ATO Interpretative Decision

ATO ID 2005/164

Income Tax

Capital Gains Tax: CGT event C2 - close-out of an exchange traded option
FOI status: may be released

This ATO ID has been amended to remove the words 'right or obligation' from the 5th paragraph of the Reasons for Decision.

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This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to a taxpayer on the close-out of an exchange-traded option (ETO)?

Decision

Yes. CGT event C2 in section 104-25 of the ITAA 1997 happens to a taxpayer on the close-out of an ETO.

Facts

The taxpayer bought call and put options (ETOs) over certain listed shares on the Australian Securities Exchange (ASX).

The ETOs were subsequently closed out by the taxpayer writing (selling) call and put options in the same series.

The taxpayer was not carrying on a business of transacting in ETOs on the ASX options market.

Reasons for Decision

An option is an intangible asset. It is also a CGT asset as defined in subsection 108-5(1) of the ITAA 1997. Options are specifically cited as examples of CGT assets (see Note 1 to subsection 108-5(2) of the ITAA 1997).

A call option in respect of shares is an option that gives the taker (buyer) the right, but not the obligation, to buy the underlying shares at a specified price on or before a specified date. A put option in respect of shares gives the buyer the right, but not the obligation, to sell the underlying shares at a specified price on or before a specified date.

The establishment of an ETO contract is referred to as opening a position (ASX Explanatory Booklet 'Understanding Options Trading'). A person who takes (buys) a call or put option as an opening position may cancel their right to exercise by writing (selling) an identical option. This is referred to as the close-out of an option or the closing-out of an opening position. (Similarly, a person who writes (sells) a call or put option may close out their position by taking (buying) an identical call or put option in the same series.)

CGT event C2 happens when a taxpayer's ownership of an intangible CGT asset ends. Subsection 104-25(1) of the ITAA 1997 provides that ownership of an intangible CGT asset ends by cancellation, surrender, or release or similar means.

CGT event C2 therefore happens to a taxpayer when their position under an ETO is closed out where the close-out results in the cancellation, release or discharge of the ETO.

The close-out of an option position is not the same as the sale of an asset. When an option position is closed out, there is no transfer of rights between two parties. CGT event A1 therefore cannot happen when an option position is closed out, there being no change in ownership of the asset from one entity to another as required by subsection 104-10(2) of the ITAA 1997.

Note 1: A profit or gain can constitute assessable income under section 15-15 of the ITAA 1997. To ensure that there is no double taxation under the income and CGT provisions, section 118-20 of the ITAA 1997 reduces the capital gain to the extent that an amount is also included as assessable income under another provision of the ITAA 1997.

Note 2: A loss incurred may be deductible under section 25-40 of the ITAA 1997 if it arose from the carrying on or carrying out of a profit-making undertaking or plan and, had any profit been derived, such profit would have been included in the taxpayer's assessable income under section 15-15 of the ITAA 1997.

Date of decision: 24 May 2005

Year of income: Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 15-15
   section 25-40
   subsection 104-10(2)
   subsection 104-25(1)
   subsection 108-5(1)
   subsection 108-5(2)
   section 118-20

ATO Interpretative Decisions overturned by this decision
ATO ID 2001/541

Keywords
Call options
Put options
Capital gains tax
Capital losses
CGT assets
CGT capital proceeds
CGT cost base
CGT reduced cost base
Securities rights & options

Siebel/TDMS Reference Number: 4636982

Business Line: Public Groups and International

Date of publication: 17 June 2005

ISSN: 1445-2782

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