1 Will the gains from the activities of trading contracts for differences ('CFDs') be assessable under section 6-5 of the ITAA 1997 and losses be deductible under section 8-1 of the ITAA 1997?
No Question 2 Will the gains from carrying out CFD trading activities be assessable under section 15-15 of the ITAA 1997 or losses from the activities be deductible under section 25-40 of the ITAA 1997 as a profit-making undertaking or plan? Answer Yes Question 3 Will the CFD trading activities of the taxpayer be considered gambling and capital gains or losses therefore disregarded under subsection 118-37(1)(c) of the ITAA 1997? Answer No This ruling applies for the following period : Year ended 30 June 20XX The scheme commences on: XX Month 20XX
The taxpayer is an individual. The taxpayer works full time and has an ownership interest in a number of xxxx businesses. The taxpayer is not registered for an ABN. The taxpayer commenced trading in contracts for difference (CFD) in Month 20XX. During the 20XX income year, the taxpayer entered into contracts for difference (CFD) through an online trading platform. The CFD trading platform requires the applicant to maintain a margin account to cover the positions taken. The amounts deposited into the margin account were considered by the applicant to be spare cash generated from his employment and businesses. The underlying indices of the CFDs were currency indices and blue-chip shares listed in Australia and xxxx. The taxpayer lost interest in trading CFDs in Month 20XX and has not re-engaged since. All positions have been closed. The taxpayer does not have any special skills or knowledge in the area of CFDs, trading, equities, currencies, or finance generally. The taxpayer did not seek any advice from financial advisers or other similar professionals.
The taxpayer has not spent considerable time conducting market research or analysing the market and has only actioned trades when he had spare time and "felt like it". The taxpayer was aware of the speculative nature of the CFDs and engaged in CFD trading to "have a go". The taxpayer hoped to gain from trading but considered CFDs to be similar to betting and the probability of losing being equally likely as winning. The taxpayer does not engage in traditional forms of gambling (such as betting on horse races) due to his personal beliefs. The CFD trading activities were only conducted on one online platform which the applicant advises was convenient and simple. The platform is a large xxxx-based financial services company that offers trading in shares, spread betting, CFDs and Forex across world markets. The taxpayer did not keep records of profits or losses apart from what was provided by the trading platform. The taxpayer did not have a systemised method of trading or business plan. The total gains made were $X and the total losses made were $X across X trades closed in the year ended 30 June 20XX (i.e. a net loss of $X).
The applicant made trades on X days during the year ended 30 June 20XX.
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 35 Income Tax Assessment Act 1997 section 118-20 Income Tax Assessment Act 1997 section 995-1
Question 1 Summary No, the gains received from activities of trading CFDs will not be assessable under section 6-5 of the ITAA 1997 and the losses will not be deductible under section 8-1 of the ITAA 1997. Detailed reasoning The Commissioner's view on the taxation treatment of CFD's is outlined in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for difference (TR 2005/15). TR 2005/15 states: A gain from a financial contract for differences will be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) 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 financial contract for differences will be an allowable deduction under section 8-1 of the ITAA 1997 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 financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 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 of the ITAA 1997. 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. A gain or loss from a financial contract for differences entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 or deductible under section 8-1 or section 25-40 of the ITAA 1997. A capital gain or capital loss from a financial contract for differences entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997. Carrying on a business of CFD trading Section 995-1 of the ITAA 1997 defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11). These indicators are applicable to business activity generally. Paragraph 13 lists the following indicators as being relevant when determining whether or not 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 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 • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit
• 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 Application of the law to the facts Whether or not the taxpayer was in business is a critical fact that will determine whether: • Gains from the taxpayer's CFD trading are assessed under section 6-5 of the ITAA 1997 and are treated as profits from carrying on a business of CFD trading. • Losses incurred from the taxpayer's CFD trading are treated as losses in carrying on of a business of CFD trading and the losses are deductable under section 8-1 of the ITAA 1997. • Gains made from the taxpayer's CFD trading are assessable under section 15-15 of the ITAA 1997 and treated as profits made from an undertaking or scheme. • Losses incurred from the taxpayer's CFD trading are deductable under section 25-40 of the ITAA 1997. The determination of whether or not an activity amounts to a business being carried on is a matter of fact, not of law. The determination is a result of the weight and influence of the facts in that situation.
