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Ruling

Subject: TOFA - Exchange Traded Options

Question 1

Is an option over an equity interest (which is not a low exercise price option) a financial arrangement, or financial arrangements, under section 230-45 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

Yes. An option over an equity interest (which is not a low exercise price option), prior to exercise, will constitute a financial arrangement under section 230-45 of the ITAA 1997 where the applicant is dealing with the option on a short term basis in order to profit from price fluctuations or dealer's margins, or is entering into offsetting arrangements in order to lock in a profit margin.

Question 2

Is an option over an equity interest (which is not a low exercise price option) a financial arrangement, or financial arrangements, under subsection 230-50(2) of the ITAA 1997?

Answer

Yes (where the answer to question 1 is not applicable). The rights and obligations arising under an option over an equity interest (which is not a low exercise price option), from the time the option is entered into until it lapses or is exercised, will constitute a single financial arrangement under subsection 230-50(2) of the ITAA 1997. The rights and obligations arising under an option over an equity interest (which is not a low exercise price option) following exercise will be a second financial arrangement under subsection 230-50(2) of the ITAA 1997.

Question 3

Is a low exercise price option over an equity interest a financial arrangement, or financial arrangements, under section 230-45 of the ITAA 1997?

Answer

Yes. A low exercise price option over an equity interest will constitute a financial arrangement under section 230-45 of the ITAA 1997 where the applicant is dealing with the option on a short term basis in order to profit from price fluctuations or dealer's margins, or is entering into offsetting arrangements in order to lock in a profit margin.

Question 4

Is a low exercise price option over an equity interest a financial arrangement, or financial arrangements, under subsection 230-50(2) of the ITAA 1997?

Answer

Yes (where the answer to question 3 is not applicable). A low exercise price option over an equity interest will constitute a single financial arrangement under subsection 230-50(2) of the ITAA 1997.

Question 5

Will a gain from an ASX listed option be assessable under subsection 230-15(1) of the ITAA 1997?

Answer

Yes. A gain from an ASX listed option will be assessable under subsection 230-15(1) of the ITAA 1997.

Question 6

Will a loss from an ASX listed option be deductible under subsection 230-15(2) of the ITAA 1997?

Answer

Yes. A gain from an ASX listed option will be deductible under subsection 230-15(2) of the ITAA 1997.

This ruling applies for the following periods:

1 July 2010 to 30 June 2015

Relevant facts and circumstances

The company operates a business to provide Contracts for Difference ("CFDs") within the Australian marketplace. The company's business model is to earn a margin over its costs.

By entering into CFDs, the company has exposed itself to the risk of loss and gain in relation to the underlying securities of the CFD. The company has entered into hedging arrangements in relation to the risk that it is exposed to through the CFDs it has entered into. The cost of these hedging arrangements, forms part of the costs, that the company must recover through its operating margins.

The company buys and sells exchange traded options, that is, put and call options traded on the Australian securities exchange. The company buys and sells exchange traded options ("ETOs") in order to hedge the risks embedded within the CFD contracts that it has entered into and to assist in the raising of finance.

It does not enter into ETO contracts for the purpose of fluctuating from price movements, to generate profits from the expiration of time value, and does not engage in "buy-write" or other option strategies.

The type of ETO contracts that the company enters into are ASX Equity Options or Low Exercise Price Options ("LEPOs"). Unlike an ordinary equity option, an ASX LEPO has a very high premium (close to the initial value of the underlying equity interest) and only a nominal (1 cent) strike price. The LEPO has a deferred purchase price whereby the holder makes margin payments over the life of the instrument and the balance of the premium is paid when the time comes for the option to be exercised. These features result in the LEPO bearing a strong similarity to a futures contract.

Relevant legislative provisions

Income Tax Assessment Act 1997

Division 230.

