Edited version of private advice

Authorisation Number: 1052207999888

Date of advice: 16 January 2024

Ruling

Subject: Contracts for difference

Question

Can you deduct aggregated Contract for Difference (CFD) losses from your assessable income generated from other activities in the same year of income?

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

You traded in Contracts for Difference (CFDs) since 20XX.

You do not work in the finance industry or trade CFDs as your primary occupation.

You maintained your primary employment in an unrelated occupation during the period you traded the CFDs.

You regarded your CFD trading to be a second job during times of extreme employment volatility.

You were made redundant during the COVID lockdowns.

The nature of the trading is share trading on the market movements and volatility on:

•         Forex

•         Australian equities & indices

•         US equities & indices

•         Commodities

•         Cryptocurrencies.

You independently educated yourself on the subject matter.

Over the relevant period your trading frequency was approximately on a daily basis.

You conducted the activities with a profit-making purpose, rather than as part of conducting a business.

You conducted the trades yourself and you did not engage a third party to act on your behalf such as a broker.

You utilised an online trading platform and you regularly contacted the dedicated account manager.

You used paid stock picking guidance to inform your CFD purchases and sales.

You placed short term trades of less than $XXX. At any one time, the cumulative value of open trades could be over $XXXX.

During the period from XX/XX/20XX to XX/XX/20XX you closed trades which resulted in an aggregated loss of $XX.

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

Reasons for decision

Contracts for difference 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.

Tax treatment of CFD trading

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference outlines the tax consequences of entering into a financial contract for differences (CFD).

Paragraphs 11 - 15 of the ATO taxation ruling TR 2005/15 provides the following guidance on the tax implications of gains and losses from CFDs:

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 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.

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on or the activities are commercial transactions.

The determination of Carrying on a business of CFD trading is outlined in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? The principles are not restricted to questions of whether a primary production business is being carried on. This is the Commissioners view of what factors to determine if a taxpayer is in business for tax purpose.

Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant to determining the question whether 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 regularity and repetition of the activity

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

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

No one indicator is 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 impression gained from examination of the facts (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551)from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). The weighting to be given to each indicator may vary from case to case.

Whether the activity has a significant commercial purpose or character.

TR 2005/15 indicates that the trading of CFD's is essentially a commercial activity. The purpose in your trading was profit making without the use of broker or staff.

Whether the taxpayer has more than just an intention to engage in business.

The intention of the taxpayer in engaging in the activity is a relevant indicator in determining whether a business is being carried on.

The Full Federal Court in Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307 stated that:

'The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant.'

Your employment as XX remained your primary income producing activity over the period you were trading in CFDs, therefore we do not regard you to have displayed a clear intention to undertake CFD trading as a business.

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

This indicator is directed at determining whether the taxpayer entered into the activity with an intention to make a significant commercial or financial gain from it. In Hope v The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1980) 12 ATR 231, Mason J states that business activities are usually activities that are 'engaged in for the purpose of profit on a continuous and repetitive basis'.

The intentions of the taxpayer are ascertained from looking objectively at their actions, including any arrangement entered into. All of the income expected to be received from, and all of the costs associated with, the activity are taken into account to determine what profit, if any, is expected.

It is important to show how the activity can make a profit. However, stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331.

You indicated that you used books and other training to research the CFD transactions before trading.

Whether there is repetition and regularity of the activity including the size, scale, and permanency of the activity.

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

Your motivation to trade CFDs was due to employment volatility. You were not intending to make CFD trading your primary income earning activity.

You maintained approximately daily trading frequency.

Additionally, section 995-1 defines a 'business to include 'any profession, trade, employment, vocation or calling, but not occupation as an employee. '

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

In considering whether the activity would be better described as recreational, there must be evidence of the CFD trading for recreation such as a hobby or gambling. Paragraph 87 in the Taxation Ruling TR 97/11 describes circumstances including evidence that the taxpayer does not intend to make profit and there is no system to allow a profit to be produced in the conduct of the activity.

You have paid for investment advice while trading, which is evidence that you intended to make a profit from trading CFDs, therefore we do not regard the endeavour to be recreational.

Conclusion

After weighing up the facts the Commissioner does not regard you to have been carrying on a business of CFD trading. Nor was your CFD trading undertaken for recreational or gambling purposes. Your CFD activities were clearly undertaken with a view to making a profit, therefore 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 in the year incurred.