Private ruling: Am I in business?
Published: October 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Were you carrying on a business of trading contracts for differences (CFDs) during the 2013-14 financial year? | A1: No | Q2: Are the gains or losses made from your CFD trading treated as profits or losses made from a profit making undertaking or scheme, with any gains assessed under sections 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997) and any losses deductible under section 25-40 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You undertake trading in CFDs in shares, currencies and indices. You have an office set up in your home used for your CFD trading activity. You are currently on long service leave and plan to retire at the end of this time. You invested considerable funds into your CFD trading activity. You undertake analysis of the markets and assess your trades five days per week using various websites but mainly through X and Y. Your share trading strategy was to make decisions on what to trade and when to trade based on recommendations you receive from your advisor at X as well as information you gather from online webinars, which you view on a nightly basis anywhere from 3-5 nights per week for an hour each per night. You attended seminars and workshops throughout the year with the X. All of your trading was conducted through one broker. All records are kept of transactions and trades made as well as any profit or losses made on these trades. During the 2013-14 financial year you conducted a number of trades which were held anywhere from a few hours for indices trading to a few weeks for foreign exchange and share CFD trading. You did not operate to a business plan.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-15 | Income Tax Assessment Act 1997 section 25-40

Reasons for decision: Summary: For the income year ended 30 June 2014, you were not carrying on a business of CFD trading. However, TR 2005/15 states where a business is not carried on, a gain or loss from CFD trading will be accounted for as isolated transactions that were a profit making undertaking or scheme. Any gains are assessable under section 15-15 of the ITAA 1997 and losses are deductible under section 25-40 of the ITAA 1997. As a profit making undertaking or scheme any gains from your transactions would be assessable as ordinary income, and would be included in your tax return as other income. Any losses would be deductions, and would be included in your tax return as other deductions. | Detailed Reasoning - Detailed reasons for decision: Taxation Ruling TR 2005/15 provides the Commissioner's view on the income tax consequences of entering into financial CFDs. Where transactions are entered into as an ordinary incident of carrying on a business the gains from financial CFDs are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), and the losses are deductible under section 8-1 of the ITAA 1997. Otherwise, TR 2005/15 states the trading activities will be regarded as part of the carrying out of a profit making undertaking and gains from CFD trading will be accounted for under section 15-15 of the ITAA 1997, while losses are deductible under section 25-40 of the ITAA 1997. Either way, the gains and losses resulting from a CFD transaction will be of an income nature. The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on but its principles may be applied to other activities. The question of whether a taxpayer is engaged in share trading is essentially based on the facts of the situation. This matter has been addressed in a number of court cases. In Case X86 90 ATC 621; (1990) 21 ATR 3747, and more recently in Shields v. Deputy Federal Commissioner of Taxation 99 ATC 2037; (1999) 41 ATR 1042 the following were stated as factors to be considered: a) the nature of the activities and whether they have the purpose of profit-making; b) the complexity and magnitude of the undertaking; c) an intention to engage in trade regularly, routinely or systematically; d) operating in a business-like manner and the degree of sophistication involved; e) whether any profit or loss is regarded as arising from a discernible pattern of trading; f) the volume of the taxpayer's operation and the amount of capital employed by him; and more particularly in respect of share traders: g) repetition and regularity in the buying and selling of shares; h) turnover; i) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records; j) maintenance of an office; k) accounting for the share transactions on a gross receipts basis; l) whether the taxpayer is engaged in another full time occupation. In your case, you displayed some regularity and repetition in your trading in that you completed a significant number of trades in the twelve month period, which is a favourable indicator of carrying on a business. The amount of capital you have invested is also considered to be a significant amount. However, your transactions were not commercially significant, as you have one CFD account with one entity and you only spent a few hours per week on the activity. This level of activity does not have the commercial character of a business. As you were not operating to a plan, and you had no trading strategy in place it would be considered that you were not operating in a business-like manner, and the degree of sophistication involved in your activities was not high. Although you do have some indicators that support that you are carrying on a business of CFD trading, the overall impression gained is that your activity did not amount to the carrying on of a business for the income year ended 30 June 2014 but was more of a passive nature.