Edited version of private advice

Authorisation Number: 1052020687129

Date of advice: 15 August 2022

Ruling

Subject: Income tax - carrying on a business

Question 1

Are the gains or losses made from your contracts for difference ('CFD') trading assessable under section 6-5 of the ITAA 1997 and deductible under 8-1 of the Income Tax Assessment Act ('ITAA 1997'), and treated as profits or losses made from carrying on a business of CFD trading?

Answer

No

Question 2

Are the losses from CFD trading subject to section 35-10 of the ITAA 1997?

Answer

No

Question 3

Are the gains from CFD trading activity assessable income under section 15-15 of the ITAA 1997, and the losses from CFD trading activity deductible under section 25-40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on:

31 March 20XX

Relevant facts and circumstances

The taxpayer is an individual.

The taxpayer works full time as an accountant.

In their fulltime job, they specialised in the financial markets sector.

The taxpayer commenced trading in CFD from 31 March 20XX.

They have not traded in CFD for the last X income years.

The taxpayer undertook a CFD course X years ago and gained experience with CFD trading from his job. The taxpayer has used this knowledge to invest in CFD trading.

The taxpayer's trading methodology is to perform technical and fundamental analysis, understand the market, then take a position as to where they expect the specific company/industry would be in the future.

The taxpayer did not formulate a business plan nor set up any business structure or premise to carry out the CFD trading activity.

The CFD trading was carried out in the taxpayer's name only, from their home outside of work hours.

The taxpayer entered CFD trading for the purpose of investing rather than for a significant commercial purpose.

The taxpayer intended to make a profit.

The taxpayer had no intention to run CFD trading as a business because they still have a very demanding full-time job.

The taxpayer spent approximately X hours per day on CFD trading, monitoring activity and undertaking fundamental analysis.

In the 20XX income year, they made a total of X trades. Total deposits were about $XX and no withdraws were made.

In the 20XX income year, a loss including the trading costs amounted to $XX.

The taxpayer's income from other sources did not exceed $250,000 in the 20XX income year.

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 Division 35

Income Tax Assessment Act 1997 section 35-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Are the gains or losses made from your contracts for difference ('CFD') trading assessable under section 6-5 of the ITAA 1997 and deductible under 8-1 of the Income Tax Assessment Act ('ITAA 1997')?

Summary

No, the gains received from activities of trading CFDs will not be assessable under section 6-5 of the ITAA 1997 and the losses will not be deductible under section 8-1 of the ITAA 1997. The profits or losses will not be treated as made from carrying on a business of CFD trading.

Detailed reasoning

The Commissioner's view on the taxation treatment of CFD's is outlined in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15).

TR 2005/15 states:

A gain from a financial contract for differences will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the transaction is entered into as an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

A loss from a financial contract for differences will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business or in a business operation or commercial transaction for the purpose of profit making.

A gain from a financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme, and the gain from it is not assessable under section 6-5 of the ITAA 1997.

A loss from a financial contract for differences where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997.

A gain or loss from a financial contract for differences entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 or deductible under section 8-1 or section 25-40 of the ITAA 1997. A capital gain or capital loss from a financial contract for differences entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

Carrying on a business of CFD trading

Section 995-1 of the ITAA 1997 defines 'business' as including '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 to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11). These indicators are applicable to business activity generally.

Paragraph 13 of TR 97/11 lists the following indicators as being relevant when determining whether or not a business is being carried on:

•         whether the activity has a significant commercial purpose or character

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

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is repetition and regularity of the activity

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

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

•         the size scale and permanency of the activity

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity

Application of the law to the facts

Whether or not the taxpayer was in business is a critical fact that will determine whether:

•         Gains from the taxpayer's CFD trading are assessed under section 6-5 of the ITAA 1997 and are treated as profits from carrying on a business of CFD trading

•         Losses incurred from the taxpayer's CFD trading are treated as losses in carrying on of a business of CFD trading and the losses are deductable under section 8-1 of the ITAA 1997

•         Gains made from the taxpayer's CFD trading are assessable under section 15-15 of the ITAA 1997 and treated as profits made from an undertaking or scheme.

•         Losses incurred from the taxpayer's CFD trading are deductable under section 25-40 of the ITAA 1997.

The determination of whether or not an activity amounts to a business being carried on is a matter of fact, not of law. The determination is a result of the weight and influence of the facts in that situation.

Whether the activity has a significant commercial purpose or character.

As discussed in TR 97/11 at paragraph 29, 'The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators'.

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

In this case, the taxpayer completed X CFD trades during the period 1 July 20XX and 30 June 20XX. The trading of CFD's is an activity that does have a potential for profit. However, in the year ended 30 June 20XX, total gains made were $XX and the total losses made were $XX, with a net loss of $XX.

In addition, the taxpayer

•         has some knowledge and experience in CFD trading

•         had no business plan

•         did not engage the use of professionals who were skilled or knowledgeable in the area of financial markets or equities

•         did not have a strategy to produce a profit from the activities other than performing technical and fundamental analysis, understanding the market and then taking a position as to where they expected the specific company/ industry would be in the future

•         engaged in CFD trading, which was not their usual vocation as an accountant

•         did not engage in CFD trading using a business structure

Whether the taxpayer has more than a mere intention to engage in business

The taxpayer intended to make a profit. However, there is nothing in the facts to suggest that the taxpayer intended to engage in a business.

Whether there is repetition and regularity of the activity

The taxpayer conducted a total of X trades in the year. The taxpayer did not have a business plan and was not systematic in their trade.

The size, scale and permanency of the activity

As there is no ownership of the underlying asset when trading CFD's the size of a taxpayer's profit and loss can help to determine the size and scale of trading activities.

