Private ruling: Am I in business trading contracts for difference (CFD's)
Date of advice: 9 September 2016
Published: October 2016
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20ZZ | Year ended 30 June 20YY
Date scheme commenced: 1 July 20XY

Ruling: Q1: For the year ended 30 June 20XX, were you in the business of trading contracts for difference (CFD's)? | A1: Yes. | Q2: For the year ended 30 June 20ZZ, were you in the business of trading CFD's? | A2: Yes. | Q3: For the year ended 30 June 20YY, were you in the business of trading CFD's? | A3: Yes.

Relevant facts and circumstances: During the income year ended 30 June 20XX you traded contracts for differences (CFD's) with an on line broker in financial markets. During this period you made a substantial amount of closed out trades (bought and sold within the same period). Overall, for the income year ended 30 June 20XX you made a loss from your CFD trading. You passed the non-commercial loss rules because you had gainful trades of more than $20,000 for the year and you met the income requirement. During the income year ended 30 June 20ZZ you resumed your trading in CFD's with your on line broker in financial markets. During this period you made a substantial amount of closed out trades (bought and sold within the same period). Overall, for the income year ended 30 June 20ZZ you made a loss from your CFD trading. You passed the non-commercial loss rules, because you had gainful trades of more than $20,000 and you met the income requirement. During the income year ended 30 June 20YY you continued trading CFD's with your on line broker in financial markets. During this period you made a substantial amount of closed out trades (bought and sold within the same period). Overall, for the income year ended 30 June 20YY you made a gain from your CFD trading. For the period commencing 1 July 20XY to 30 June 20XX you invested a significant amount in your CFD trading. For the period commencing 1 July 20XZ to 30 June 20ZZ you invested a significant amount in your CFD trading. For the period commencing 1 July 20ZZ to 30 June 20YY you invested a significant amount in your CFD trading.

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 118-20

Reasons for decision: Summary: For the year ended 30 June 20XX, 30 June 20ZZ and 30 June 20YY you were carrying on a business of share trading contracts for difference (CFD's). The losses from your business of CFD trading will be deductible on revenue account and your gains will be assessable. | Detailed Reasoning - Contracts for difference: CFDs are a form of cash-settled derivative in that they allow investors to take risks on movements in the price for 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. Participants in CFDs take a risk that the price of the underlying will or will not exceed a price for that underlying at some time in the future. 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 Income Tax Assessment Act 1997 (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 being accounted for under the capital gains tax provisions. | Detailed Reasoning - Carrying on a business of CFD trading: Regarding the matter of carrying on a business, 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. | Detailed Reasoning - Application to your situation: You have made a substantial amount of CFD trades in the income year ended 30 June 20XX, the income year ended 30 June 20ZZ and the income year ended 30 June 20YY. This is considered to be a commercial amount of transactions, and shows a high level of repetition and regularity. You have also invested a substantial amount of money into your activities. This is considered to be an investment of a commercial level. In your case, you were carrying on a business of CFD trading because your activity exhibited a strong regularity in trading CFD's and a high sales turnover. As a trader, the losses you have made from your CFD activities are deductible under section 8-1 of the ITAA 1997 and your gains are assessable under section 6-5 of the ITAA 1997. The losses will be included as non-primary production losses in your relevant income tax returns. You have lodged an amendment request for these years and this will be processed shortly. When you lodge your income tax return for the year ended 30 June 20YY you should include the overall gain from your CFD trading as a non-primary production gain.