Private ruling: Losses made from contract for difference trading
Date of advice: 18 May 2023
Published: 3 July 2023
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the taxpayer's losses from contract for difference trading deductible under section 25-40 of the Income Tax Assessment Act 1997 as a profit-making undertaking or plan? | A1: Yes.

Relevant facts and circumstances: The taxpayer runs more than one professional practice. This is their primary occupation which occupies the bulk of their time. The taxpayer also trades on the share-market with the primary objective to make a profit. The taxpayer looks at the short-term movement of currencies and indices and anticipates their movement to make a profit. The taxpayer has a professional contract for difference (CFD) account on a CFD trading platform after passing the relevant test allowing them to trade with higher leverage. To help and assist the taxpayer with these trades they have subscribed to numerous services. The taxpayer also reads many financial news sources including the Financial Times, the Wall Street Journal, The Straits Times and Sydney Morning Herald. The taxpayer examines the upcoming economic calendar each day and awaits the outcome of the economic date such as the non-farm payrolls, inflation date, employment numbers around the world, macroeconomic and microeconomic data, politics and the resulting market reaction from which he makes a profit or loss the resultant movement. In executing a trade on any financial instrument, the taxpayer examines and studies carefully the trend of the instrument, support and resistance levels, Fibonacci retracements levels, volume analysis and retail customer sentiment as a contrarian basis for trading. On any given trading day, the taxpayer examines the markets and market moving events such as central bank monetary announcements. The taxpayer is very committed to continual improvement of their trading and is continually trying to improve its profitability. The taxpayer has experience in the share-market prior to their CFD trading having bought and sold shares with the assistance and encouragement of a relative who operated as an accountant and financial advisor. The taxpayer was introduced to various CFD trading platforms and the methodology of this form of trading by another relative who worked in a stock broking firm. The taxpayer subsequently attended a number of training courses in shares, options, ETFs, derivatives and CFD trading to obtain accreditations and knowledge to trade. The taxpayer has completed courses, training, and accreditations to enable trading, use of various platforms and understanding of complex financial security transactions. The taxpayer traded in commercial volumes of shares/indices/commodities/currencies and options for a number of years while living overseas. The taxpayer re-commenced commercial level CFD trading in Australia over the last two income years using the above noted market experience, subscriptions and training. The taxpayer started trading to develop a secondary income-stream as their professional work was becoming difficult due to health-related issues. The taxpayer researches and reviews various world-wide financial publications and data from financial stock/derivative and trading markets on a daily basis. On average the taxpayer spends a number of hours a day on weekdays monitoring the markets. Trading is then undertaken during downtimes in their professional occupation and when at home. The taxpayer's trading is financed through inheritance, savings, and profits from the sale of businesses over the years. The taxpayer also invests profits from trading to reduce reliance on external funding. The taxpayer does not have a business plan. The taxpayer has a trading plan outlining the taxpayer's motivation, time commitment, goals, measured achievements, capital allocation, market knowledge and risk to reward ratio. The taxpayer's CFD trading Annual Statement for year ended 30 June 20XX and Annual Statement for year ended 30 June 20XX for the taxpayer show substantial total funds committed to the taxpayer's CFD activity and a large number of transactions including daily trades on trading days. The taxpayer's June 20XX log of their CFD trading activity shows a total of XXX Buy Trade and Sell Trades. The taxpayer's net CFD trading position for the 20XX and 20XX income years is a significant overall loss.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-1 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 15-5 | Income Tax Assessment Act 1997 Section 25-40

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - Tax treatment of CFD trading: Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference outlines the tax consequences of entering into a financial contract for differences (CFD). TR 2005/15 says: • a gain from a CFD will be assessable income under section 6-5 where the transaction is entered into as an ordinary incident of carrying on a business, or where the profit was obtained in a business operation or commercial transaction for the purpose of profit making • a loss from a CFD will be an allowable deduction under section 8-1 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 • a gain from a CFD will be assessable income under section 15-15 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 • a loss from a CFD where the gain would have been assessable under section 15-15 is an allowable deduction pursuant to section 25-40. | Detailed Reasoning - Carrying on a business of CFD trading: Section 995-1 defines 'business' to include 'any profession, trade, employment, vocation or calling, but not occupation as an employee.' Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on. Paragraph 13 of TR 97/11 states that the courts have held that the following indicators are relevant to determining the question 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 regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point. The analysis in this case must reflect that the alternate outcome would be to conclude that activities in relation to CFDs would be an investment. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impression gained from examination of the facts ( Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). The weighting to be given to each indicator may vary from case to case. