ATO View

How CFDs Work

When you trade CFDs you are required to provide a small percentage of your total exposure, in the form of margin payment. However, your total profit and loss potential is greater than the amount of margin that you pay. So, if you buy $10,000 worth of BHP CFDs with a margin requirement of 5%, you need to provide margin of $500 to open the position. If the position moves against you by 10%, you will lose $1,000 or double your initial deposit.

Margin Calls can be required

Depending on the CFD trades you've opened, and how long they are open for, the CFD Provider may require you to pay financing costs. You will incur these financing costs on a daily basis when you keep CFDs on certain underlying assets open overnight. In some cases, particularly if you hold CFDs for a long time, the aggregate of these financing costs may exceed the amount of any profits or increase losses. If the position moves against you, or you allow financing costs to add up, you could lose more than you have deposited. If this happens you will be required to make additional margin payments to cover losses on your open positions. If this is not done your position will be closed and the loss crystallized.

SMSF Issues

Under current rules an SMSF, cannot borrow (unless under an instalment warrant structure) and cannot place a charge against any SMSF Asset. This then raises the following key issues:

Is there a borrowing, and hence a contravention of the 'No Borrowing" rules with CFDs?
Is there a contravention of the 'No charge over Fund Assets" Law due to the margin requirement with CFDs?

The ATO Responds

The ATO have addressed these issues as follows:

CFDs are not a Borrowing

The ATO have confirmed that "there is no loan between the CFD provider and the SMSF Trustee and therefore no contravention of the prohibition on borrowing by trustees under Super Laws". The requirement to pay a deposit and meet margin calls does not represent a borrowing. These are contractual liabilities to make payments if and when required and are not repayments. The ATO have confirmed that CFDs even though they offer leverage are not Borrowings and hence are not a breach of Super Laws.

There is no Charge over Fund Assets with CFDs

The ATO have confirmed that "the operation of the CFD bank account and the obligation to pay deposits and margins does not create a charge over any assets of the Fund". Under the CFD, the monies in the CFD bank account are the property of the CFD provider and the Fund (investor) has no beneficial interest in the account.

CFDs with CMC Markets

Importantly CFD Investments with CMC Markets are allowable SMSF Investments in accordance with the ATO guidelines and do not breach any Super Laws.

Derivatives Risk Statement

Clients who trade Derivatives for their SMSF must prepare a Derivatives Risk Statement in accordance with current Superannuation Laws. The Derivatives Risk Statement details the reasons for the use of derivatives by the SMSF, along with an analysis of the risks involved within the SMSF Investment Strategy.

No financial product advice or recommendation

No Advice Express or Implied: It is important to understand that ESUPERFUND has not taken into account any particular investor's objectives, financial situation or particular needs. ESUPERFUND does not provide financial product advice or recommend any financial products either expressly or implied. ESUPERFUND expressly states that it does not recommend, represent as suitable, or endorse any financial product or service available through ESUPERFUND. This applies in relation to the CMC Markets Account. ESUPERFUND does not advise or recommend that this product is suitable to a particular investor’s financial requirements or needs in relation to their SMSF. Any information provided in relation to the CMC Markets Account is factual information only about the operation of the account and how data is made available to ESUPERFUND. Accordingly you should read the disclosures relating to the CMC Markets Account before making any decision about whether the CMC Markets Account is suitable for your SMSF needs. We also recommend that you should seek professional advice from a financial adviser before making any decision to use the CMC Markets Account for your SMSF.

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General Advice Warning

No Advice Express or Implied: The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. ESUPERFUND does not provide financial product advice or recommend any financial products either expressly or implied. ESUPERFUND expressly states that it does not recommend, represent as suitable, or endorse any financial product or service available through ESUPERFUND. This applies equally to those financial products which are established for your SMSF when you become a client of ESUPERFUND. Any information provided in relation to any financial product or service available through ESUPERFUND is factual information only about the operation of the account and how data is made available to ESUPERFUND. Where this website refers to a particular financial product then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice (see below) from a financial adviser before making any decision to purchase any financial product referred to on this website. While the sources for the material are considered reliable, responsibility is not accepted for any inaccuracies, errors or omissions.

Seek Professional Advice from a Financial Adviser: ESUPERFUND is a no advice model and does not provide financial, legal or tax advice to clients. We recommend that you seek appropriate professional advice in view of your personal circumstances. A licensed financial adviser will consider your personal situation and make a recommendation suitable to your financial needs. All information detailed on our website is purely factual and is general in nature. Accordingly, you should not rely on it. It should always be remembered that Trustees are legally responsible for all the decisions made even if you obtain advice from a Financial Planner. Whilst a Financial Professional can provide advice and assistance you are ultimately responsible for the Fund.

Fees: Fees relating to operating your SMSF with ESUPERFUND are detailed on our fee page here. When setting up a SMSF it is important to understand that additional fees may apply that must be carefully considered prior to making a decision to setup a SMSF including an ATO Supervisory Levy, Company Trustee Setup Fee (where applicable), and Investment Fees.