Edited version of private advice

Authorisation Number: 1052029391688

Date of advice: 13 September 2022

Ruling

Subject: Assessable income - income vs capital

Question 1

Was the Contracts for Difference (CFD) trading loss on revenue account, but not from carrying on a business?

Answer

Yes.

Question 2

If the answer to question 1 is no, was the trading loss a capital loss?

Answer

Not applicable.

Question 3

If the answer to questions 1 and 2 is no, was the trading loss from the carrying on of a business?

Answer

Not applicable.

Question 4

Is the forex loss deductible under section 775-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commenced on

1 July 20xx

Relevant facts and circumstances

CFDs are 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. CFD's are derivative products that are speculative

On 1 July 20xx, the taxpayer (you) opened an account on a CFD trading platform

Between July 20xx and May 20xx, in a single income year, you engaged in trading CFDs that resulted in a net CFD trading loss

You previously owned a business in an unrelated industry and have only limited experience buying and selling shares

You have no formal training in securities or derivatives trading.

The losses that are the subject of this ruling application are your first substantial losses encountered in years of investing.

Prior to this you had not traded in CFDs.

Your goal was to make sufficient profits to assist your children financially. Your approach was to "start small" with amounts invested to ensure the platform was reliable while you came to understand the trading process.

You had an agreement with the platform that set out terms and conditions. This created contractual rights that existed between you and the platform provider (X)

X provided their telephone contact details and address to you. On occasions where you were not satisfied with something, you were able to call X's client service department and have the issue rectified

X did not act as your agent or broker. You traded based on your own research, or according to advice provided by X. You accessed the platform by logging into your account through a web browser. You entered trades by bringing up the stock code and putting in the number of trades. A price was calculated, and you would decide if you were trading on the basis of the stock price going up or down. The transaction was then entered. If the price went up or down as predicted in the CFD trade, reaching the price you entered, that CFD would close.

Anytime you wanted to contact X you were able to do so.

There was never any money removed from your account by X other than their commission and fees i.e. X never removed funds from your account without your express permission.

All trades were entered by you only.

You successfully withdrew amounts from your account with X and did not experience any obstacles withdrawing funds from your account.

You never had a formal business plan in place for the trading activity

You received advice and updates from X about market activity, however the trading was determined and actioned by you. You decided which markets you liked, and it was solely up to you how much money was invested in those trades

A net trading loss arose due to the impact of COVID-19 and economic uncertainty caused by the global pandemic prompting a dramatic downturn in many markets in a short period. These market drops affected your trades i.e. an initial prospect of profit changed dramatically circa May 20xx

Forex Loss

As a part of the trading process with X you acquired USD, and you would enter trades via X's platform in USD. You provided a spreadsheet with a running balance of profit and losses from trades with X, including exchange rates at the time of each trade. The spreadsheet calculates that you incurred a forex loss (the Forex Loss)

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 104-10

Income Tax Assessment Act 1997 Section 775-30

Reasons for decision

All references are to the Income Tax Assessment Act 1997, unless otherwise stated

Question 1

Summary

Your CFD trading loss, made through the activity conducted through X's trading platform, is on revenue account, but not from carrying on a business.

Detailed reasoning

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences applies to persons who enter into financial contracts for differences

Paragraphs 11-15 of TR 2005/15 contains the following:

11. 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.

12. 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.

13 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.

14. 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.

15. A gain or loss from a financial contract for differences entered into for the purpose of recreation by gambling will not be assessable...

Carrying on a business

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? at paragraph 13 contains general indicators of carrying on a business:

• 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 business-like manner such that it is directed at making a profit
• the size, scale and permanency of the activity, and
• whether the activity is better described as a hobby, a form of recreation or a sporting activity

No one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way (TR 97/11 paragraph 15)

The table at paragraph 18 of TR 97/11 provides a summary of the main indicators of carrying on a business as set out alongside their application to your circumstances:

In determining whether you were carrying on a business, it is acknowledged the activity undertaken had a profit purpose, albeit for a limited period of time. There were some characteristics that aligned the activities to those associated with carrying on a business

However, your activities also lacked 'significant commercial purpose or character' i.e. there was no business premises, no staff, limited time given to the activity and no business plan in existence. Although there was a profit purpose, you did not have an intention to carry on business

You did not carry on the activities in a similar manner to that of ordinary traders in the business of financial investments, or in a businesslike manner. Furthermore, there was no permanency in your activities

