Edited version of private advice

Authorisation Number: 1052193650718

Date of advice: 23 November 2023

Ruling

Subject: CFD trading

Question

Are the gains or losses made from your Contracts for Difference (CFD) trading assessed as business income and deductible under sections 6-5 and 8-1 respectively of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Financial year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You began trading in CFDs through an online trading platform as you believed from your general knowledge that trading shares and other instruments could be profitable and you wanted to make a profit. You had no prior share or CFD trading experience, no formal training, sought no professional advice on this activity, and undertook no market research. You have other well paid full-time employment and in the relevant financial year you invested a significant amount of money in CFD trading drawn from your salary, and made a significant loss.

Over the months you undertook the trading activity you actively traded on a smaller number of days in 2 shorter rounds of activity. You personally spent very little time trading yourself, and after setting directions and operating parameters for third-party plugin software you allowed it to undertake most of the trading activity on your behalf. You occasionally intervened in its operations.

Your trading was undertaken through a retail trading account with a provider who offered access to their proprietary digital market platform. You mainly dealt in foreign exchange futures and derivatives tracking index funds. Under your agreement with this provider all your dealings were directly with them through their market structure for a fee. Working from a security of at least 5% of the required liability you were able to place orders for CFDS with the balance, or margin, provided by the platform. As your liability for this margin varied in response to market movements you could be called on, in a margin call, to provide additional funds.

If you did not provide the additional funds required by a margin call your position on the trading order could be closed out by the platform or further funds recovered by the platform provider closing other orders placed by you to the point where your trading position was liquified. The platform provider was only authorised to recover monies to the extent that they were being held by you in your account with them. You were required by the platform to review your position daily to ensure your liquidity within this market. Further facilities provided by the platform for risk management included access to stop and limit orders.

The platform allows for the use of third-party plugins but does not take responsibility for, or indemnify clients against, any loss incurred as a result of their use. You used such third-party plugins, or bots, to automate your trading. The plugin software was programmed to buy or sell if the price parameters of the contracts you had engaged in went under or over pre-set limits.

You did not have a business plan or any methodical approach to your trading activity. You did not keep any records but have provided lists of your transactions through the online platform you used for your trading activity.

In the time you were trading you made a large number of transactions, many of them entered into by automated software you had downloaded from the platform with which you were engaged. You ceased your CFD trading activity in the relevant financial 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 section15-15

Income Tax Assessment Act 1997 section 25-40

Summary

The gains or losses made from your CFD trading will not be assessed as business income under section 6-5 of the ITAA 1997 or the losses deductible under section 8-1 of the ITAA 1997. Your CFD trading activity had little prospect of profit in the manner it was carried out. It was unplanned, sporadic, conducted in an unsophisticated manner, and relatively impermanent.

Reasons for decision

Under section 6-5 of the ITAA 1997 assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as 'income according to ordinary concepts'. Typical examples of ordinary income include salary, wages, dividends, rent, and proceeds from carrying on a business.

The factors taken into consideration in determining if a taxpayer is carrying on a business are discussed in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? While written for primary producers, these indicators are the consolidation of many years of case law and have broad application over many industries. TR 97/11 identifies the following indicators for consideration in determining whether a taxpayer is carrying on a business for taxation purposes.

•         whether the activity has a significant commercial purpose or character

•         whether there is more than just an intention to engage in business

•         whether there is 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, and

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

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

The taxation treatment of gains and losses from CFD trading is discussed in Taxation ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences. Trade in derivative instruments can be considered to be commercial in character as it increases the efficiency of financial markets by adding to their depth, liquidity, and stability (paragraph 23 of TR 2005/15). Where gains from trading in CFDs are produced by business activity they are assessable under section 6-5 of the ITAA 1997, and losses can be claimed as a deduction under section 8-1 of the ITAA 1997.