Section 230-45

Subsection 230-45(1)

Subsection 230-45(2)

Subsection 230-45(3)

Subsection 230-45(4)

Subsection 230-45(5)

Section 230-50

Subsection 230-50(1)

Subsection 230-50(2)

Subsection 230-55(4)

Section 230-85

Subdivision 230-C

Subdivision 230-E

Subdivision 230-F

Division 974

Section 974-70

Section 974-75

Section 995-1

Reasons for decision

Question 1

The definition of 'financial arrangement' determines the unit of taxation in respect of which gains and losses are recognised under Division 230 of the ITAA 1997. In order to determine whether gains and losses arise under a financial arrangement, it is first necessary to establish whether the rights and obligations under the agreement give rise to an 'arrangement' that in turn meets the definition of a financial arrangement.

The term 'arrangement' is defined in section 995-1 of the ITAA 1997 to mean any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

As noted in paragraph 2.47 of the Explanatory Memorandum to the Taxation Laws Amendment (Taxation of Financial Arrangements) Bill 2008, generally a contract will constitute the relevant arrangement for TOFA purposes. However, section 230-55 of the ITAA 1997 contains grouping and disaggregation rules which may operate to group rights and obligations under a number of contracts into one arrangement, or alternatively to disaggregate rights and obligations into a number of arrangements.

In the current circumstances, it must be considered whether an option over an equity interest (which is not a low exercise price option) constitutes one or more arrangements. Having regard to the factors in subsection 230-55(4) of the ITAA 1997, the option will be disaggregated into two separate arrangements, being:

1) the option itself, including all rights and obligations from commencement until exercise or expiry (the 'option'); and

2) the rights and obligations relating to the transfer of the underlying property (e.g. a share) upon exercise (the 'transfer agreement').

The arrangement prior to exercise or expiry: the option

Prior to the exercise or expiry of an option over an equity interest (which is not a low exercise price option), the holder of the option has a right to receive the agreement which arises post-exercise and the obligation to provide the premium. Conversely, the issuer of the option has the obligation to provide the agreement which arises post-exercise and the right to receive the premium.

The option will be a financial arrangement under section 230-45 of the ITAA 1997 where the requirements in subsection 230-45(1) of the ITAA 1997 are met. Relevantly, subsection 230-45(1) provides that:

"You have a financial arrangement if you have, under an arrangement:

(a) a cash settlable legal or equitable right to receive a financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(c) a combination of one or more such rights and/or one or more such obligations;

unless:

(d) you also have under the arrangement one or more legal and equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement."

Broadly, an arrangement will constitute a section 230-45 financial arrangement the rights and obligations under the arrangement are cash settlable within the meaning of subsection 230-45(2) of the ITAA 1997, and where there are no 'not insignificant' rights and obligations under the arrangement which are not cash settlable.

Under the arrangement, the holder has the right to receive the agreement which arises post-exercise. This arrangement is not, in itself, a section 230-45 financial arrangement, and does not come within the meaning of 'money equivalent' as defined in section 995-1 of the ITAA 1997. As such, a right to receive or obligation to provide such an arrangement will not be cash settlable under paragraph 230-45(2)(a) of the ITAA 1997. Nor will the arrangement come within the meaning of cash settlable under paragraphs 230-45(2)(b) to (d) and (g) of the ITAA1997.

Furthermore, the right to receive or obligation to provide the arrangement which arises post exercise will not come within the meaning of cash settlable under paragraph 230-45(2)(f) of the ITAA 1997. For the arrangement to satisfy this paragraph, subsection 230-45(3) of the ITAA 1997 must be met. This subsection will be met where the financial benefit is readily convertible into money or a money equivalent, there is a market for the financial benefit that has a high degree of liquidity and subsection 230-45(4) or (5) of the ITAA 1997 are met.

Irrespective of whether subsections 230-45(4) or (5) of the ITAA are met, paragraphs 230-45(3)(a) and (b) of the ITAA 1997 are not met in these circumstances. The right to receive or obligation to provide the agreement which arises is not readily convertible into money or a money equivalent, nor is there a market for the agreement with a high degree of liquidity.

In the circumstances where the company is dealing in the arrangement prior to the exercise or expiry of the option to profit from fluctuations in the price of the rights/obligations under this arrangement - that is, the option premium - or to profit from a dealers margin, the arrangement will be cash settlable within the meaning of paragraph 230-45(2)(e) of the ITAA 1997.

