Edited version of your written advice

Authorisation Number: 1012876160417

Date of advice: 11 September 2015

Ruling

Subject: CFDs

Question 1

Are you carrying on a business in contracts for differences (CFD)?

Answer

No.

Question 2

Is the income from your CFD activities included in your assessable income under section 15-15 of the Income Tax Assessment Act 1997 (ITAA 197)?

Answer

Yes.

Question 3

Are you entitled to a deduction for losses you incur from your CFD activities under section 25-40 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

Your intention for the 20XX-YY financial year was to commence indefinite and continuous frequent systematic trading for the purpose of profit making.

You have several years experience in your field of work.

You are currently employed full time.

You commenced CFD activities in 2014 and did several transactions in the 20XX-YY financial year.

You spend approximately X hours per week for research, adaption and recalibration of trading methods dependent on volatility. You use various electronic resources for your research and development. You spend approximately XX hours per week in total for both trading and research activities.

You put in $xxx capital for CFD trading.

In periods were there was little volatility on the index, trading was made up in shares and continuous research for further opportunities.

You have provided your trading statement showing all your trades for the 20XX-YY 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.

Reasons for decision

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences deals with the tax consequences of financial CFDs. 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.

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 Income tax: am I carrying on a business of primary production? 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 CFDs 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, and/or

• the basis of decisions as to when to hold or to sell CFDs.

In your case, you have a business plan and aim to make a profit from trading in CFDs. You will use information from various resources to help you in your investment decisions. Your trading in CFDs supplements your income from your full time employment.

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. Due to periods of low volatility, your CFD transactions were limited in some months. You spent approximately XX hours per week on 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 CFDs 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 and other relevant details. You have relevant qualifications and experience.

Volume of trading

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

You entered into approximately xxx contracts during the 20XX-YY financial year. 

Amount of capital injected

Your CFD investment was $xxx. Additional funds are available. 

Conclusion

After weighing up the factors outlined above, it is considered that you are not carrying on a business of CFD trading. Although you use various sources of information to help you with your CFD decisions and keep adequate records, you have not had regular CFD activities throughout the year. 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.