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Ruling

Subject: Exchange traded options - timing of CGT event C2 happening

Question: Can any ultimate capital loss made on an exchange traded option (ETO) contract that remains open at 30 June be reflected in that year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011.

Year ended 30 June 2012.

The scheme commenced on

1 July 2010.

Relevant facts and circumstances

You invest in ETO's.

Any gain or loss made on ETO contracts is accounted for on capital account.

Sometimes an ETO will remain open at 30 June and therefore straddle two financial years, (i.e. it is opened in a current financial year and closed in the next financial year).

In most instances, by the time you prepare your income tax return, most of the positions that remained open at 30 June have been closed, assigned or expired.

For the year ended 30 June 2011, you have capital gains of a certain amount made on ETO's.

A review of the positions that were open at 30 June 2011, has found that all were closed in the September 2011 quarter and the overall loss on these positions was a certain amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25,

Income Tax Assessment Act 1997 Section 108-5,

Income Tax Assessment Act 1997 Section 109-5 and

Income Tax Assessment Act 1997 Section 295-85.

Reasons for decision

Summary

The ultimate capital loss made on an exchange traded option (ETO) contract that remains open at 30 June cannot be reflected in that year.

Detailed reasoning

Our view is that when a taxpayer who is not carrying on a business of trading in ETO's closes out an ETO, CGT event C2 happens at that time.

In your circumstances when you open a position by buying an ETO, no immediate taxation consequences arise. You have simply acquired an asset for the amount paid, (the premium) and this will form part of the cost base of the asset. On the close out of the position you make a capital gain or loss equal to the difference between the cost base of the ETO and the amount received on its expiry or termination.

Subsection 104-25(2)(a) of the Income Tax Assessment Act 1997 states that the time of CGT event C2 happening is when you enter into the contract that results in the asset ending.

For you this means that the timing of CGT event C2 happening is when; and only when the ETO position is closed out, this may be in a later financial year to the opening position.

The Commissioner has no discretion to back date CGT event C2 to a previous financial year or change the ATO views expressed in:

ATO Interpretative Decision ATO ID 2005/164 Income Tax Capital Gains Tax: CGT event C2 - close-out of an exchange traded option

ATO Interpretative Decision ATO ID 2009/111 Income Tax Self Managed Superannuation funds: exchange traded options - tax treatment of premiums payable

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