This will be the case if the company is actually trading in options (rather than merely buying or merely selling) with the purpose of profiting from price fluctuations or a dealer's margin, or if the company is entering into offsetting positions in order to lock in a profit margin.

This will not be the case where:

· the company is selling options as a buy-write strategy as the company is simply profiting from the premium and using the funds to purchase equity interests rather than actually trading in rights/obligations under option agreements prior to exercise.

· The company is selling the option to ensure the underlying share may be sold at a higher price as again the purpose of this is to profit from the premium and the strike price rather than from fluctuations in the value of the option (or obtaining a dealer's margin).

· The company is entering into option agreements to manage risk, other than circumstances where the company does so by entering into offsetting arrangements to lock in a profit margin.

Accordingly, the arrangement will be a financial arrangement for the purposes of section 230-45 of the ITAA 1997 only where paragraph 230-45(2)(e) of the ITAA 1997 is satisfied. Where paragraph 230-45(2)(e) is not satisfied, the arrangement will not be a financial arrangement for the purposes of section 230-45 of the ITAA 1997.

The arrangement post-exercise: the transfer agreement

Once an option over an equity interest has been exercised, the holder of the option has either a legal right to receive or obligation to provide the equity instrument (and a corresponding right or obligation in relation to the strike price as consideration). The issuer has equivalent (opposite) legal rights and obligations.

The strike price, where it is money, is clearly a financial benefit which is cash settlable under paragraph 230-45(2)(a) of the ITAA 1997. The equity instrument however is not cash settlable under subsection 230-45(2) of the ITAA 1997 and not insignificant for the purposes of paragraphs 230-45(1)(d) to (f) of the ITAA 1997.

The rights/obligations for an option over an equity interest, following exercise, will not be considered to be cash settlable within the meaning of subsection 230-45(2) of the ITAA 1997 for the following reasons.

The underlying equity interest, being the relevant financial benefit that the rights and obligations correspond to post-exercise, is not money or money equivalent as defined for the purposes of paragraph 230-45(2)(a) of the ITAA 1997.

Nor are the rights/obligations relating to the transfer of the underlying equity interest settled or satisfied with a payment of money or money equivalent as an alternative to the provision of the equity interest itself, for the purposes of paragraphs 230-45(2)(b) to (d) and (g) of the ITAA 1997. These rights/obligations are discharged/satisfied/settled by the transfer of the underlying equity interest (which is not a section 230-45 financial arrangement), not cash.

Nor, for the purposes of paragraph 230-45(2)(e) of the ITAA 1997, is the company trading in the rights/obligations relating to the relevant financial benefit (the equity interest) which arise post-exercise. Any profit derived under the transfer agreement which arises post-exercise will be from the receipt of the financial benefits which are transferred under this arrangement, rather than fluctuations from the 'price' of the rights/obligations relating to the financial benefits (to the extent that these rights/obligations could be disposed of in any event).

Finally, regardless of whether the underlying equity interest comes within the meaning of paragraphs 230-45(3)(a) or (b) of the ITAA 1997, subsections 230-45(4) and (5) of the ITAA 1997 will not be satisfied.

The reference 'substantial risk of substantial decrease in value' is a term which utilises, particularly in the references to 'substantial', wording of potentially diverse and ambiguous meanings and as such will necessarily derive its meaning from the legislative context in which it appears. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2010 Measures No. 4) Bill 2010 which introduced subsections 230-45(4) and (5) states at paragraph 3.23:

"Subsection 230-45(3), together with either subsection 230-45(4) or (5), seeks to bring within the scope of 'cash settlable' rights or obligations, a right to receive, or an obligation to provide, a certain type of financial benefit that is not in a formal sense money or money equivalent but is money-like."

