Private ruling: Contracts for difference trading
Date of advice: 17 February 2023
Published: 11 April 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the gains or losses made from Contracts for Difference (CFD) trading considered to be assessable profits or deductible losses made from carrying on a business of CFD trading? | A1: No.

Relevant facts and circumstances: You work full time in an unrelated role. You do not hold an ABN. You commenced CFD trading during the relevant income year and ceased trading a little more than a year later after you determined the activity was unprofitable when you made a significant loss. You made X trades during this time with an average of X per week. The regularity of these transactions ranged from some weeks with no activity to weeks with up to X trades. You spent approximately X hours a week on CFD trading activities. These were conducted in your free time. You used online trading platform to conduct your trading activity. You have no relevant qualifications, formal education or experience in finance or economics and undertook very basic training by reading periodicals and following global financial trends. You did not engage a professional stockbroker, trading experts, financial planners or any professional consultants or for advice. You relied on the tutorials provided by the trading platform you use. You did not have a business plan or strategy in place prior to or during the period of transacting in CFD's. You relied on the default generated reports from your trading platform to keep records of your trading activities. You did not have a business premises to conduct activities from and no dedicated space or area designated for trading activities. You funded the CFD trading activity via a combination of personal savings and your personal credit card which was supported by your non-related fulltime position.

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 995-1

Reasons for decision: Detailed Reasoning - Tax treatment of CFD trading: Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference outlines the taxation treatment of CFD's. A CFD is a form of cash settled derivative that allows investors to take risks on movements in the price of a subject matter (the 'underlying') without ownership of the underlying. Paragraph 16 of TR 2005/15 says where this type of trading is part of the carrying on of a business, the gains and losses from the transactions will be assessed under sections 6-5 of the ITAA 1997. Otherwise, paragraphs 34 and 35 of TR 2005/15 states the trading activities will be regarded as the carrying out of a profit-making undertaking and a net gain or a net loss from trading will be accounted for under either sections 15-15 or 25-40 of the ITAA 1997. | Detailed Reasoning - Carrying on a business of CFD Trading: Determining whether or not an activity amounts to carrying on a business is a matter of fact and degree. Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? provides indicators that the courts have concluded are relevant when determining whether a business is being carried on. These indicators are no different in principle, from the indicators as to whether activities in any other area constitute carrying on a business. The indicators provided in TR 97/11 are: • 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 repetition and regularity of the activity • 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 size, scale, and permanency of the activity • whether the activity is better described as a hobby, a form of recreation or a sporting activity. Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on. | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: Due the inherent nature of CFD trading discussed in paragraph 23 of TR 2005/15 there is a fundamental element of speculating on a financial risk that is commercial by nature. Based on this it could be considered that trading CFDs does have commercial purpose however, in your situation there are serval key elements that would be expected to be present in a commercial operation that are missing form your activity. As such, your activity lacks significant commercial purpose or character. | Detailed Reasoning - Whether the taxpayer has more than just an intention to engage in business: You commenced your CFD trading activity with the intention to produce an income based on a short-term opportunity you identified in the market conditions. You did not have a business plan and did not engage any industry professionals or experts prior to commencement and had no formal education or qualifications in the area you were trading in. You did not hold an ABN in relation to this activity. Based on the information provided it is clear you did not have more than just an intention to engage in business. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity: You commenced your CFD trading activity with the intention of producing a profit. During the relevant income year your trading activities produced a loss and you ultimately ceased the activity once you determined it to be unprofitable. It is accepted that your CFD activity had the prospect of profit but lacked the purpose of profit. | Detailed Reasoning - Whether there is repetition and regularity of the activity: You undertook your CFD trading activity approximately X hours per week in your free time. During the relevant income year, you conducted X trades amounting to approximately X per week. The regularity of these trades fluctuated from no weekly activity at all to up to X trades in a single week. Although the activity was undertaken in a repetitious manner the trades themselves were executed irregularly and had no discernible pattern or strategy. It is concluded that you did not display repetitious and regular activities that would be expected of a CFD trading operate that is carrying on a business. | 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: You did not have a business plan that you follow in relation to your activity. You have not engaged experts in the field you are trading in, and you have no formal education or qualifications that might give you a competitive edge in that market. There is no evidence of a trading strategy or plan that would typically be expected of a commercial operation. You did not have a dedicated space for your trading activity and did not actively research or proactively study the underlying assets you're buying. Your activity lacks several key factors that would be expected of a business that is carrying on CFD trading and is not carried on in the same or similar manner to that of the ordinary line of business in this trade. | Detailed Reasoning - The size, scale, and permanency of the activity: It is common for the size, scale and permanency, and the repetition and regularity indicators to be intrinsically linked. As the repetition of an activity increased so does the amount of work that is completed and subsequently more income is received. In your case, although the number of trades could be representative of a commercial operation, the amount of capital involved, and the turnover of the activity would not typically be sufficient for an activity that is carrying on a business. The fact that the activity has now ceased after a short period of time also reflects a lack in permanency. It is not considered that your activity satisfies the size, scale and permanency indicator. | Detailed Reasoning - Whether the activity is better described as a hobby, a form of recreation or a sporting activity.: Due the commercial nature of CFD trading it would not be better described as a hobby, a form of recreation or a sporting activity. | Detailed Reasoning - Conclusion: After weighing up the relevant business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner's view that the overall impression is that you are not carrying on a business of CFD trading in the relevant income years and that the CFD trading activity would better be described as carrying out a profit-making undertaking or scheme. Any gains received from financial contracts for differences will be assessable under section 15-15 of the ITAA 1997 where the taxpayer has entered into a financial contract for differences in carrying on or carrying out a profit-making undertaking or scheme. A loss from a financial contract for differences where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997.