains are assessable under section 6-5 of the ITAA 1997 and losses deductible under section 8-1 of the ITAA 1997?

Answer

No.

Question 3

If the answers to questions 1 and 2 are no, did you carry out a profit making undertaking or plan in relation to your contract for difference trading activities with gains assessable under section 15-15 of the ITAA 1997 and losses deductible under section 25-40 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 2021

Income year ending 30 June 2022

The scheme commences on:

1 July 2020

Relevant facts and circumstances

1. You are a medical professional consultant.
2. On average you are rostered on for approximately 76 hours each week, including weekends.
3. You are a Board Member of a Society and was the president for the years ending 30 June 2021 and 30 June 2022. The Society is a charity administering training and professional standards for all medical professional consultants in in Australia and another country. You spend approximately 5 to 10 hours per week in fulfilling your duties for this Society.
4. In the relevant years you would typically perform the trading activity late at night. On the days where you spent time on your trading activity, you spent approximately 1 hour per day with trades left "to run".
5. During the year ended 30 June 2021, the number of trades averaged XX trades per week. However, there were days where you did not carry out any trading activity. For example, you did not trade between March 2021 and 30 June 2021.
6. During the year ended 30 June 2022, you averaged less than one trade per day. The trades were sporadic, with a number of periods where no trades occurred at all.
7. Your understanding of trading and the actual trades completed were based on information gained from watching online videos, reading content posted on an online forum or from reading charts.
8. You have no formal qualifications in trading or any other financial instruments and have no professional financial background.
9. You had no trading plan.
10. In terms of amounts invested, you initially invested approximately $XX with additional deposits of $XX as needed. Larger transfers were made to cover margin calls as required.
11. You utilised a trading platform for the trading activity. You did not receive advice from the trading platform or any other professional advisor.
12. You did have stop loss amounts but these sometimes moved as the trade went against you. Also, the trading platform sometimes closed its positions completely if there were no funds.
13. You do not trade in shares or other financial instruments. You hold a share portfolio with a small number of shares that are held for the purpose of long form investment. Transactions in relation to this share portfolio are quite rare.
14. The trading activity was funded from the income you derived from your professional occupation.
15. You do not have any business premises from which you conduct your trading activity, nor do you have a separate area within your home that is used solely to conduct your trades.
16. There was no margin loan. There were margin calls which represent the requirement to have funds in the account when the position moves against the direction of the trade.
17. There has been no third party involvement in any of the trades. No third-party closed off the trades on your behalf.
18. Two accounts were used for the trading activity. You obtained both profits and losses over the two year period.

Relevant legislative provisions

Subsection 6-1(1) of the Income Tax Assessment Act 1997

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 15-15 of the Income Tax Assessment Act 1997

Section 25-40 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Are you carrying on a business in respect of your contract for difference trading activity, with gains assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income derived from carrying on a business and losses deductible under the second positive limb of section 8-1 of the ITAA 1997 as amounts necessarily incurred in carrying on a business?

Summary

Based on your circumstances, you are not considered to be carrying on a business in relation to your contract for difference trading activities in the 2021 and 2022 income years and consequently the gains or losses are neither assessable income under section 6-5 of the ITAA 1997 nor deductible under section 8-1of the ITAA 1997.

Detailed reasoning

Where a taxpayer enters into a contract for difference in the ordinary course of carrying on a business, any profits will be brought to account as assessable income under section 6-5 of the ITAA 1997. Conversely, any losses will be deductible under section 8-1 of the ITAA 1997.

Taxation Ruling 2005/15 Income tax: tax consequences of financial contracts for differences (TR 2005/15) provides that the question of whether a business is carried on will be a question of fact to be determined in light of all of the surrounding circumstances. In particular, TR 2005/15 refers to paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) which sets out the following general indicators of when a business is 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; and
• whether the activity is better described as a hobby, a form of recreation or a sporting activity.

No one indicator is decisive (Evans v. FC of T 89 ATC 4540 (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way (TR 97/11 paragraph 15).

The following table draws upon paragraph 18 of TR 97/11 and sets out the main factors that indicate a business is being carried on along with how each is considered to apply in your circumstances:

Table 1: Main factors to indicate a business is being carried on along with how each is considered to apply in your circumstances:

Whilst no single factor is necessarily determinative, in weighing up all factors in this case, you are not considered to be carrying on a business in relation to your contract for difference trading activities in the 2021 and 2022 income years.

