Private ruling: CFD Trading - income and Losses
Date of advice: 19 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the income from your Contracts for Differences (CFD) activities included in your assessable income? | A1: Yes. | Q2: Are you entitled to a deduction for losses you incur from your CFD activities? | A2: Yes.

Relevant facts and circumstances: You have been trading Contracts for Difference (CFD). In the 20XX financial year, you made a loss from trading. The main part of the loss was from the disposal of a number of securities for one entity. The cost of the securities was higher resulting in a loss on the sale. In 20XX, you also sold other securities which resulted in a small profit. The securities were initially purchased in the relevant financial year before being sold in the 20XX financial year. You purchased the securities at a time when the company was performing well and this was reflected in the share price. The Global Financial Crisis (GFC) resulted in a significant decline in value of the securities. You intended to hold the securities until the share price improved. The CFDs were sold as the company was delisted from the Australian Stock Exchange. In the years prior to the GFC you traded in CFDs frequently. You traded every day with the intention of making a small profit for a house deposit. On some days you executed three or four trades. You would watch for leads from overseas markets, then look for the average prices, and buy and quickly sell which resulted in clearing a profit on most trades. You were self-educated in relation to CFDs. A work colleague showed you the basics and provided some mentoring. You purchased several books in regards to CFDs. You also subscribed to free newsletters, read articles, and participated in webinars and various online events. You completed a computer based CFD training course, and actively followed the financial reporting of the markets. You have not recently placed any trades as there isn't enough volume in the current market to make trading CFDs an attractive proposition. You do not gamble in the ordinary recreational way. Your CFD trading was calculated with entry and exit points planned in advance. Your positions were monitored on a daily basis.

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: Summary: Taxation Ruling TR 2005/15 deals with the tax consequences of financial CFDs. Paragraph 11 in TR 2005/15 explains that gains from a financial CFD will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making. However, for those taxpayers not engaged in business operations and who have entered into a CFD as a result of carrying on or carrying out a profit-making undertaking or scheme the gains made will be assessable under section 15-15 of the ITAA 1997 (paragraph 13 of TR 2005/15). Likewise, paragraphs 12 and 14 in TR 2005/15 explains that losses from a financial CFD will be deductible under section 8-1 of the ITAA 1997 if the CFD transaction is entered into as an ordinary incident of carrying on a business, or the profit was obtained in a business operation or commercial transaction for the purpose of profit making. In addition, losses from CFD transactions are deductible under section 25-40 of the ITAA 1997 where the gain would have been assessable under section 15-15 of the ITAA 1997. Therefore to determine which legislation is relevant in your case we need to consider whether your CFD activities are regarded as a business activity. Business is defined in section 995-1 of the ITAA 1997 to be 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. Paragraph 17 of TR 2005/15 states that to determine if a business is being carried on, matters such as whether the transactions are entered into in a systematic, organised and businesslike way; the repetition or regularity of the transactions; the scale of the transactions; whether the transactions are related to or part of other activities of a businesslike character; the purpose of the taxpayer; the degree of skill employed in how you engage in the transactions. Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors can be applied to other types of businesses, such as CFD transactions. No individual factor is determinative, but should be weighed up in conjunction with the other factors. These factors are outlined below: Nature of activity and purpose of profit making 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 CFDs exists, there is usually a business plan of how the activities will be conducted. A business plan might show, for example: • an analysis of potential investments, • analysis of the current market value and various segments of the market, • research to show when or where a profit may arise, and/or • the basis of decisions as to when to hold or to sell CFDs. In your case, you aimed to make a profit from trading in CFDs. You have used information from the internet, books and a course undertaken to help you in your investment decisions. Repetition and regularity of the activities Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions. Prior to the Global Financial Crisis, you were making daily trades but have now ceased to make regular trades. Your initial trades were intended to generate small profits that would be used for a house deposit. Organisation in a business-like manner and the keeping of records Generally a business would involve study of trends, analysis of relevant material and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. As per Case X86 90 ATC 621, this means having or operating on a particular plan with the main goal of maximising profits. If records of purchases and sales of CFDs were not kept, it would be more difficult for a person to demonstrate that a business was being carried on. You do not have professional CFD qualifications, however, you have time doing a course and researching CFD trading through publications and other reference material. You plan to make a profit from your CFD account. Volume of trading and amount of capital injected A higher volume of purchases and sales of CFDs is more likely to indicate that a business is being carried on. Prior to the Global Financial Crisis, you were making daily trades but have now ceased to make regular trades Conclusion After weighing up the factors outlined above, it is considered that you are not carrying on a business of CFD trading. Although you use various sources of information to help you with your CFD decisions, you have not shown that you utilise a sophisticated business technique. Therefore, as your CFD activities were undertaken with a view to making a profit, your gains from trading CFDs are assessable under section 15-15 of the ITAA 1997 and losses are deductible under section 25-40 of the ITAA 1997.