Edited version of private advice

Authorisation Number: 1051911314769

Date of advice: 27 April 2022

Ruling

Subject: Contracts for difference

Question 1

Are the gains or losses made from your Contracts for Difference (CFD) trading considered as profits or losses made from an undertaking or scheme for tax purposes?

Answer

Yes.

Question 2

Are the gains or losses made from your CFD trading considered profits or losses made from carrying on a business of CFD trading?

Answer

No.

This ruling applies for the following period:

DD MM YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

You are a qualified professional, employed on a full-time basis.

Due to COVID-19, you experienced a significant reduction in your working hours.

You commenced trading CFD:

You opened an account.

You completed research online (using videos, websites, podcasts, newspapers and social media platforms) and training package/s.

You maintained basic records of your trading activities.

You did not use an online broker or software to trade.

You did not produce a formal busines plan or strategy.

You would spend an average of x hours per day trading at home in which you did not have a dedicated space.

You invested $x into the account.

You made $x in gains.

You made $x in losses.

You paid $x in interest.

You paid $x in dividends.

You gradually reduced your hours dedicated to CFD trading as you became responsible for home-schooling your children.

You returned to working as a professional on a full-time basis and further reduced your CFD trading to x hours per day.

You ceased trading CFD.

Additionally, you do not have any formal qualification, skills, or experience relative to trading in CFD.

It is your contention that the underlying motive of all the above-mentioned actions was to make a profit or gain.

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 995-1

Reasons for decision

Question 1

Are the gains or losses made from your Contracts for Difference (CFD) trading considered as profits or losses made from an undertaking or scheme for tax purposes?

Question 2

Are the gains or losses made from your CFD trading considered profits or losses made from carrying on a business of CFD trading?

Summary

The gains you have made from your CFD activities are assessable under section 15-15 of the ITAA 1997, and the losses you have incurred from your CFD activities are deductible under section 25-40 of the ITAA 1997.

Tax treatment of CFD trading

Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15) outlines the taxation treatment of CFD's. A CFD is a form of cash settled derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying.

Paragraph 16 of TR 2005/15 states where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be assessed under sections 6-5 and 8-1 of the ITAA 1997.

Otherwise, paragraphs 34 and 35 of TR 2005/15 states the trading activities will be regarded as the carrying out of a profit-making undertaking and a net gain or a net loss from trading will be accounted for under either sections 15-15 or 25-40 of the ITAA 1997.

In any case, the gains and losses resulting from a CFD transaction will be of an income nature.

Carrying on a business of CFD trading

Section 995-1 of the ITAA 1997 defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether or not particular activities constitute a business is a question of fact and degree. A process is undertaken where all the facts of a situation are applied to the relevant indicators, taking into account the weight and influence of the facts within the context of that particular situation.

The Commissioner' view about carrying on a business is found in Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production (TR 97/11). The ruling lists the following indicators as being relevant when determining 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 repetition and regularity of the activity

•         whether the activity is of the same kind and carried out 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

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

Application of the law to your facts

In your case, whether you are in business is a critical fact that will determine whether your gains and losses from your CFD trading are assessed under sections 6-5 and 8-1 of the ITAA 1997 or in the alternative under sections 15-15 and 25-40 of the ITAA 1997.

As stated earlier, the determination of whether an activity amounts to a business being carried on is a matter of facts, not of law. The determination is a result of the weight and influence of the facts in that situation.

The facts of your particular situation are applied to the relevant indicators as listed in TR 97/11 below:

Whether the activity has a significant commercial purpose or character

The trading of CFD's occurs without ownership of the underlying asset being traded.

As such the trading of CFD's is an inherently commercial activity.

In your case you completed few transactions in an X week period.

Whether there is repetition and regularity of the activity

As you have few CFD transactions during your trading period of approximately X weeks, this would indicate that there is repetition and regularity. Considering the short-term nature of the activity, this amount of transactions in the period you have been trading is not indicative of a commercial purpose and character, and does not represent a significant level of commercial activity.

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

Whilst you did not have a business plan, it is clear that your goal is to generate income from your CFD trading. This is considered to indicate that you have a profit purpose.

The trading of CFD's is an activity that does have potential for a profit, and a few of your trades generated a profit over the period you have been trading.

Whether there is a repetition and regularity of the activity

As stated above you have completed few CFD transactions in the abovementioned period.

This would indicate that there is repetition and regularity, however this is not considered to be a level of activity of a business of this type being carried on.

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.

Despite you investing a significant amount of funds into the activity, you did not complete a business plan and you did not have a plan in place on how you would preserve your capital and limit your losses.

Your level of knowledge and preparation is limited and not as sophisticated as that of a person who would be in the business of trading CFD's.

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

You did not set anything in place to minimise your losses while trading CFD's and how you would preserve your capital. Whilst you have undertaken your own research, there are no planned-out goals or trading methodology. As such your CFD trading is not conducted in an organised and businesslike manner.

The size, scale and permanency of the activity

As there is no ownership of the underlying asset when trading CFD's the size of your profit and loss can help to determine the size and scale of your trading activities.

In your case your net trading position to date for the income year ended 30 June 20YY is a significant loss. In addition, your CFD transactions were largely small net values.

The size of your CFD trading activities are not substantial, and as stated above the quantity of CFD trades made are not considered to be at a commercial level./p>

It is then considered that your operations do not have the scale that would indicate that you are carrying on a business of CFD trading.

Conclusion

The balance of the above factors show that you were not carrying on a business of trading in CFD's during the income year ended 30 June 20YY. As such, and following the principles set out in TR 2005/15, the gains you have made from your CFD activities are assessable under section 15-15 of the ITAA 1997, and the losses you have incurred from your CFD activities are deductible under section 25-40 of the ITAA 1997.

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