Private ruling: Am I in business - CFD trader - broker in administration - partial loss of margin deposit
Published: February 2013
Ruling period: Year ended 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1:  | A1:  | Q2:  | A2: 


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 104-145, | Income Tax Assessment Act 1997 Section 118-20, | Income Tax Assessment Act 1997 paragraph 118-37(1)(c), | Income Tax Assessment Act 1936 subsection 70B(2) and | Income Tax Assessment Act 1936 subsection 70(4).

Reasons for decision: Summary: For the year ended 30 June 2012, your CFD activity is considered to be the carrying out of a profit making undertaking or scheme. You can offset your loss from your CFD trades against your other income, in your income tax return for the year ended 30 June 2012. | Detailed Reasoning - Detailed reasoning: CFD's are a form of cash-settled derivative in that they allow investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Financial CFD's include those relating to share prices, share price indices, financial product prices, commodity prices, interest rates and currencies. Unlike share trading, the non-margin amount of a CFD position is merely a deposit. When a transaction is made, the deposit is not included in the calculation of gross receipts. The Commissioner's view about the tax consequences of CFD trading is found in Taxation Ruling TR 2005/15 Income Tax: tax consequences of financial contracts for differences (TR 2005/15). Where CFD trading is part of the carrying on of a business, the gains from the CFD transactions will be accounted for under section 6-5 of the ITAA 1997 and the losses under section 8-1 of the ITAA 1997. Otherwise, the CFD trading will be regarded as part of the carrying out of a profit making undertaking and the gains from the CFD transactions will be accounted for under section 15-15 of the ITAA 1997 and the losses under section 25-40 of the ITAA 1997. Either way, the gains and losses from CFD trading are accounted for on revenue account. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from CFD trading to be accounted for under the capital gains tax provisions. However, a gain or loss from CFD trading entered into for the purpose of recreation will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 nor be deductible under section 8-1 of the ITAA 1997 or section 25-40 of the ITAA 1997. Further, a capital gain or capital loss from a financial CFD entered into for the purpose of recreation will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997. Regarding the matter of share market trading, court cases such as AAT Case 6297 (1990) 21 ATR 3747 and Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 91 ATC 4689; (1991) 22 ATR 344 have held regularity in the buying and selling of shares and sales turnover to be the salient indicators of whether a taxpayer is carrying on a business of share trading. Operating in a business-like manner and the degree of sophistication involved is a supportive indicator. In your case, your CFD trading allowed you to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Whilst your activity had a reasonably large turnover the frequency of trading was low, it is unclear what kind of experience or knowledge you had to carry out your CFD trading and whether or not you used a sophisticated or business like approach, therefore the impression gained is that you were not carrying on a business of CFD trading. However, because the Commissioner in general regards CFD trading as 'an act of commerce', your CFD activity is considered to be the carrying out of a profit making undertaking or scheme and accordingly your trading losses are deductible under section 25-40 of the ITAA 1997. You may offset your CFD trading loss against your other income. Your CFD trading losses are to be included at label D15 in your tax return, supplementary section. | Summary: Any partial non return of your margin deposit that was held with your broker will be accounted for on capital account, once the liquidator has made a final declaration in accordance with subsection 104-145(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Your margin deposit with your CFD broker is considered to be a traditional security, therefore legislation and tax rulings regarding the taxation of traditional securities are first considered before moving over to capital gains tax legislation. Taxation Ruling TR 96/14 Income Tax: traditional securities (TR 96/14) deals with the topic of traditional securities and at paragraph 2 examples of traditional securities are provided, one of which is a deposit with a financial institution. For you, your margin deposit with your CFD broker is considered a deposit with a financial institution. When a traditional security is either disposed of, or redeemed at a loss, the loss is generally accounted for on revenue account as a deduction in accordance with subsection 70B(2) of the Income Tax Assessment Act 1936 (ITAA 1936). However, where the issuing company of the traditional