Edited version of private advice

Authorisation Number: 1051851313039

Date of advice: 12 July 2021

Ruling

Subject: Losses incurred from contracts for difference

Question 1

Were you running a business of contracts for difference (CFD) trading during the year ending 30 June 20XX?

Answer

No.

You do not meet the relevant factors contained in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?. Further information about carrying on a business can be found by searching 'QC 31733' on ato.gov.au.

Question 2

Are your losses on CFD trading deductible under section 25-40 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences have been applied, which provides the Commissioner's view on the income tax consequences of entering into financial CFD's.

As you are not carrying on a business and enter into a financial CFD in carrying out a profit-making undertaking or scheme, the CFD gain will be assessable under section 15-15 of the ITAA 1997. Any losses made will be deductible under section 25-40 of the ITAA 1997.

In your case, we do consider that you were engaged in a commercial transaction for the purpose of profit making. The very nature of engaging in buying and selling these types of financial products is for a profit making purpose.

Having considered your circumstances, the relevant legislation and taxation rulings surrounding CFD trading, your net loss is able to be deducted against your total assessable income for the 2020 income year as per section 25-40 of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You had never previously invested in contracts for difference (CFD).

You opened a CFD trading account with Y with the intention of investing in CFD's to make a profit. The trades were carried out on separate days for part of a financial year and were for varying amounts. Some of these days were consecutive, and sometimes numerous days would lapse between trades.

During the trading period you deposited $X into the Y account. Converted to Z dollars (Z) this amount was Z $X.

You conducted X number of trades of CFD's with some being profitable, but more incurring losses. The trades were carried out in Z.

The net loss over this period was Z $X/AUD $X - the total amount you had deposited into the account.

You were assigned an A by Y who assisted you with all trades.

The A was not paid directly by you for the advice they provided, this was part of the service generally provided by Y to their clients.

You installed B software on your home computer. The Y A would share your screen via B and would call you on the phone to instruct you on how to make each trade. They would not have control of your computer. The trades were placed yourself, however you would follow their instructions for placing the trades.

Y provided training on how CFD's work and provided advice on what trades to make. You relied on this advice in order to conduct the CFD trading.

You hold a Bachelor of C (D) and Master of E.

You have a full-time job in F, so the CFD trading was done outside of office hours, generally in the late evening.

Over the trading days in the period, on average you would spend at least X hours on each of these days placing the trades and discussing the trades with your A. This represents X hours of active trading activity. Separate to this you spent a number of hours monitoring the progress of active trades, with an estimate of a further X hours devoted to this type of monitoring activity. In total you spent approximately X hours over the period.

The trading of CFD's is an activity which has the potential to make a profit. This was what attracted you to commence trading in CFD's. You planned to make additional income from the CFD trading to supplement your salary from your full time job, in order to generate wealth.

Your trading in CFD's was heavily influenced by the advice you received from Y. They would highlight trading opportunities for you and assist you with placing the trades.

The Y software keeps a record of the trades and could produce reports showing profits and losses. You reviewed these reports to monitor your progress from time to time, however did not keep your own records in a spreadsheet or accounting software.

Following the instruction of your A you utilised stop-losses on trades and invested in various CFD markets, predominantly currencies, but also gold, silver, oil and listed shares.

You did not produce a formal business plan, did not read any books relating to CFD trading or participate in any training courses. You relied on advice from your account manager with the goal of making profitable trades.

By the date you ceased trading you had lost your funds deposited of AUD $X/Z $X, so made no further deposits after that date.

Your trading was only for a short period of time and there was not significant regularity of trading during the financial year.

The funds invested in CFD's of AUD $X/Z $X represents a large portion of your life savings.

Relative to your taxable income of approximately $X per annum, the investing you did in CFD's was on a large scale. You consider the gains of AUD $X/Z $X and the losses of AUD $X/Z $X to both be significant amounts.

Your investing in CFD's is not related to any other activity that you participate in and has no relevance to your

full time job in F.

You commenced investing in CFD's with the intention of making a profit. Some of the early trades you participated in following the advice from your Y account manager were profitable. After incurring some losses you were convinced by Y that your A could assist you to recoup the losses and place profitable trades in the future, which is why you deposited more funds.

You did make some profitable trades, X in total, however the losses on the X other trades outweighed these profits, resulting in an overall loss.

The reason you continued depositing funds and investing in CFD's was to make profitable trades in order to recoup losses and with the intention of making an overall profit.

With no prior experience in CFD's and no formal training you brought a low level of skill to your CFD trading. You relied on advice from your account manager in order to make all the trades.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 15-15

Income Tax Assessment Act 1997 Section 25-40