Edited version of private advice

Authorisation Number: 1052298683111

Date of advice: 13 September 2024

Ruling

Subject: Deductions - investment - scam

Question

Is your profit from your trading contracts for differences (CFD) assessable under section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your related entities all invested various sums of money in CFD's through specified number of international brokers. You have provided details of these international brokers.

At the time that the investment was made, you believed the brokers to be genuine and reputable.

In a specified year, Company A was frozen and withdrawals were prohibited by the regulatory authority of that overseas country due to suspected irregular trading activities.

You were unable to retrieve the funds that you invested.

In a specified year, you discovered that your broker Company A involved was not genuine, and your investments were at risk of significant losses.

You provided us with details on the unrealised profit for you and your related entities, in 2 different foreign currencies.

The majority of your transactions were conducted through Company A. Company A is a company that primarily operates from 2 overseas countries.

Company A has been under investigation since a specified year because it had been operating without obtaining a license from the regulatory authority of the overseas country.

You made the investments due to the promises of high monthly returns. The investments were promoted through various media platforms and claimed to possess regulated licenses.

You continued to invest additional savings and even secured significant loans for the investment, even though your investigations revealed that their claim of possessing regulated licenses was unfounded.

You received a letter from a large accounting firm operating in that overseas country regarding the court's decision to wind up Company A. The accounting firm have been appointed to supervise the liquidation of the assets for equitable distribution. The case is still in progress.

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

Question

Is your profit from your trading contracts for differences (CFD) assessable under section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The profits from your CFD trading are assessable under section 15-15 of the ITAA 1997. The profits are assessable on the receipt's method, meaning they are assessable income in the year that they are derived.

The commissioner does not have any discretion to defer the reporting of the assessable income. Therefore, your profit from your CFD trading activities is assessable under section 15-15 of the ITAA 1997 in the income year in which they were derived.

Detailed reasoning

Tax treatment of CFD trading

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

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

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.

In your case, you and your related entities invested funds to engage in a profit-making venture by trading CFDs through international brokers. Consequently, your trading profits are assessable under section 15-15 of the ITAA 1997.

Method of when income is derived

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) contains details on various types of sources of income and when you are required to report the income. TR 98/1 includes investment income. Paragraph 19 of TR 98/1 provides that generally for investment income the cash receipts method is the most appropriate method, meaning that it is derived when it is received or credited (paragraph 47 of TR 98/1).

In your case, the profit from your CFD investments are credited to your broker account which you have access to in the same way as a bank account. Following this same principle, when the CFD's are paid/credited to your broker account, you are able to withdraw the funds to your broker account, as such the CFD's are assessable income to you when they are paid/credited to your broker account. This follows the same principle of interest income being deposited into a bank account and being assessable income at that time.

Commissioners' discretion

The ITAA 1997 allows the Commissioner certain powers in order to grant discretion in limited circumstances. Deferring the reporting of assessable income is not a discretion that is available to the Commissioner under the ITAA 1997.

Conclusion

Your CFD activities were 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 any losses are deductible under section 25-40 of the ITAA 1997 in the year incurred. Whilst the Commissioner sympathises with your situation, the Commissioner does not have the discretion to defer the reporting of your assessable income.