Edited version of private advice

Authorisation Number: 1051788242790

Date of advice: 8 December 2020

Ruling

Subject: Contracts for differences

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 1997)?

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.

Question 4

Do the non-commercial loss provisions apply in your circumstances?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

You commenced CFD trading in the 20XX-XX income year.

You transferred funds to an internet based trading platform.

You started trading with no knowledge of trading or experience with the financial market and undertook the trades yourself.

The main purpose of your trading activity was to make a profit.

You were also working full time.

You have degrees in an unrelated field.

You have not completed any CFD related courses and your base knowledge was sourced from watching YouTube videos. The videos and other online resources showed you how to analyse the market, study trends and other strategies.

You did not have a trading methodology as your advisor executed all of your trades on your behalf. Whilst you had some experience in CFD trading, you did not have a sound knowledge on the topic.

You did not set up a home office to be used for your CFD activities.

You did not draw up any business plan for your CFD trading activities.

For the 20XX-XX income year, you made xxx trades. Your total deposits were $xxxx and your total withdrawals were $xxxx. Your total net trading loss was $xxxx.

In the 20XX-XX income year you transferred funds to entity A, an internet based CFD trading platform. An electronic trading platform, was used to access the CFD market.

You undertook the trades yourself. The total number of trades for the 20XX-XX year was xxx. Deposits of $xxxx and withdrawals of $xxxx were made.

CFD activity occurred for xxx days in the 20XX-XX income year.

The total loss was for the 20XX-XX income year was $xxxx.

In the 20XX-20XX income year, an expert advisor was used to complete the trades. You did not spend any time trading yourself. All trades were executed by your advisor. You only transferred funds to your CFD trading account.

For the 20XX-XX income year, xxx total trades, deposits of $xxxx and withdrawals of $xxxx were made.

The overall loss was $xxxx in the 20XX-XX income year.

You believe there is a possibility of making a profit if you spend more time formulating trading strategies and studying chart patterns.

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 outlines 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 do not have a business plan, however you aim to make a profit from trading in CFDs.

You have other 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. Some months had several transactions, however other months had no or limited activity.

There was not consistent time spent throughout the years 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. You do not have any related qualifications with financial products.

Volume of trading

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

The total number of trades for the 20XX-XX income year was xxx, for the 20XX-XX year there was xxx trades and the total trades for the 20XX-XX income year was xxx.

Amount of capital injected

Total deposits made were $xxxx, $xxxx and $xxxx for the 20XX-XX to 20XX-XX income years.

Conclusion

After weighing up the factors outlined above, it is considered that you are not carrying on a business of CFD trading. Although you had various trades and kept records, you have not had regular CFD activities throughout the years. Your injection of capital into your CFDs was not large.

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.

The non-commercial loss provisions will not apply in your circumstances, as you are not carrying on a business for taxation purposes.