security is in liquidation TR 96/14 rules that there is no disposal of the traditional security, even if all or part of the security might ultimately cease to exist or become worthless as a result of the liquidation. As a result the loss made on the traditional security will not be a revenue loss in accordance with subsection 70B(2) of the ITAA 1936. Once it is established that a loss is not a revenue loss, the capital gains tax provisions are next considered to check if the loss is a capital loss. | Detailed Reasoning - CGT Event G3: CGT event G3 in section 104-145 of the ITAA 1997 happens if you own financial instruments issued by, or in relation to a company and a liquidator or an administrator of the company declares in writing that they have reasonable grounds to believe (as at the time of the declaration) that the instruments have no value or have only negligible value. A margin deposit held with your CFD broker is an example of a financial instrument. The time of the event is when the declaration is made. | Summary: Comments, statements or offers made to date by the administrator, you or a third party about the amount of margin deposit that will be repaid do not constitute a declaration in writing of a liquidator or administrator as required by subsection 104-145(1) of the ITAA 1997; and therefore do not represent CGT Event G3. | Detailed Reasoning - Detailed reasoning: The question for determination in your case is whether certain comments, emails or the part return of your margin deposit constitute a declaration by the administrator that meets the requirements of a valid declaration (i.e. that any remaining part of your margin deposit is worthless) as stipulated in subsection 104-145(1) of the ITAA 1997. (Taxation Determination TD 92/101 discusses the requirements for a valid declaration in respect of valueless shares by a liquidator.) To date the administrator has not explicitly stated that any remaining part of your margin deposit is worthless, comments provided give the impression that a further instalment of the margin deposit will be returned to you and in fact that you may receive most of your margin deposit back. Until the final outcome of your CFD broker's administration is known and a final declaration is made by the liquidator as to what part of your margin deposit is worthless, CGT Event G3 has not happened therefore any potential or possible capital loss can not be realised. It follows that a capital loss cannot be returned in your income tax return regarding any non return of your margin deposit until CGT Event G3 happens.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Issue 1: Question 1: For the year ended 30 June 2012, was your contracts for difference (CFD) activity, the carrying out of a profit making undertaking or scheme? | Question 2: Can you offset your loss from your CFD trades against your other income, in your income tax return for the year ended 30 June 2012. | Issue 2: Question 1: Will any partial non return of your margin deposit that was held with your broker be accounted for on capital account, once the liquidator has made a final declaration in accordance with subsection 104-145(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question 2 : Do comments, statements or offers made to date by the administrator, you or a third party about the amount of margin deposit that will be repaid constitute a declaration in writing of a liquidator or administrator as required by subsection 104-145(1) of the ITAA 1997; and therefore represent CGT Event G3? | Relevant facts: As at 1 July 2011, you had a CFD account with a broker. | Administrators were appointed for your broker sometime in the year ended 30 June 2012. | Trading was suspended and your open CFD trades were closed out by the administrator. | For the period 1 July 2011 to the time that your open trades were closed out by the administrator you had a low number of X opened and closed out trades. | You made an overall net loss from your CFD trading in the year ended 30 June 2012. | At the time that your broker went into administration you had a large amount of margin deposit in your CFD account, from which the CFD trading loss was deducted. The remaining margin deposit was locked down by the administrator. | Sometime in the year ended 30 June 2013, a significant percentage of your locked down margin deposit was deposited into your bank account as a first instalment and you felt that you may get the majority of the margin deposit back. | The following documents are to be read with and form part of the scheme for the purposes of this private binding ruling: | · Email from you addressed to your accountant of a certain date regarding the margin deposit; | · Excel spreadsheet titled CFD TRADING FY 2012 - in your name, summarising CFD trades, recording an overall net loss after commission of a certain amount; | · Letter of a certain date from your brokers administrator regarding your CFD account; and | · Email from your broker's administrator addressed to CFD clients.