It goes on at paragraph 3.25:

"…a right to receive, or an obligation to provide, a financial benefit which is liquid and convertible into money is 'cash settlable' if the recipient of the financial benefit(s) is entitled to receive at least a predetermined money equivalent amount of the financial benefit(s). An example would be a right to receive $100 worth of Big Bank shares. In this case, while the Big Bank shares are not money or money equivalent and the right to receive and the obligation to provide Big Bank shares are not to be settled in money or money equivalent, the monetary value of the financial benefits is at least $100…economically akin to a right to receive, or an obligation to provide, $100." (emphasis added)

The examples provided in the EM at paragraph 3.27 are capital protected deferred purchase agreements and mandatorily convertible notes both of which involve a financial benefit in the form of shares which, although indeterminate in number, have a value of at least a certain monetary amount. Paragraph 3.27 of the EM provides a clear statement of the intention of the amended definition of 'cash settlable' in subsections 230-45(3) and (4) of the ITAA 1997:

"The intention of the amended definition is to ensure that substantially capital protected deferred purchase agreements are 'cash settlable' financial arrangements. It also clarifies that convertible and similar instruments will generally be financial arrangements. More broadly, it is consistent with the notion that in substance debt, even with upside potential (whether through convertibility or otherwise), should as a general principle be treated as a financial arrangement."

It is clear from the EM that the intended operation of paragraph 230-45(3)(a) and subsection 230-45(4) of the ITAA 1997 was to apply to circumstances where, although the financial benefit is not in the form of cash, it is the equivalent of receiving cash of at least a certain amount. The reference to 'readily convertible into money or money equivalent' in paragraph 230-45(3)(a) does not require an actual conversion by the holder of the right, but rather at the time that the arrangement is tested for section 230-45 purposes inquires only whether it is so readily convertible to cash (or vice versa) that it is the equivalent of cash. The test in subsection 230-45(4) and the words 'substantial risk of substantial decrease in value' is read as meaning where a financial benefit is readily convertible in this manner, at the time the arrangement is tested for section 230-45 purposes, it is possible to say that the cash equivalent will be of at least a certain amount and the arrangement as a whole is therefore debt-like in character.

The facts in this case do not reflect any level of capital protection the options do not involve convertible instruments, deferred purchase agreements or similar instruments. Therefore, regardless of whether paragraphs 230-45(3)(a) or (b) of the ITAA 1997 are satisfied, the mere fact that the options are over shares listed on the ASX 200 is not sufficient for the purposes of the test in subsection 230-45(4). It is not possible to say with any certainty that a listed share or a determinate number of listed shares, are convertible into money or money equivalent of at least a certain amount, or vice versa. Such shares therefore lack the debt-like character required by the test in paragraph 230-45(3)(a) of the ITAA 1997 and subsection 230-45(4) of the ITAA 1997, and indeed in a contextual sense as required by the rest of section 230-45.

Furthermore, where the company is the transferee of the underlying financial benefit (the equity interest), and intend to sell the financial benefit for profit, this is not done for the purpose of financing, nor is it done other than as part of the company's expected sale or usage requirements as required by subsection 230-45(5) of the ITAA 1997. Whilst the holding of options, combined with entering into other financial instruments, may give rise to a situation where cash flows akin to financing are obtained by an entity, in the context of the current financial arrangement, the equity interest (the relevant financial benefit) is itself not provided or received for the purposes of providing or raising finance, as required by paragraph 230-45(5)(a) of the ITAA 1997.

Accordingly, as the holder has a right to receive the underlying property (i.e. the share) which is not cash settlable as defined in subsection 230-45(2) of the ITAA 1997, and would not be considered 'not insignificant' for the purposes of paragraph 230-45(2)(f) of the ITAA 1997, the arrangement will not be a financial arrangement under section 230-45 of the ITAA 1997.

Question 2

As noted in the response to question 1, an option over an equity interest (which is not a low exercise price option) will be a section 230-45 financial arrangement only where paragraph 203-45(2)(e) of the ITAA 1997 is satisfied.

Relevantly, subsection 230-50(2) of the ITAA 1997 provides:

"You also have a financial arrangement if:

(a) you have, under an arrangement:

(i) a legal or equitable right to receive something that is a financial arrangement under this section ; or

(ii) a legal or equitable obligation to provide something that is a financial arrangement under this section ; or

(iii) a combination of one or more such rights and/or obligations; and

(b) the right, obligation or combination does not constitute, or form part of, a financial arrangement under subsection 230-45(1).

