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Edited version of private ruling

Authorisation Number: 1011651154381

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Ruling

Subject: Deduction-contracts for differences

Can you deduct the losses from your contract for differences (CFD) trading activities against your assessable income?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You traded in CFDs.

You performed a large number of transactions.

You consider the transactions were made to make a profit.

You traded a variety of CFD products.

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 paragraph 118-37(1)(c).

Reasons for decision

The Commissioner's view about the tax consequences of CFDs is found in Taxation Ruling TR 2005/15. TR 2005/15 states a loss from CFDs 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.

Otherwise, a loss from CFDs is an allowable deduction pursuant to section 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997), where a taxpayer enters into a CFD transaction 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 CFD transaction entered into for the purpose of recreation by gambling is not deductible under section 8-1 of the ITAA 1997 or section 25-40 of the ITAA 1997. Further, a capital gain or capital loss from a CFD transaction entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

TR 2005/15 places non-business profits and losses from CFD trading as falling under sections 15-15 and 25-40 of the ITAA 1997 rather than under the capital gains tax provisions because there is no ownership of the underlying assets by the trader.

Paragraph 33 of TR 2005/15 states that in Australia, the only decisions on the taxation of speculative futures contracts are three tribunal decisions, Case Q77 83 ATC 388; (1983) 27 CTBR (NS) Case 28 (Case Q77), Case X47 90 ATC 382; AAT Case 5,878 (1990) 21 ATR 3416 (Case X47) and Case X85 90 ATC 615; AAT Case 6286; (1990) 21 ATR 3728 (Case X85). These decisions support the view that speculating on futures contracts may be taxable even though the investor does not carry on a business of speculating in these contracts.

In Case Q77, the Tribunal took the view that speculation on a small number and value of transactions in metal futures was undertaken for the dominant purpose of profit, profit being the difference between the cost of the various contracts and the net proceeds received by the taxpayer on their sale. In Case X47, the Tribunal took the view that the one purpose for entering into the arrangements was to derive a profit from trading on the margins or differentials of the yields on the different series Treasury Bonds. In Case X85, the Tribunal took the view that a single cash-settled derivative transaction was on revenue account on the basis of the transaction's essential commercial nature, in the sense the transaction was part of the commercial world of buying and selling assets.

In your case, you entered into CFD transactions in carrying on or carrying out a profit-making undertaking with the intention of making a profit. As such, your CFD losses are accounted for on revenue account under section 25-40 of the ITAA 1997 and can be used to offset other income.

Gains or losses from CFDs can only be determined when the contracts are closed out.

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