Although you had various trades and kept records, you have not been involved in regular CFD trading activities, your trading was ad hoc and undertaken over a period of 10 months. You have no formal training in securities or derivatives trading

A profit-making purpose or undertaking

Section 6-5 states: 'Your assessable income includes income according to ordinary concepts, which is called ordinary income.' Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This is the case even if the transaction was not part of a taxpayer's ordinary course of business

The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer), that:

The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income provides the ATO view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5 of the ITAA 1997

Paragraph 1 of TR 92/3 describes the term 'isolated transactions' for the purposes of the Ruling. It refers to:

(a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

(b) those transactions entered into by non-business taxpayers

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (paragraph 12 TR 92/3)

Speculation on a financial risk can be characterised as being commercial (TR 2005/15 paragraph 23). It increases the efficiency of the financial markets by adding to the depth and liquidity of the markets

Where a taxpayer is not carrying on a business but makes a profit, it can still be income. Paragraph 16 of TR 92/3 states that:

If a taxpayer not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Paragraph 6 of TR 92/3 is similar regarding profits from isolated transactions

Although not carrying on a business the gain or loss made on entering a CFD is assessable income or an allowable deduction if entered into with a profit-making purpose in a commercial transaction. This is consistent with the High Court view in Myer that a profit is income when there was a commercial transaction for the purpose of profit-making (paragraph 26 of TR 2005/15)

Paragraph 19 of TR 2005/15 also confirms the principles established in Myer when stating a gain or a loss from a financial contract for differences will be respectively assessable income under section 6-5 or an allowable deduction under section 8-1 when made in either a business operation or a commercial transaction for the purpose of profit making

Where the transaction does not fall within the Myer principle, a gain will be assessable income under section 15-15 where a taxpayer enters into a financial contract for differences in carrying on or carrying out a profit-making undertaking or plan and that gain is not assessable under section 6-5 (paragraph 34 of TR 2005/15)

Similarly, a loss from a CFD transaction will be an allowable deduction[1] if there had been a gain, and section 15-15 would have included it in assessable income under section 25-40 (paragraph 35 TR 2005/15)

Conclusion - CFD losses

After weighing up the factors outlined above, it is considered that you were not carrying on a business of CFD trading. Although you had a number of trades through the months that you were conducting this activity, kept records and utilised significant capital, this was commensurate with your personal wealth. A profit-making purpose did exist however you did not have an intention to carry out a business of trading in CFD's or undertake these activities as commercial transactions

Your trading in CFD's was undertaken with a view to making a profit, therefore your gains from this activity in the year ended 30 June 20xx are assessable under section 15-15 and losses deductible under section 25-40

Question 2

Not applicable

Question 3

Not applicable

Question 4

Summary

Your forex gains are assessable under section 775-15 and forex losses deductible under section 775-30.

Detailed reasoning

Forex assessable gains and deductible losses

The forex measures in Division 775 set out rules for expressing the Australian currency values of amounts that are denominated in foreign currency and explain how to calculate gains and losses that are attributable to currency exchange rate fluctuations

The general principle is that foreign currency gains or losses have a revenue character rather than a capital nature. Foreign currency gains or losses are assessable or deductible when they are realised. They are realised when a forex realisation event (FRE) happens

FRE 1 happens when an entity disposes of foreign currency, or a right, or part of a right, to receive foreign currency (subsection 775-40(1))

Section 775-15 provides that a forex realisation gain that a taxpayer makes as a result of the FRE is assessable income in the year that the gain is realised, provided it is not a gain of a private or domestic nature and the circumstances covered by the table in paragraph 775-15(2)(b) do not apply (pertaining to CGT assets)

Section 775-30 provides that a forex realisation loss that a taxpayer makes as a result of a FRE is deductible from the taxpayer's assessable income in the year that loss was realised, provided it is not a loss of a private or domestic nature and the circumstances covered by the table in paragraph 775-30(2)(b) do not apply (pertaining to CGT assets)

The activities carried on by you had a profit-making purpose and were not of a private or domestic nature

Given that paragraphs 775-15(2)(b) and 775-30(2)(b) pertaining to CGT assets does not apply in this case, any gain will be assessable under section 775-15 and any loss will be deductible under section 775-30 which arises from FRE 1.

[1] Note that, pursuant to subsection 25-40(3), a loss under subsection 25-40(1) can be deducted only if either (a) notice is given to the Commissioner that the taxpayer acquired the financial contract for differences for the carrying on or carrying out of any profit-making undertaking or plan or (b) the Commissioner is satisfied the taxpayer acquired the financial contract for differences for that purpose.