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: The intention of the taxpayer in engaging in the activity is a relevant indicator in determining whether a business is being carried on. In Thomas v FC of T 72 ATC 4094; (1972) 3 ATR 165 the court found that the intention of the taxpayer in engaging in an activity is a significant factor in determining whether a business is being carried on. Further, Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: 'The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.' According to paragraph 40 of TR 97/11, this indicator is particularly related to: The Full Federal Court in Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307 stated that: 'The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant.' | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: This indicator is directed at determining whether the taxpayer entered into the activity with an intention to make a significant commercial or financial gain from it. In Hope v The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1980) 12 ATR 231, Mason J states that business activities are usually activities that are 'engaged in for the purpose of profit on a continuous and repetitive basis'. The intentions of the taxpayer are ascertained from looking objectively at their actions, including any arrangement entered into. All of the income expected to be received from, and all of the costs associated with, the activity are taken into account to determine what profit, if any, is expected. It is important to show how the activity can make a profit. However, stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. | Detailed Reasoning - Whether there is repetition and regularity of the activity: Paragraph 55 of TR 97/11 states: It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business. The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. | 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: A taxpayer's activity is more likely to be a business where it is carried on in a similar manner to other businesses in the industry. TR 97/11 provides at paragraph 64 that the consideration of the following factors as guidance in determining whether the taxpayer's activities have the characteristics of those engaged in similar trade: | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: A taxpayer's activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records. | Detailed Reasoning - The size, scale and permanency of the activity: The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. When considering this factor, we are looking at the scale in terms of the number of trades or transactions and the amount of 'management' input that may be required to conduct the activity. The business should be large enough to make it commercially viable and provide the taxpayer with a reasonable expectation of making a profit from the activity. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: Paragraph 87 of TR 97/11 lists a number of indicators which are relevant to determine whether an entity's activities amount to a private recreational pursuit or hobby, being: a. the taxpayer does not intend to make a profit from the activity b. losses are incurred because the activity is motivated by personal pleasure and rather than a profit motive c. there is no plan to show that a profit can be made d. the transaction is isolated and there is no repetition or regularity of sales e. the activity is not carried out in a manner similar to ordinary business or trade f. there is no system in place to allow a profit to be produced in the conduct of the activity g. the activity is carried out on a small scale h. there is an intention by the taxpayer to carry on a hobby, recreation or sport rather than a business, and i. any produce of the activity is sold to friends and relatives and not to the public at large. | Detailed Reasoning - Significant commercial purpose or character: The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: Whilst the taxpayer did not have a business plan, it is accepted that their goal was to generate income from CFD trading to ultimately fund their retirement. The trading of CFD's is an activity that does have a potential for profit. However, in the first income year, the taxpayer's trades generated a loss of $XXX,XXX. Further, in the second income year, the taxpayer's trades also generated a loss of $XXX,XXX. Although no profit has been made, it is accepted that the taxpayer had a purpose and a prospect of profit. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: Although the taxpayer defines themself as a trader, they do not have a business plan. The taxpayer has a trading plan however it does not include detailed strategies. The taxpayer runs more than one professional practice, and this is their primary, full-time occupation. The taxpayer's motivation, expressed in their trading plan, includes wanting to provide another revenue stream other than from their professional activities; and to build a solid capital base for a self-managed super fund. The activity does not appear to be preliminary, as there is no plan to change the activity, or expand into other forms of trading. Although there is an intention to make a profit, only losses have been made. There is a significant dedication of the taxpayer's time and funds, however, there is no indication in the trading plan that the taxpayer intends to establish a business. Instead, the goals are based on wealth accumulation leading to retirement. It appears that the taxpayer does not intend to engage in the business of trading CFDs at this time. | 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: The taxpayer examines market movements and places trades throughout a trading day when their professional practice is quiet and after hours at home. They place many trades through the course of a day in an attempt to make small profits that will eventually add up to a large capital sum. We do not consider that an entity in the business of CFD trading would carry out this activity in this manner. The amounts invested are commensurate with the taxpayer's personal wealth. They are trading amounts that they have saved or capital gains realised on the sale of personal assets. They have not pursued external means of providing finance to grow the business, such as bank loans or credit. It is considered that the taxpayer has knowledge and experience in CFD trading but their significant losses in the 20XX and 20XX income years indicate that they are not at the level of an entity in the business of CFD trading. Although the taxpayer has undertaken the necessary training to allow them to trade CFDs, they have no formal education in finance or trading related discipline. They have not consulted experts for advice, beyond family members. The taxpayer reviews their achievements X times