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Ruling

Subject: non-commercial losses

Questions

Are you carrying on a business in CFD?

Answer: No  

Are you entitled to a deduction for losses incurred from your CFD trading activities?

Answer: Yes.

Will Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to defer losses incurred in your CFD trading activities?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are employed full time.

You commenced CFD trading in the 20XX-XX financial year with the intentions of it being a supplement activity to your main income earning activities.

You have no previous experience with trading CFD or other securities. You commenced trading following on from a weekend course. Whilst you read some trading subscriptions, you have not consulted a financial planner or stock broker for advice. You do not spend a significant amount of time on analysing market reports to determine which trades to place.

You did not develop a business plan.

You devote on average one hour per evening to review how your portfolio is performing, at which point you would consider whether you would place any trades.

Your intention was to use a small amount of capital.

In the 20XX-XX financial year you averaged XX trades per month.

During the 2010-11 financial year trades averaged approximately X per month although there was a large variance between individual months.

You went overseas during the 2010-11 financial year, during which period you did not check your portfolio or trade regularly.

You made a profit in the 20XX-XX financial year and a loss in the 2010-11 financial year.

You adjusted taxable income for non-commercial loss purposes exceeded $25,000 for the 2010-11 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-15.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 25-40

Income Tax Assessment Act 1997 Division 35

Reasons for decision

Taxation Ruling TR 2005/15 deals with the tax consequences of financial CFD.

Paragraph 11 in TR 2005/15 explains that gains from a financial CFD will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making. However, for those taxpayers not engaged in business operations and who have entered into a CFD as a result of carrying on or carrying out a profit-making undertaking or scheme the gains made will be assessable under section 15-15 of the ITAA 1997 (paragraph 13 of TR 2005/15).

Likewise, paragraphs 12 and 14 in TR 2005/15 explains that losses from a financial CFD will be deductible under section 8-1 of the ITAA 1997 if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making. In addition, losses from CFD transactions are deductible under section 25-40 of the ITAA 1997 where the gain would have been assessable under section 15-15 of the ITAA 1997.

Therefore to determine which is the relevant legislation in your case we need to consider whether your CFD activities are regarded as being a business activity.

Business is defined in section 995-1 of the ITAA 1997 to be any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Whether activities undertaken constitute the carrying on of a business is essentially a question of fact. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators.

Paragraph 17 of TR 2005/15 states that to determine if a business is being carried on, matters such as whether the transactions are entered into in a systematic, organised and businesslike way; the repetition or regularity of the transactions; the scale of the transactions; whether the transactions are related to or part of other activities of a businesslike character; the purpose of the taxpayer; the degree of skill employed in how you engage in the transactions.

Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors can be applied to other types of businesses, such as CFD transactions. No individual factor is determinative, but should be weighed up in conjunction with the other factors. These factors are outlined below:

Nature of activity and purpose of profit making

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

A business plan might show, for example:

· an analysis of potential investments

· analysis of the current market value and various segments of the market

· research to show when or where a profit may arise

· the basis of decisions as to when to hold or to sell CFD.

In your case, you commenced trading in CFD to supplement your income from your full time job. Your CFD trading activities included both shares and currencies.

Repetition and regularity of the activities

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

There is no obvious pattern or regularity to your buying and selling CFDs. There were large variances in the number of trades conducted each month. Due to personal reasons, you CFD transactions were limited when overseas during the 2010-11 financial year. You spent on average one hour per day reviewing your CFD activities.

Organisation in a business-like manner and the keeping of records

Generally a business would involve study of trends, analysis of relevant material and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. As per Case X86 90 ATC 621, this means having or operating on a particular plan with the main goal of maximising profits. If records of purchases and sales of CFD were not kept, it would be more difficult for a person to demonstrate that a business was being carried on.

You keep records of your CFD transactions through your share trading facility. You do not have professional CFD qualifications; however, you undertook a weekend course on CFD trading. 

Volume of trading

A higher volume of purchases and sales of CFD is more likely to indicate that a business is being carried on.

Conclusion

After weighing up the factors outlined above, it is considered that you are not carrying on a business of CFD trading. Although you read trading subscriptions and keep adequate records, you do not spend a significant amount of time on analysing market reports and you have not shown that you have a sophisticated business technique. You did not seek financial advice and you spend only one hour per day managing your CFDs. Your injection of capital into your CFDs was not large.

Therefore, as your CFD activities were undertaken more with a view to making a profit, your gains from trading CFDs are assessable under section 15-15 of the ITAA 1997 and losses are deductible under section 25-40 of the ITAA 1997.

Non-commercial losses

The non-commercial losses provisions in Division 35 of the ITAA 1997 will only apply to individuals carrying on a business.

As you are not considered to be carrying on a business the non-commercial loss measures do not apply.