Edited version of your written advice

Authorisation Number: 1012858466643

Date of advice: 12 August 2015

Ruling

Subject: Trading contract for differences activity

Question 1

For the year ended 30 June 20XX, were you carrying on a business of trading in contracts for differences (CFDs)?

Answer

Yes.

Question 2

Do the non-commercial loss (NCL) rules operate to prevent you from claiming the loss from your CFD trading activity?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 2014

Relevant facts and circumstances

You commenced trading in CFDs.

You ceased trading shortly after due to incurring a large loss for the majority of your capital.

During the period, you made X transactions spending an average of Y hours per day including weekends researching and monitoring your CFD activities.

You used two main strategies for trading and all transactions were made through your online broker/dealer. These are short term strategies with most transactions lasting less than one day.

You commenced trading with the intention of making a continuing profit.

Gains from the profitable trades exceeded $20,000.

For the year ended 30 June 20XX, you meet the income requirement because the total of the following amounts is less than $250,000:

• taxable income excluding the share trading losses

• total reportable fringe benefits

• reportable superannuation contributions

• total net investment losses.

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 35-10

Income Tax Assessment Act 1997 Section 35-55

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Taxation Ruling TR 2005/15 deals with the tax consequences of financial CFDs. It states that gains from CFDs are assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the transactions are an ordinary incident of carrying on a business, or where they are part of a business operation or commercial transaction entered into for the purpose of profit making.

Gains are assessable under section 15-15 of the ITAA 1997 where they are part of carrying on or carrying out a profit making undertaking, or scheme and the gain is not assessable under section 6-5 of the ITAA 1997.

Losses from CFDs are deductible under section 8-1 of the ITAA 1997 where the transaction is an ordinary incident of carrying on a business, or where they are part of a business operation or commercial transaction entered for the purpose of profit making.

Losses are deductible under section 25-40 of the ITAA 1997 if a gain would have been assessable under section 15-15 of the ITAA 1997.

Carrying on a business

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

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine if you are in business for tax purposes.

Taxation Ruling TR 97/11 provides the Commissioner's view of factors used to determine if you are in business for tax purposes.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

• whether the activity has a significant commercial purpose or character

• whether the taxpayer has more than just an intention to engage in business

• whether there is regularity and repetition of the activity

• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

• whether the activity is planned, organised and carried out in a businesslike manner such that it is described as 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. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

In your case, you traded in CFDs to produce an ongoing profit. You invested a significant amount of capital in the activity. Whilst the activity lasted a short time, you traded frequently and spent a significant amount of your time researching and monitoring your transactions. You maintained records of your CFD transactions. After weighing up the above factors, the Commissioner considers you were carrying on a business of CFD trading during the period you were engaged in this activity.

Therefore, the income from the CFD trading activity is assessable under section 6-5 of the ITAA 1997. The losses related to the activity are allowable as deductions under section 8-1 of the ITAA 1997.

Non-commercial loss (NCL) rules

Division 35 of the ITAA 1997 will apply to defer a non-commercial business loss from a business activity carried by you, as an individual, unless:

• you satisfy the income requirement and the business activity passes one of the four tests listed in section 35-10 of the ITAA 1997

• the Commissioner exercises the discretion in section 35-55 of the ITAA 1997 for the activity, or

• you come within the exceptions contained in subsection 35-10(4) of the ITAA 1997 which may apply to a primary production or professional arts business.

The income requirement prevents you from accessing the four tests where your adjusted taxable income exceeds $250,000 (that is, the sum of your taxable income, reportable fringe benefits, reportable superannuation contributions and total net investment losses but excluding your business losses).

The first of the four tests is the assessable income test. A business passes this test where it produces assessable income of at least $20,000 in the income year.

In your case, your adjusted taxable income is less than $250,000 and the assessable income from your profitable CFD transactions exceeds $20,000.

Therefore the NCL rules will not apply and you are entitled to offset your CFD trading business losses against your other income in the year ended 30 June 20XX.