during the year. An entity in the business of CFD trading is likely to review its achievements more frequently. The taxpayer did not complete a business plan and although they have taken steps to increase their knowledge of CFDs, their level of knowledge and preparation is limited and not as sophisticated as that of a person who would be in the business of trading CFDs on a full-time basis. | Detailed Reasoning - Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit: The taxpayer does not have a business plan or detailed trading plan and conducts CFD trading around his professional occupation. The CFD trading platform provides the taxpayer with an Annual Statement detailing all transactions related to the taxpayer's CFD trading. Throughout the year the taxpayer views their trades through the market platform and endeavours to construct a personalised diary. The taxpayer's aim is to improve in this area by keeping a more detailed diary and record of trading, learning from their trades and removing emotion from the trades. The taxpayer states that the activity is directed at making a profit. All decisions relating to trading/transactions appear driven by the intention to make a profit. Statements are provided by the online trading platform however there does not appear to be business records kept beyond endeavours to keep a trading diary. Although the taxpayer trades consistently, the daily consistency of operations is dependent upon business requirements in the practice. There is limited evidence of actions taken to pursue profitable activities and discontinue unprofitable activities in a businesslike manner. The activities do not appear to be carried on in a business-like manner such that it is directed at making a profit. | Detailed Reasoning - The size, scale and permanency of the activity: The taxpayer re-commenced commercial level CFD trading in Australia over the last X income years and made a significant loss in these years. Annual Statements provided show a significant number of CFD transactions including trades throughout the 20XX and 20XX income years. The taxpayer allocates a certain amount of money per month to trading. As there in no ownership of the underlying asset when trading CFDs the size of the taxpayer's profit and loss can help to determine the size and scale of trading activities. In the taxpayer's case the net trading position for both income years was a significant loss. The settlement amounts varied significantly. The size of the taxpayer's CFD trading activities were not always substantial, and as stated above the taxpayer conducted a high quantity of CFD trades. The size and scale of the CFD trading was commensurate to the taxpayer's personal level of wealth and private time. The taxpayer's motivation for trading in CFD's includes wanting to build a solid capital base to develop a large self-managed super fund. The taxpayer aims to achieve their goal of increasing their portfolio within a certain number of years. This could indicate lack of permanency of the activity. At present, it is not considered that the taxpayer's trading in CFDs has the size, scale and permanency of a business. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity: The activities undertaken by the taxpayer do not have any of the characteristics associated with a hobby or recreational activity (Paragraph 87 of TR 97/11). This is evident in the amount of time devoted to the activity, the money invested, the qualifications gained to trade at this level, the expertise applied and intention to make a profit. | Detailed Reasoning - Significant commercial purpose or character: TR 2005/15 indicates that the trading of CFD's is essentially a commercial activity. The amount invested per month, could be considered substantial for a less experienced and knowledgeable investor. The taxpayer has gained accreditation so that they can trade at a commercial level and their intention is to make a profit. The taxpayer trades regularly, placing many trades throughout the course of a trading day. It is acknowledged that the activity undertaken had a profit purpose. There are some characteristics that aligned the activities to those associated with carrying on a business. However, the activities also lacked indicators of a 'significant commercial purpose or character'. That is, there was no business premises, no staff, limited time given to the activity, no business plan in existence, no loss mitigation action, no plan to expand the activities, no intention to continue beyond achieving a wealth goal, and no design or purchase of customised market analysis tools. Although there was a profit purpose, the taxpayer did not have an intention to carry on a business. The taxpayer did not carry on the activities in a similar manner to that of ordinary traders in the business of financial investments, or in a businesslike manner. Furthermore, there was no permanency to the activities. | Detailed Reasoning - Conclusion: The Commissioner has determined that the taxpayer is not carrying on a business in relation to their CFD activities in the 20XX and 20XX income years. All the indicia summarised in TR 97/11 have been considered. No one indicator is decisive. The indicators have been considered in combination and as a whole. Instead, the Commissioner finds that the taxpayer is carrying on or carrying out a profit-making undertaking or plan. The taxpayer can claim losses made from his CFD trading under section 25-40. Note that, pursuant to subsection 25-40(3), a loss under subsection 25-40(1) can be deducted only if either (a) notice is given to the Commissioner that the taxpayer acquired the financial contract for differences for the carrying on or carrying out of any profit-making undertaking or plan or (b) the Commissioner is satisfied the taxpayer acquired the financial contract for differences for that purpose.

whether the activity is preparatory or preliminary to the ultimate activity | whether there is an intention to make a profit, and | volume of sales (taking into account the fact that, at the commencement of a business, sales would be relatively low) | the types of customers and marketing for the activity (that is, whether the taxpayer sell his/her product to the public at large or only to friends and family) | the types of expenses incurred | the level of capital investment | previous experience. Specifically, a taxpayer with no previous knowledge or experience in the activity will be expected to have sought advice from experts in the industry, and | comparison with similar activities carried out by a keen amateur.