Warren Buffet once described derivatives as ‘weeds priced as flowers’ and then they turned more toxic and became ‘financial weapons of mass destruction’.

Contracts for difference (CFD) are a type of derivatives, confusing and curly and according to recent reports are spinning out of control.

CFDs are mostly “over-the –counter” deals and that’s not helpful for disclosure and transparency.

With the recent troubles faced by investors in CFD’s, attention has quickly turned to the adequacy of disclosure in their product disclosure statements.

There’s no excuse for losing money with Sonray

Tax Office wanted Sonray wound up

One area in which adequate information is not given to investors is the taxation consequences of CFD investment.

Providers need to do more to ensure investors understand the risks of CFD trading

The value of a CFD is determined by the price of the stock being traded on the market.

The acquisition of a CFD on a particular stock does not mean that the acquirer gets the stock.

It is only a bet on the price of the underlying stock. If the stock price goes the CFD holder gains and vice versa.

In Taxation Ruling TR 2005/15 the Australian Tax Office (ATO) sets down its position on taxation of gains and losses from CFD’s.

The ATO’s inclination is to treated gains and losses on the revenue and not on the capital account, thus depriving the tax payers of capital gains tax concessions, such as the general discount of 50 percent and small business CGT concessions.

Gains and losses will be treated on the revenue account 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.

According to the Ruling, gains or losses are expected most often to be on revenue account, because it is expected that usually they will be entered into with the purpose of profit-making.

If the transaction does not fall within the above circumstances, capital gains tax will apply.

A CFD is a CGT asset.

However if the transaction was entered into for merely recreational purposes in a manner similar to making a bet in a game of chance, no capital gain or loss will arise.