Private ruling: Contracts for difference gains and losses
Date of advice: 30 June 2022
Published: October 2022
Ruling period: 1 July 20XX to 30 June 20XX | 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the gains or losses made from your CFD trading assessed under sections 6-5 and 8-1 of the ITAA 97, and treated as profits or losses made from carrying on a business of CFD trading? | A1: Yes. | Q2: Are the gains or losses made from your Contracts for difference (CFD) trading assessed under sections 15-15 and 25-40 of the ITAA 1997 and treated as profits or losses made from an undertaking or scheme? | A2: No.

Relevant facts and circumstances: You are a XXXX and carry out your work at XXXX. You do not satisfy the income requirement contained in subsection 35-10(2E) of the ITAA 1997 for both the 20XX and 20XX financial years. For example, the financial year ended 30 June 20XX, your income was XXXX. You commenced trading activities on or about 20XX, this included crypto currency during one of the financial years. Prior to this time, you allocated time to build your knowledge and experience in trading. You signed up with an online trading platform. The broker also provides a news feed service, which alerted any news or announcements that could affect certain assets. You have a home office designated for CFD trading, including a desk with a number of monitors to assist with trading. High speed internet connection is used to obtain the correct trade process as quickly as possible. You provided a business plan which states how you track and determine your trades. All trades are undertaken online through market and pending orders whereby each transaction is handled by XXXX; trading statements are issued by this company. Copies of trading statements were provided. You engaged in extensive research, training and learning development in CFD trading. Copies of membership, course completion and various purchase receipts were provided. You were mentored by a senior professional trader who provided ongoing support, including professional and expert advice, risk management and the need for a sound trading strategy. Tools were also purchased to assist in decision making and trading education. Programmers were hired to code the sites and trading tools. During 20XX and 20XX financial years you worked XXXX hours per week in your XXXX work and an average of XXXX hours per week actively trading CFD's, plus additional time reviewing the markets and commentary from various sources. You provided your strategy for CFD trading with a view to making profit. You had systems and rules in place to limit losses and preserve capital. Transaction records indicate extensive CFD transactions over a two-year period. Throughout 20XX and 20XX your trading activities increased significantly due to the pandemic as you were able to dedicate more time due to lockdowns. Whilst you did derive profit from time to time, your net position in CFD trading was: • Financial year 20XX losses from foreign currency and crypto currency trading to be approximately XXXX • Financial year 20XX losses from the foreign currency to be XXXX. You advised the trading losses resulted from a cumulation of particular circumstances; including you deviated from your researched position and risk prevention model, losing impartiality in making decisions.

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 division 35

Reasons for decision: 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 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. 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 97. Otherwise, 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 section 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. | Detailed Reasoning - 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 activities undertaken constitute the carrying on of a business is essentially a question of fact. Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. The Commissioner's 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 or not 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 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 • whether the activity is better described as a hobby, a form of recreation or a sporting activity. The bar for CFD trading is quite high, with the most significant factors usually the volume of trading and conducting operations in a businesslike manner. | Detailed Reasoning - Application of the law to your facts: In your case, whether or not you are in business is a critical fact that will determine: • whether your gains and losses from your CFD trading are assessed under Section 6-5 and 8-1 of the ITAA 1997 or in the alternative under Section 15-15 and 25-40 of the ITAA 97 • whether the non-commercial loss legislation applies to you. The facts of your particular situation are applied to the relevant indicators as listed in TR 97/11 below: | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: You completed a high number of trades, besides full-time employment, you spent approximately XXXX hours per week trading CFD's. The level of your CFD trading was commercially significant, with losses in the 2021 financial year of XXXX. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: An intention to engage in business was shown by the amount of planning, training, mentoring, networking, data and systems management, innovative website development and high-level trading activities for a number of years. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business of trading in CFDs and shares exists, there is usually a business plan of how the activities will be conducted. You have a business plan; your goal is to generate income from your CFD trading to supplement your other income. Your business plan outlined that trades are to be based on a combination of strategies. In your case, you aimed to make a profit from trading in CFDs and crypto currency. You use information from various resources to help you in your trading decisions. You planned to grow your investments. | Detailed Reasoning - Whether there is a repetition and regularity of the activity: Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions. Transaction records for the 20XX and the 20XX financial years indicate extensive CFD transactions over a two-year period. Trading data provided for the 20XX financial year and for the 20XX financial year was extensive. There was regularity to your buying and selling. You spent many hours per week on your activities. | Detailed Reasoning - 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: Your CFD trading is conducted in the same organised and businesslike manner as that of a business of this type being carried on. Your level of knowledge and preparation is extensive and sophisticated as that of a person who would be in the business of trading CFD's. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: Generally, a business would involve study of trends, analysis or relevant materials and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. You kept records of your trading transactions and other relevant details, through accounts, spreadsheets, and statements. You have set up a home office to trade. You also have a laptop, monitors and high-speed internet. You used a trading strategy to study and analyse trends. You took a systematic and organised approach to your trading since 20XX, spending time attending web-based training and seminars, networking, researching companies and planning future trades. You planned to make a profit from your trading activities. | Detailed Reasoning - The size scale and permanency of the activity: The size of your CFD trading activities is substantial, and as stated above the quantity of CFD trades is at a commercial level. A higher volume of purchases and sales of CFDs and shares is more likely to indicate that a business is being carried on. You invested a considerable amount of time and money into your trading activities since 20XX. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: Your trading activity is not a hobby or lifestyle choice done in one's leisure time for pleasure. | Detailed Reasoning - Conclusion: After weighing up the factors outlined above, it is considered that you are carrying on a business of CFD and crypto trading for income tax purposes for the 20XX and 20XX financial years. You took a systematic and organised approach to your trading, spending time training and researching companies, networking, developing websites and planning future trades. Various sources of information and data were used to help you with your decisions, you have kept detailed and adequate records. There has been repetition and regularity in your trading activities throughout the years. While you were engaged in your normal employment, you still devoted many hours per week to CFD trading from your home. Your injection of capital into trading was commercially significant and you had a view to making a profit. You incurred losses in the 20XX financial year. Your gains from trading CFDs are included in your assessable income under section 6-5 of the ITAA 1997, and your losses are deductible under section 8-1. Therefore, the losses from your business will be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997.