In the taxpayer's case, the net trading position for the income year ended 30 June 20XX was a net loss of $XX. The taxpayer undertook X trades in the income year.

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

Activities are more likely to be part of carrying on a business when they are carried on in a similar manner to other businesses in the industry.

In this case the taxpayer had a low number of CFD transactions, there was no defined trading strategy and no business plan in place.

The facts would not indicate that the taxpayer was carrying out activities in a similar manner to someone operating as a professional trader.

Whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit.

As discussed above, although the taxpayer intended to make a profit, there was no defined trading strategy or business plan.

Overall, it is not considered that the taxpayer's CFD trading activities were carried out in a manner that supports a business of CFD trading being carried on.

Whether the activity would be better described as a hobby, recreational or sporting activity

In considering whether an activity may be a hobby, paragraph 87 in TR 97/11 describes circumstances such as when:

•         it is evident that the taxpayer does not intend to make a profit from the activity

•         losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made

•         the transaction is isolated and there is no repetition or regularity of sales

•         any activity is not carried on in the same manner as a normal, ordinary business activity

•         there is no system to allow a profit to be produced in the conduct of the activity

•         the activity is carried on a small scale

•         there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business

•         any produce is sold to friends and relatives and not to the public at large

The CFD trading activities would not be better described as a hobby, recreational, or sporting activity.

Carrying on a business - Conclusion

In weighing up the relevant factors discussed above, it is considered that the balance of the above factors indicate that the taxpayer was not carrying on a business of trading in CFD's during the income year ended 30 June 20XX.

Profit in a business operation or commercial transaction for the purpose of profit making

As discussed above, the taxpayer is not considered to be making profit in a business operation or commercial transaction for the purposes of profit making.

As a result, the gains from the CFDs will not be assessable income under section 6-5 of the ITAA 1997 and the losses from the CFDs will not be deductible under section 8-1 of the ITAA 1997, as the transactions were not entered into as an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making.

Question 2

Are the losses from CFD trading subject to section 35-10 of the ITAA1997?

Summary

No, the CFD trading activities will not be considered carrying on a business. Therefore, the non-commercial loss legislation will have no application.

Detailed reasoning

Division 35 of ITAA 1997 prevents losses of individuals from non-commercial business activities being offset against other assessable income in the year that the loss is incurred. Such a loss is deferred.

A non-commercial business activity is a business activity where the expenses in the year exceed the income derived from the activity.

The Division sets out a series of tests to determine whether a business activity is treated as being non-commercial.

The deferred losses may be offset in later years against profits from the activity or, if one of the tests is satisfied or the Commissioner exercises a discretion, against other income.

The Division only applies to losses from business activities and does not apply to losses arising from mere passive activities.

As discussed above, the CFD transactions have not been entered into in the carrying on of a business. Therefore, there has not been any non-commercial business activity and the non-commercial loss legislation has no application.

Question 3

Are the gains from CFD trading activity assessable income under section 15-15 of the ITAA 1997, and the losses from CFD trading activity deductible under section 25-40 of the ITAA 1997?

Summary

Yes, the gains from carrying out CFD trading activities will be assessable under section 15-15 of the ITAA 1997 as assessable income from a profit-making undertaking or plan. The losses from the activities will be deductible under section 25-40 of the ITAA 1997.

Detailed reasoning

As discussed in TR 2005/15

•         A gain from a financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme, and the gain from it is not assessable under section 6-5 of the ITAA 1997

•         A loss from a financial contract for differences where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997

In determining whether the taxpayer has carried on or carried out a profit-making under taking or scheme under section 15-15, TR 2005/15 makes the following observations:

36.The case of Antlers Pty Ltd (in liq) v. FC of T 97 ATC 4201; 35 ATR 64, although a decision about the first limb of the former section 25A of the Income Tax Assessment Act 1936, contains helpful obiter dicta as to the role of intention and purpose in section 15-15 as a successor to the second limb of section 25A. Lockhart J said in this case: FCT v. Myer Emporium Ltd (1987) 163 CLR 199 is authority for the proposition that the profit arising from an isolated commercial or business transaction will constitute income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of the taxpayer's daily business activities....

The taxpayer's purpose or intention is usually ascertained from an objective consideration of the circumstances of the case but his subjective purpose or intention is also of course relevant and may sometimes be the determining factor.

It is the intention of the taxpayer that is relevant for section 25A purposes; it may be gleaned not by mere declarations of intention, but also by examining all the relevant circumstances, especially the conduct of the taxpayer in order to discern or ascertain his intention or purpose.

...

The determination of the taxpayer's purpose in acquiring the relevant property involves an analysis of his state of mind at the time of purchase and his declarations of intention. However, it is important to examine carefully, not only the taxpayer's declarations of intention, but also the objective facts, especially as they existed at the time of the purchase, in order to glean the taxpayer's purpose.

37. What is important is the taxpayer's actual purpose, determined by a consideration of the objective facts. Part of the objective factual matrix is that the transactions are the purchase of financial risk - something with a significant commercial flavour - by means of a contract productive only of a gain or a loss. The statements of a taxpayer's subjective intention are also relevant.

Therefore, the taxpayer's purpose and intention for entering into the CFDs will be relevant in determining whether section 15-15 and section 25-40 have application.

The taxpayer intended to make a profit. The number of trades and size of the gains and losses indicates more than just a one-off recreational activity.

The facts, coupled with the inherent commercial flavour of CFDs, the Commissioner finds that the taxpayer has carried on or carried out a profit-making undertaking or scheme.

Therefore, any gains from carrying out CFD trading activities will be assessable under section 15-15 of the ITAA 1997 and any losses from the activities will be deductible under section 25-40 of the ITAA 1997.