Edited version of private advice

Authorisation Number: 1052159589356

Date of advice: 25 August 2023

Ruling

Subject: Commissioner's discretion - non-commercial loss

Question

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your Contracts for Differences (CFDs) trading activity in your calculation of taxable income for the 2021-22 financial year?

Answer

No.

This ruling applies for the following period:

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You do not satisfy the under $250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

You will not be able to carry forward the loss in future financial years as you will not meet the income test.

You commenced trading Contracts for Differences (CFDs) on a specified date.

Your last trade was on a specified date (in the same month that you commenced trading), and you ceased trading due to the volatility of the market.

You completed a specified number of trades over a specified period of days.

You invested a specified amount as capital in the trading activity. The capital was from savings from the sale of your stake in a business and also a parcel of land.

You had a loss and provided a figure for this loss.

You also trade cryptocurrency assets that are accounted for on a capital basis.

You commenced CFD trading as you have experience with trading in different financial markets and you saw an opportunity in cryptocurrency. Additionally, you sold your stake in a business and saw the activity as a flexible source of income.

You provided details on the specific CFDs you trade. These trades enabled you to make a profit on both rising and falling markets.

You have history of investing in stocks and shares overseas and continue to invest with specified trading accounts. You provided details on what you invest in.

You have completed online trading courses and spent numerous hours reading and researching trading books.

You have a mentor that has experience in trading CFDs that you converse with a specified number of times a week. You provided details on the topics you would discuss.

Your provided details on your trading strategy.

You follow cryptocurrency specialists on social media platforms such as YouTube and Twitter.

You used a trading simulator available on a specified platform to practice trading without using personal capital.

You used a specified charting software to operate trading algorithms and test them prior to implementing them.

The time spent trading and researching varied dependant on the volume and volatility of the market, however you traded a specified number of days a week. You often traded a specified number of hours a day. Majority of your research was done in the morning of weekdays while the markets were quieter.

Your record keeping was kept on a specified platform which is a self-monitoring system that shows transactions, gains/loss, and remaining capital.

You had another business that required a specified number of hours per week involvement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 35-35

Income Tax Assessment Act 1997 section 35-40

Income Tax Assessment Act 1997 section 35-45

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Income Tax Assessment Act 1997 paragraph 35-55(1)(c)

Reasons for Decision

Am I In Business?

For the purposes of considering the discretion in subsection 35-55(1) of the ITAA 1997 it is a requirement that Division 35 applies in the first place. Subsection 35-5(2) of the ITAA 1997 specifies that Division 35 is not intended to apply to activities that do not amount to carrying on a business.

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.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer is carrying on a business:

•                     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.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole.

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.

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need 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.

The low level of transactions that you have completed during the financial year indicates that your trading activity lacks a commercial purpose.

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

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

Purpose and prospect of profit

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business trading in CFDs exists, there is usually a business plan on how the activities will be conducted.

Based on the information provided you had a net loss and did not make a profit from your trading activity in the relevant financial year.

You did, however, attempt to implement basic trading strategies, supplied a capital investment to initiate trading, and educated yourself further on cryptocurrency in an attempt to increase profit. This displays a purpose as well as prospect of generating profit from the trading activity.

Whether there is repetition and regularity of the activity

In the case of CFD trading, repetition and regularity are important indicators on whether a business is being carried on, with the size and scale of the activity being supporting factors.

Your trading activity was conducted over a specified period, with no regularity or repetition to the days traded and quantity of trades completed. You completed a specified number of trades over the relevant financial year. This is not considered to be a high level of transactions and is not in keeping with the sales that would be expected of a person who was in business as a CFD trader.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

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

The following information indicates that you are not carrying out your cryptocurrency trading activities in a similar manner to others in this industry:

•                     Though a business is not necessarily infinite, no further funds were borrowed or attempted to be sourced to maximise any potential gains / returns and to continue the trading activity

•                     Your trade choices were limited and did not have the variety or diversity that would normally be expected of commercial trading operation

Whether the activity is planned, organised, and carried out in a businesslike manner

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as having some form of forward planning to take account of contingencies and market fluctuations setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

You completed research on the market and expected trends, however, your trading strategy and strategy to preserve capital did not display the sophistication that may be expected of a CFD trading business.

The size, scale, and permanency of the activity

CFD trading that is being conducted on a small scale is more likely to be considered investing, however a trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

Although you had a high value of transactions, the number of CFD transactions completed for the financial year has limited the size and scale of the trading activity. There was no permanency of your CFD activity as you only traded for a specified number of days during the financial year.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

Due to the small time in which you were operation and the limited transactions, it can be said you were not operating in a similar manner to that of other businesses in your industry

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

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

Based on the information that has been provided, there has not been repetition and regularity in the trading activities that a person in the business of CFD trading would display. The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on.

It is the view of the Commissioner that you were not carrying on the business of CFD trading during the relevant financial year. You entered into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme.

Division 35 - Commissioner's Discretion

Division 35 of the ITAA 1997 applies to losses from certain business activities. Under the rule in subsection 35-10(2) of the ITAA 1997, a loss made by an individual from a business activity will not be taken into account in an income year unless:

•                     the exception in subsection 35-10(4) of the ITAA 1997 applies,

•                     you satisfy the income requirement in subsection 35-10(2E) of the ITAA 1997 and one of the following four tests:

•                     the assessable test (section 35-30 ITAA 1997)

-        the profits test (section 35-35 ITAA 1997)

-        the real property test (section 35-40 ITAA 1997)

-        the other assets test (section 35-45 ITAA 1997), or

•                     the Commissioner exercises the discretion in section 35-55 of the ITAA 1997.

As you are not considered to be 'carrying on a business' of CFD trading, Division 35 of the ITAA 1997 is not applicable.

Commissioner's discretion

The Commissioner's approach to exercising the discretion under subsection 35-55(1) of the ITAA 1997 is outlined in Taxation Ruling TR 2007/6 Income Tax: non-commercial losses: Commissioner's discretion (TR 2007/6).

The following paragraphs have been extracted from TR 2007/6:

47. In the context of Division 35, where the income requirement is satisfied, special circumstances are ordinarily those affecting the business activity such that it is unable to satisfy a test and it would be unreasonable for the loss deferral rule to apply. Subject to paragraphs 48 and 53 of this Ruling, ordinary economic, weather or market fluctuations that might reasonably be predicted to affect the business activity would not be considered to be special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry. (Refer to Example 1 at paragraph 110 of this Ruling). However, substantial unexpected fluctuations of a scale not regularly encountered previously may qualify on a case by case basis.

A volatile market and the associated fluctuations are expected to occur on a regular or recurrent basis when carrying on a trading business. Ordinary economic and market fluctuations are not regarded as special circumstances under paragraph 35-55(1)(a) of the ITAA 1997, therefore, had you been viewed as 'carrying on a business' of CFD trading, the Commissioner would not exercise his discretion under this circumstance.

Tax Treatment of CFDs

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.

Conclusion

In weighing up the relevant factors it is considered that you were not carrying on a business in CFD trading in the relevant income year. You entered a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme.

Accordingly, as Division 35 of the ITAA is not applicable in this case, the Commissioner will not exercise the discretion in subsection 35-55(1) of the ITAA 1997 to allow you to include losses from this activity to offset other assessable income in the calculation of your taxable income for the relevant financial year.

Where you have traded in CFD's, any gains will be assessable under section 15-15 of the ITAA 1997, and any losses deductible under section 25-40 of the ITAA 1997.

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