January 18, 2011

CFDs and Tax

By Planet Wealth

pA Contract for Difference (CFD) is a derivative that allows you to speculate on the price movement of underlying securities such as shares, indices and commodities over which the CFD is based without the need to own the instrument./p
pIn simple terms a Contract for Difference can be described as small term agreement between the buyer of the Contract for difference and the CFD broker, with both parties taking an opposite view to whether the value of the underlying security or instrument on which the CFD is based will improve or decline in price. CFDs are settled by way of a cash transaction that is calculated as the difference between the opening and closing price of the underlying security or instrument. If the difference is positive the CFD provider pays the difference, and the holder of the CFD will benefit. Should the end result be negative, the holder of the CFD must pay the difference to the CFD provider, and the holder will incur a loss. As a href=http://icmarkets.com.au/cfds_ic_markets.html target=_blankCFDs/a dont have an expiry date CFD positions are able to be held open indefinitely./p
pThe Australian Taxation Office (ATO) has published a Tax Ruling TR-2005/15 lsquo;Income tax – tax consequences of financial contracts for differencesrsquo;, regarding the tax treatment of financial Contracts for Difference./p
pThe Tax Ruling states that if you are carrying on a business (or entering into commercial transactions) of buying and selling CFDs for the aim of profit making, any gains made will be regarded as assessable income and any losses incurred will be an allowable deduction. The deciding factor here is whether you happen to be in fact carrying on a business (or entering into a commercial transaction) the principle tests to determine this are outlined below:/p
p-The quantity of transactions you enter into each year (e.g. on a weekly or monthly basis); nbsp; nbsp;/p
p-The size and scale of your operations; nbsp; nbsp;/p
p-Whether or not youre carrying on your activities in a systematic, organised and professional manner for the aim of profit making; and nbsp; nbsp;/p
p-The degree of skill employed in performing these activities./p
pIf you determine that youre not carrying on a business (or entering into commercial dealings), any gain or loss youd usually make would fall under the Capital Gains Tax (CGT) provisions. As CFDs are considered a CGT-asset, any capital gains are dealt with as assessable income and capital losses are usually deducted from any current or future capital gain./p
pBecause the ATO views Contracts for Difference as contracts of speculation, in that you are effectively betting that the underlying share or instrument will either increase or reduce in value, it would seem from the ruling that the aforementioned many not be relevant to CFD transactions. If so, any capital gain or capital loss you make lsquo;from a financial Contract for Difference entered into for the aim of recreation by gamblingrsquo; is going to be disregarded under the CGT gambling exemption provision./p
pWhat this all means is that if you have made a $1,000,000 capital gain from a CFD trade and you can convince the ATO the transaction was entered into for the purpose of recreation by gambling, you will be laughing all the way to the bank. But, if the outcome were a $1,000,000 capital loss, you would lose the ability to offset the capital loss from any current or future capital gains that you have./p
pAs the ATO views that Contracts for Difference are predominantly entered into for an income making or gambling purpose, it would hard for you to claim a capital loss if you could not prove that you are carrying on a business or entering into profitable transactions./p
pFor more information on CFD tax rulings in Australia, you should consult your a href=http://www.icmarkets.com.au target=_blankCFD broke/ar or question your accountant. You will find simple tax guidance in the PDS issued by your CFD broker, you would have received this document before you start trading a href=http://www.icmarkets.com.au target=_blankCFDs online/a./p

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