Whether the activity has a significant commercial purpose or character. As discussed in TR 97/11 at paragraph 29, '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'. This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. In this case, the taxpayer completed X CFD transactions during the period 1 July 20XX and 30 June 20XX. The trading of CFD's is an activity that does have a potential for profit. However, in the year ended 30 June 20X, total gains made were $X and the total losses made were $X, with a net loss of $X.
The taxpayer made a high number of transactions in the X-month period. The taxpayer hoped to make and gain ie they hoped to profit from the CFD trading. However, the CFD trading activities were not commercially viable for the taxpayer due to the high level of losses sustained. In addition, the taxpayer • had no skill in trading CFDs, equities or currencies other than what he picked up as a result of "having a go" • had no business plan or detailed knowledge of the underlying assets that was relevant to the CFD trading • did not engage the use of professionals who were skilled or knowledgeable in the area of financial markets or equities • did not have a strategy to produce a profit from the activities other than relying on some general business acumen gained through his involvement in the xxxx businesses • engaged in CFD trading, which was not his usual vocation or as an owner of xxxx businesses • did not engage in CFD trading using a business structure Whether the taxpayer has more than a mere intention to engage in business
The taxpayer hoped to make a profit, but realised the speculative nature of CFDs. The taxpayer engaged in CFD trading to "have a go". There is nothing in the facts to suggest that the taxpayer intended to engage in a business. Whether there is repetition and regularity of the activity The taxpayer had a significant number of closed out CFD transactions in a X-month period. However, trading activities were undertaken on only X days of the year. The taxpayer did not have a business plan and was not systematic in their trades. The size, scale and permanency of the activity As there is no ownership of the underlying asset when trading CFD's the size of a 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 the income year ended 30 June 20XX was a loss of $X. The taxpayer undertook X trades on XX days of the year until trading stopped in Month 20XX. 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
Activities are more likely to be part of carrying on a business when they are carried on in a similar manner to other businesses in the industry. In this case the taxpayer had a high number of CFD transactions, there was no defined trading strategy, no business plan in place and trades were made on XX days of the year. The facts would not indicate that the taxpayer was carrying out activities in a similar manner to someone operating as a professional trader. Whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit. As discussed above, although the taxpayer hoped to make a profit, there was no defined trading strategy or busines plan. Overall, it is not considered that the taxpayer's CFD trading activities were carried out in a manner that supports a business of CFD trading being carried on. Whether the activity would be better described as a hobby, recreational or sporting activity In considering whether an activity may be a hobby, paragraph 87 in TR 97/11 describes circumstances such as when: • it is evident that the taxpayer does not intend to make a profit from the activity;
• losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made; • the transaction is isolated and there is no repetition or regularity of sales; • any activity is not carried on in the same manner as a normal, ordinary business activity; • there is no system to allow a profit to be produced in the conduct of the activity; • the activity is carried on a small scale; • there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business; • any produce is sold to friends and relatives and not to the public at large. The CFD trading activities would not be better described as a hobby, recreational, or sporting activity. The transactions have not been isolated or on a small scale. Carrying on a business - Conclusion
In weighing up the relevant factors discussed above, it is considered that the balance of the above factors indicate that the taxpayer was not carrying on a business of trading in CFD's during the income year ended 30 June 20XX. Profit in a business operation or commercial transaction for the purpose of profit-making As discussed above in paragraphs 28-34 and paragraph 47, the taxpayer is not considered to be making profit in a business operation or commercial transaction for the purposes of profit-making. As a result, the gains from the CFDs will not be assessable income under section 6-5 of the ITAA 1997 and the losses from the CFDs will not be deductible under section 8-1 of the ITAA 1997, as the transactions were not 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. Question 2 Summary Yes, the gains from carrying out CFD trading activities be assessable under section 15-15 of the ITAA 1997 as assessable income from a profit-making undertaking or plan. The losses from the activities will be deductible under section 25-40 of the ITAA 1997.