The right, obligation or combination referred to in paragraph (a) constitutes the financial arrangement."

Accordingly, as provided for in paragraph 230-50(2)(b), where an arrangement constitutes a section 230-45 financial arrangement, it will not be a subsection 230-50(2) financial arrangement. However, the arrangement may constitute a subsection 230-50(2) in situations where the answer to question 1 is not applicable (because paragraph 230-45(2)(e) is not met).

As noted in the response to question 1, having regard to section 230-55 of the ITAA 1997, an option over an equity interest will be disaggregated into two arrangements, being:

1) the option itself, including all rights and obligations from commencement until exercise or expiry (the 'option'); and

2) the rights and obligations relating to the transfer of the underlying property (e.g. a share) upon exercise (the 'transfer agreement').

The arrangement post-exercise: the transfer agreement

In relation to an option over an equity interest (which is not a low exercise price option), the underlying asset is an equity interest. Relevantly, subsection 230-50(1) of the ITAA 1997 provides that an equity interest is a financial arrangement.

The rights and obligations relating to the transfer of this underlying equity interest essentially constitute an agreement to transfer/sell a subsection 230-50(1) financial arrangement, and so will constitute a right to receive and corresponding obligation to provide a financial arrangement as defined under section 230-50 of the ITAA 1997. Accordingly, the transfer agreement will constitute a section 230-50(2) financial arrangement.

The arrangement prior to exercise or expiry: the option

Similarly at commencement, the rights/obligations pre-exercise will satisfy the definition of financial arrangement in subsection 230-50(2) of the ITAA 1997.

Subsection 230-50(2) of the ITAA 1997 refers to a right to receive, or obligation to provide, a financial arrangement within the meaning of section 230-50 of the ITAA 1997 as a whole. It is not limited to a right to receive or obligation to provide a subsection 230-50(1) financial arrangement. It is equally applicable to a right to receive another (subsequent) subsection 230-50(2) financial arrangement, for example a compound option or indeed any other arrangement which could be described as a right to receive (or obligation to provide) an option or some other subsection 230-50(2) financial arrangement. The broad applicability of subsection 230-50(2) of the ITAA 1997 is facilitated by the use of the term 'something' which has no specific or defined meaning and could potentially apply to many types of arrangements, including another subsection 230-50(2) arrangement. This is supported by the commentary at paragraphs 2.103 and 2.104 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008:

"2.103 A right or obligation to receive or provide an equity interest, or a combination of such rights and/or obligations will also be an equity financial arrangement, if such a right, obligation or combination does not already meet the definition of a cash settlable financial arrangement in section 230-45. [Schedule 1, item 1, subsection 230-50(2)]

2.104 Likewise, a right or obligation to receive or provide such a financial arrangement (or a combination of these rights and/or obligations, whether or not together with other rights and/or obligations to other equity interests) will also be a financial arrangement if it is not already a cash settlable financial arrangement (or part of a cash settlable financial arrangement) under subsection 230-45(1). [Schedule 1, item 1, paragraph 230-50(2)(b)]"

(emphasis added)

The rights and obligations post-exercise, being essentially the legal rights and obligations for a transfer agreement or contract, are capable of constituting a subsection 230-50(2) financial arrangement. It follows therefore that, bearing in mind the breadth of the wording in subsection 230-50(2) of the ITAA 1997, it is anticipated that it is possible to have a right to receive, or obligation to provide, 'something' which constitutes a subsection 230-50(2) financial arrangement.

The arrangement prior to exercise will therefore satisfy the definition of financial arrangement under subsection 230-50(2) of the ITAA 1997 and will constitute the right to receive and obligation to provide the subsection 230-50(2) financial arrangement which arises post-exercise.

Question 3

As noted in the response to question 1, it is necessary to determine the relevant 'arrangement' when considering whether an arrangement is a financial arrangement for the purposes of section 230-45 of the ITAA 1997.

