Edited version of your written advice

Authorisation Number: 1051424570124

Date of advice: 11 October 2018

Ruling

Subject: Deductions under section 8-1 of the Income Tax Assessment Act 1997

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses you have incurred in relation to your trading in contract for difference (CFD) activities?

Answer

Yes

Question 2

Are you entitled to a deduction under section 8-1 of the ITAA 1997 for your interest expenses in relation to your CFD activities?

Answer

Yes

Question 3

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses you have incurred in relation to your trading in Australian stocks and shares?

Answer

Yes

Question 4

Are you entitled to a deduction under section 8-1 of the ITAA 1997 for your interest expenses in relation to your trading in Australian stocks and shares?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You began trading CFDs and Australian stocks during the 20XX-XX financial year.

For the preceding two tax years, you practiced on demonstration accounts, researched the market system and attended web based seminars. You also read training resources on plotting charts, reading charts and trend analysis.

You developed a plan which involved several steps.

You used three platforms for your trading activities.

You traded for XX months until you reached your investment cap.

Profit making was your sole intent. It was your intention to supplement your income to such a point where it would replace your other income.

You estimate that you spent at least X hours per day (including weekends) engaged in in some aspect of trading.

Over the financial year, you completed CFD trades and Australian share/stock trades, which included some same day trades.

You incurred an overall loss.

You have kept accounts, spreadsheets and statements. You have a home desk set up which you use to study law and trade. You also have a laptop, tablet and smart phone which you use to trade on the move.

You invested $XXXXX in your CFD and share trading activities. You have withdrawn $XX,XXX from the activity.

You have loans totalling $XX,XXX which have been used for your activities. You have paid $X,XXX in interest towards loans for the purposes of trading.

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 995-1

Reasons for decision

CFD trading

Taxation Ruling TR 2005/15 is about the income tax consequences of entering into financial CFDs. Gains from a financial CFD will be assessable income under section 6-5 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. 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 (paragraphs 11and 13 of TR 2005/15).

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. Losses from CFD transactions are deductible under section 25-40 where the gain would have been assessable under section 15-15 (paragraphs 12 and 14 of TR 2005/15).

Share trading

Generally, there are two possible ways share trading activities may be treated for income tax purposes.

1. Business Income

In this scenario you would be a share trader, your shares are trading stock, income from sales are included in your assessable income under section 6-5 of the ITAA 1997, and expenses incurred to acquire the shares are deductible under section 8-1. Other expenses incurred in the course of carrying on the business would also be deductible under relevant provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

2. Investment income

In this scenario, you would be regarded as a share investor. Your shares are treated as CGT assets, any gains from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10).

Therefore to determine which is the relevant legislation in your case we need to determine whether your activities amount to the carrying on a business of CFD and share trading.

Carrying on a business

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 and share trading. 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 trading in CFDs and shares 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 or shares.

In your case, you aimed to make a profit from trading in CFDs and shares. You used information from the internet, practiced on demonstration accounts, researched the market system and attended web based seminars to help you in your investment decisions. You planned to grow your investments in order to supplement your income to such a point where it would replace your income.

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.

In your case, you completed CFD trades and Australian stock/share trades during the 20XX financial year, with some same day trades. You have estimated that you spent X hours per day (including weekends) on your trading.

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 (and shares) were not kept, it would be more difficult for a person to demonstrate that a business was being carried on.

You do not have professional CFD or share trading qualifications; however, you have spent time practicing for two years and attended web based seminars. You keep accounts, spreadsheets and statements. You have set up a home desk to trade. You also have a laptop, tablet and smart phone which enable you to trade on the move. You planned to make a profit from your trading activities.

Volume of trading and amount of capital injected

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

You invested a considerable amount into your trading activities. You have two loans that you used to finance for your trading. You incurred interest expenses on these borrowed funds.

Over the financial year, you completed CFD trades and Australian share/stock trades, which included some same day trades.

Conclusion

After weighing up the factors outlined above, it is considered that you were carrying on a business of CFD and share trading.

Your gains from trading CFDs are included in your assessable income under section 6-5 of the ITAA 1997, and your losses are deductible under section 8-1. Note that a CFD is not trading stock. A CFD is a form of cash settled derivative that allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. It is only the gain or loss made on the transaction that is brought to account as income or an expense.

The proceeds from your shares are also included in your assessable income under section 6-5 of the ITAA 1997 and the costs of acquiring your shares are deductible under section 8-1. As you are in business your shares are trading stock.

When calculating your profit or loss from your share trading you will need to take into account the provisions about trading stock contained in Division 70 of the ITAA 1997. There are 3 key features of tax accounting for trading stock:

1. you bring your gross outgoings and earnings to account, not your profits and losses on disposal of trading stock

2. those outgoings and earnings are on revenue account, not capital account, and

3. you must bring to account any difference between the value of your trading stock on hand at the start and at the end of the income year (section 70-5 of the ITAA 1997).

Interest expenses

Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. TR 95/25 provides that there must be a sufficient connection between the interest expense and the activities which produce assessable income, and specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.

In your case, the interest expenses are incurred in funding your CFD and share trading activities. As such, they are deductible under section 8-1 if the ITAA 1997.