Question 2

If the answer to question 1 is no, were the contract for difference trading activities isolated transactions imbued with a commercial purpose such that gains are assessable under section 6-5 of the ITAA 1997 and losses deductible under section 8-1 of the ITAA 1997?

Summary

Your contract for difference trading activities are not considered to be isolated commercial transactions of which any gain or loss is to be brought to account under sections 6-5 and 8-1 of the ITAA 1997 respectively.

Detailed reasoning

Subsection 6-5(1) of the ITAA 1997 states that assessable income includes income according to ordinary concepts, which is called ordinary income. Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business.

As set out in Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3), and relying on FCT v The Myer Emporium Ltd (1987) 163 CLR 199 (Myer), profit from an isolated transaction is generally income when:

a)    the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

b)    the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

a)    the nature of the entity undertaking the operation or transaction;

b)    the nature and scale of other activities undertaken by the taxpayer;

c)    the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d)    the nature, scale and complexity of the operation or transaction;

e)    the manner in which the operation or transaction was entered into or carried out;

f)     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g)    if the transaction involves the acquisition and disposal of property, the nature of that property; and

h)    the timing of the various transaction or the various steps in the transaction.

As concluded in Question 1, you are not considered to be carrying on a business in relation to your contract for difference trading activities in the 2021 and 2022 income years.

Application to your circumstances

Your contract for difference trading activities do not represent isolated transactions connected with the carrying on of any business. Further, the context, regularity, size and scale of the trades do not allow a conclusion to be reached that they are isolated transactions imbued with any commercial purpose. Therefore, any gain or loss cannot be brought to account under sections 6-5 and 8-1 of the ITAA 1997 respectively.

Question 3

If the answers to questions 1 and 2 are no, did you carry out a profit making undertaking or plan in relation to your contract for difference trading activities with gains assessable under section 15-15 of the ITAA 1997 and losses deductible under section 25-40 of the ITAA 1997?

Summary

You carried out a profit making undertaking or plan in relation to your contract for difference trading activities with the gains assessable under section 15-15 of the ITAA 1997 and the losses deductible under section 25-40 of the ITAA 1997.

Detailed reasoning

A gain from financial contract for difference trading will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into the financial contract for difference trade in carrying on or carrying out a profit-making undertaking or plan that is not otherwise assessable under section 6-5 of the ITAA 1997.

A loss from financial contract for difference trading will be an allowable deduction pursuant to section 25-40 of the ITAA 1997 where the gain would have been assessable under section 15-15 of the ITAA 1997.

Subsection 15-15(1) of the ITAA 1997 states that assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan.

Subsection 15-15(2) of the ITAA 1997 states that the section does not apply to a profit that:

(a) is assessable as ordinary income under section 6-5 of the ITAA 1997; or

(b) arises in respect of the sale of property acquired on or after 20 September 1985.

TR 2005/15 observes that a financial contract for difference cannot be assigned and confirms that a profit from a trade can satisfy the testing in section 15-15 of the ITAA 1997.

Paragraph 41 of TR 2005/15 provides that a financial contract for difference trade could be entered into with either a profit making purpose or a recreational purpose, so that the gain or loss is either on revenue account or properly characterised as the pursuit of a recreational activity or pastime. Further, it is stated it is "exceedingly unlikely" that a financial contract for difference trade would be entered into for any other purpose.

Paragraphs 44 and 45 of TR 2005/15 explain when a contract for difference trade might be considered a recreational activity or pastime.

Application to your circumstances

In your case, as discussed in addressing questions 1 and 2, you are not considered to be carrying on a business and the contract for difference trading activities are not isolated commercial transactions imbued with a commercial purpose. However, as explained in TR 2005/15 a taxpayer's contract for difference trading activity may come within section 15-15 and in the present case:

•         we do not consider your trading activities are undertaken as a recreational pursuit or pastime; and

•         you had a profit-making purpose in relation to your trading activities.

For these reasons your gains from your contract for difference trading activities are assessable under section 15-15 of the ITAA 1997 and your losses deductible under section 25-40 of the ITAA 1997.

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