Where gains from CFD trading are not produced through business activity they are considered to be generated from a profit-making undertaking or scheme as there was an intent to profit. Income generated through a profit-making undertaking or scheme is assessable under section 15-15 of the ITAA 1997 and losses from such an undertaking or scheme will be allowable deductions under section 25-40 of the ITAA 1997.

Factors considered particularly relevant in deciding if CFD trading constitutes a business activity are discussed in TR 2005/15. These include the question of whether transactions are conducted in a systematic, organised, or business-like way, the degree of repetition or regularity of the transactions, and the degree of skill employed in making these transactions. These factors are considered in discussion of the indicators for being in business outlined in TR 97/11. Your trading activity has been assessed against the indicators outlined in TR 97/11 as follows.

Whether the activity has a significant commercial purpose or character

An activity can be considered to have significant commercial purpose or character if it has a business plan, a profit-making purpose, and can be shown to be carried on in a commercially viable manner. While CFD trading activity can be considered to have commercial character because it enriches and stabilises market processes your activity was not conducted in a commercially viable manner. You undertook your trading activity with a profit-making purpose but had no business plan, no experience, no market research, and sought no expert advice.

Whether there is more than just an intention to engage in business

For a business to be carried on there must be some business activity, and you commenced your trading activity in the relevant financial year.

Whether there is purpose of profit as well as a prospect of profit from the activity

A business must have a purpose as well as a prospect of profit. This includes planning and activity that is directed towards making a profit and being able to demonstrate how that profit is to be made. You directed your activity toward making a profit but trusted the plug-in software you employed to make that profit for you, manually intervening from time to time. You did not engage in any other planning for this activity and are not able to demonstrate how a profit was to be made.

Whether there is repetition and regularity of the activity

Activity must be undertaken on a continuous and repetitive, as appropriate to the industry, basis for it to be considered a business. You spent very little time trading yourself, allowing the plug-in software to undertake most of your trading activity, and spent no time researching your activity. Your trading activity can be described as sporadic.

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

An activity can more readily be recognised as commercial if it is of same kind and carried on in a similar manner to other businesses in the same industry. You have undertaken your trading activity through an account on a trading platform that creates its own market and you have been bound by your agreement to deal only with that provider in making your trading transactions. Your trading agreement is a standard retail trading arrangement and your costs have been deducted from your profits or your account balance with the platform you have been using. You sought no guidance or expert advice on your trading activity, trusting instead in the efficacy of the automated plug-ins, or bots, you employed. While the instruments you have been dealing in are complex your conduct of this activity has not been sophisticated.

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

An activity can more readily be characterised as a business when it is carried on in a planned, organised, and businesslike manner such that it is directed at making a profit. Beyond direction and setting of parameters for the plug-ins you have been using you have not operated to any set business plan. You have on occasion intervened in the operation of this software so you could increase your profits or minimise your losses. You have been able to monitor your trading positions and have access to records kept by the trading platform you have been using but there is little other evidence of businesslike record keeping.

The size, scale, and permanency of the activity

An activity would be expected to be of a size, scale, and permanency suitable to the industry it is operating in to be recognised as a business. You invested a significant amount of money in your trading activity and made a significant loss. You ceased your trading activity in the relevant financial year.

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

As you undertook your CFD trading activity for the sole purpose of making a profit, and the activity was not on a small scale, it cannot be better described as a hobby or form of recreation.

Conclusion

The transactions in your CFD trading activity were not entered into as an ordinary incident of carrying on a business. The activity was unplanned and there is little evidence in the way it was conducted that it was likely to be viable or have much prospect of profit. It was undertaken on a sporadic basis, conducted in an unsophisticated manner, and relatively impermanent.

The gains or losses made from your CFD trading will not be assessed as business income under section 6-5 and section 8-1 of the ITAA 1997 respectively. This being the case your gains will be assessed as a product of a profit-making scheme or undertaking and assessable under section 15-15 of the ITAA 1997, and losses claimed as a deduction under section 25-40 of the 1997.