Issue

How to account for a Contract For Difference (CFD) in Class. 

Background

The ATO has a view on CFD’s in TR 2005/15 Income tax: tax consequences of financial contracts for differences, which outlines the treatment for CFD should be ordinary income rather than capital gains or losses.

Resolution

In Class you will need to:

Step 1: Create a CFD account as a Custom Holding Account

Step 2: Process Cash In and Out transactions

Step 3: Record Accounting Gains and Losses

Step 4: Match net of Cash In and Cash Out transaction to the Realised Accounting Gain/Loss event

Step 5: Add New Income Expense Types for both Gain or Loss situation

Step 6: Create Business Events to take up income or expense for tax purpose only

Create a CFD account as a Custom Holding Account

Navigating to Fund Level > Investment > Custom Holding Account

1. Enter the holding account code
2. Enter the relevant Description
3. Choose the relevant Classifications, refer to the screenshot below
   
   

Process Cash In and Cash Out transactions

Apart from normal transfer from Cash into this account

1. All profits will be reflected via 'Cash In' transaction to this account
2. All losses will be reflected as 'Cash Out' transaction from this account.

Record Accounting Gains and Losses

Navigating to Fund Level > Transactions > Realised Accounting Gain/Loss

1. Create a business event to record the accounting gain or loss 
2. Only top three fields (Custom Holding Account, Effective Date and Gain/Loss Amount) are required.
   
   

Match net of Cash In and Cash Out transaction to the Realised Accounting Gain/Loss event

Add New Income Expense Types for both Gain or Loss situation

Navigate to Business Level > Settings > Investment Income 

1. Create the below Income Expense Type
   
   

Navigate to Business Level > Settings > Investment Expense

1. Create the below Income Expense Type
   
   

Step 6: Create Business Events to take up income or expense for tax purpose only

Refer to knowledge article How to process a Tax Only Income or expense for detailed steps.

Further reading

It is argued that CFD trading activities should be on revenue rather than CGT assets. Two private rulings confirming this view are ATO ID 2007/56 and ATO ID 2007/57. 

However, if you still want to treat for CGT, then the steps are simpler:

1. In Step 1: Creating a CFD account as a Custom Holding Account, the Capital Gains Classification should be "Other CGT Assets and events", rather than "Non CGT Asset".
2. In Step 3:  just use realised accounting gains event to book capital gains or losses.

For more information, refer to ATO ID 2007/56 and 2007/57. Make sure the types of CFD do not have charge over the fund assets (e.g. margin facility).