Detailed reasoning As discussed in TR 2005/15 • A gain from a financial contract for differences will be assessable income under section 15-15 of the ITAA 1997 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 of the ITAA 1997. • 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. In determining whether the taxpayer has carried on or carried out a profit-making undertaking or scheme under section 15-15, TR 2005/15 makes the following observations:
The case of Antlers Pty Ltd (in liq) v. FC of T 97 ATC 4201; 35 ATR 64, although a decision about the first limb of the former section 25A of the Income Tax Assessment Act 1936, contains helpful obiter dicta as to the role of intention and purpose in section 15-15 as a successor to the second limb of section 25A. Lockhart J said in this case: FCT v. Myer Emporium Ltd (1987) 163 CLR 199 is authority for the proposition that the profit arising from an isolated commercial or business transaction will constitute income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of the taxpayer's daily business activities.... The taxpayer's purpose or intention is usually ascertained from an objective consideration of the circumstances of the case but his subjective purpose or intention is also of course relevant and may sometimes be the determining factor.
It is the intention of the taxpayer that is relevant for section 25A purposes; it may be gleaned not by mere declarations of intention, but also by examining all the relevant circumstances, especially the conduct of the taxpayer in order to discern or ascertain his intention or purpose. ... The determination of the taxpayer's purpose in acquiring the relevant property involves an analysis of his state of mind at the time of purchase and his declarations of intention. However, it is important to examine carefully, not only the taxpayer's declarations of intention, but also the objective facts, especially as they existed at the time of the purchase, in order to glean the taxpayer's purpose. What is important is the taxpayer's actual purpose, determined by a consideration of the objective facts. Part of the objective factual matrix is that the transactions are the purchase of financial risk - something with a significant commercial flavour - by means of a contract productive only of a gain or a loss. The statements of a taxpayer's subjective intention are also relevant.
Therefore, the taxpayer's purpose and intention for entering into the CFDs will be relevant in determining whether section 15-15 and section 25-40 have application. As discussed above, he 'hoped to gain', which is to say that he hoped to profit from the CFD transactions. Although the taxpayer 'wanted to have a go', the number of trades and size of the gains and losses indicates more than just a one-off recreational activity. Profit-making or Gambling? TR 2005/15 discusses the distinction between profit-making and gambling at paragraph 43: How is the distinction between profit-making and gambling to be drawn? It is a question of fact in each case. The horse race betting cases have established that: • there is a chance-to-skill spectrum and gains which depend on a significant element of skill are more likely to have tax consequences than 'gambling on merely random events'.... and • there is a private/recreational-to-commercial spectrum and the more closely an activity is identified as undertaken for recreational purposes, the less likely it will have tax consequences.
As discussed at paragraph 45 of TR 2005/15, a taxpayer who enters into a financial CFD only once, or very occasionally, who has no expertise, does not engage in any income-producing activities of a character bearing some association with the financial CFD or its underlying, and, in particular, who gambles in the ordinary recreational way is the product of gambling (and not the result of a profit-making endeavour.) Paragraph 70 of TR 2005/15 also confirms that the degree of control that investors have in determining when to close out a transaction also contributes to distinguishing financial CFD's from recreational gambling since it allows skill and judgment to be exercised right up to the termination time. Given that the taxpayer entered into and closed out X trades, their CFD trading is not considered gambling. The facts, coupled with the inherent commercial flavour of CFDs, the Commissioner finds that the taxpayer has carried on or carried out a profit-making undertaking or scheme.
Therefore, any gains from carrying out CFD trading activities will be assessable under section 15-15 of the ITAA 1997 and any losses from the activities will be deductible under section 25-40 of the ITAA 1997. Question 3 Summary No, the CFD trading activities will be considered to have been carried on or carried out as a profit-making undertaking or scheme. The CFD trading activities will not be considered gambling. The gains and losses from the CFD trading activities will be of a revenue nature, and not capital gains or losses. Detailed reasoning As discussed above, the CFD activities will not be considered gambling. The CFD activities will be considered to have been carried on or carried out under a profit-making undertaking or scheme. The gains and losses resulting from a CFD transactions will be of a revenue nature. The anti-overlap provisions in section 118-20 of the ITAA 1997 prevent gains and losses from CFD contracts being assessed under the capital gains tax provisions.