In the current circumstances, it must be considered whether a low exercise price option over an equity interest constitutes one or more arrangements. Having regard to the factors in subsection 230-55(4) of the ITAA 1997, the low exercise price option will be a single arrangement.

It should be noted that this is a different outcome to the response in question 1, in relation to options over equities which are not low exercise price options. The outcome under section 230-55 of the ITAA 1997, having regard to the factors in section 230-55(4) of the ITAA 1997, is different primarily due to the substance of the rights and obligations under the LEPO being akin to a futures contract.

This is supported by the consideration and pricing under a LEPO. The very high premium and nominal strike price means that it is from the outset (and should remain) deeply in the money, and is therefore, similar to a contract of sale. Even though in legal form the holder of the LEPO has the discretion to exercise or allow the LEPO to lapse (if it is not otherwise closed out), the pricing, terms and conditions indicate that despite this in-form option, the holder will adopt a certain course of action (being to exercise the LEPO).

When testing this arrangement to determine whether it constitutes a section 230-45 financial arrangement, we must again consider the nature of the rights and obligations under the arrangement to identify if the arrangement consists of cash settlable rights and obligations.

Under the LEPO arrangement, the holder has the right to receive the underlying equity interest which is the subject of the LEPO, has the obligation to provide the premium, and, upon exercise, has the obligation upon exercise to pay the remainder of the premium and the strike price. The issuer of the LEPO has the converse rights and obligations.

The right to receive the equity interest is not money or money equivalent, and would not be 'cash settlable' within the meaning of paragraph 230-45(2)(a) of the ITAA 1997. Nor will this right come within the meaning of cash settlable under paragraphs 230-45(2)(b) to (d) and (g) of the ITAA 1997. The right will also not be cash settlable due to the operation of paragraph 230-45(2)(f) of the ITAA 1997, as even where subsection 230-45(3) is satisfied, subsections 230-45(4) and (5) of the ITAA 1997 will not be satisfied.

As with question 1 above, paragraph 230-45(5)(a) of the ITAA 1997 will not apply, as the equity interest (the relevant financial benefit) is not provided or received to raise or provide finance. Whilst the holding of options, combined with entering into other financial arrangements, may give rise to a situation where cash flows akin to financing are obtained by an entity, in the context of the current financial arrangement, the equity interest (the relevant financial benefit) is itself not provided or received for the purposes of providing or raising finance, as required by paragraph 230-45(5)(a) of the ITAA 1997.

In the circumstances where the company is dealing in the arrangement prior to the exercise or expiry of the option to profit from fluctuations in the price of the rights/obligations under this arrangement - that is, the option premium - or to profit from a dealers margin, the arrangement will be cash settlable within the meaning of paragraph 230-45(2)(e) of the ITAA 1997.

This will be the case if the company is actually trading in options (rather than merely buying or merely selling) with the purpose of profiting from price fluctuations or a dealer's margin, or if the company is entering into offsetting positions in order to lock in a profit margin.

This will not be the case where:

· The company is selling options as a buy-write strategy as the company is simply profiting from the premium and using the funds to purchase equity interests rather than actually trading in rights/obligations under option agreements prior to exercise.

· The company is selling the option to ensure the underlying share may be sold at a higher price as again the purpose of this is to profit from the premium and the strike price rather than from fluctuations in the value of the option (or obtaining a dealer's margin).

· The company is entering into option agreements to manage risk, other than circumstances where the company does so by entering into offsetting arrangements to lock in a profit margin.

Accordingly, the arrangement will be a financial arrangement for the purposes of section 230-45 of the ITAA 1997 only where paragraph 230-45(2)(e) of the ITAA 1997 is satisfied. Where paragraph 230-45(2)(e) of the ITAA 1997is not satisfied, the arrangement will not be a financial arrangement for the purposes of section 230-45 of the ITAA 1997.

Question 4

A LEPO over an equity interest, to the extent that it is not a section 230-45 financial arrangement, will be a financial arrangement within the meaning of subsection 230-50(2) of the ITAA 1997.

As noted in the response to question 3, having regard to the factors in subsection 230-55(4) of the ITAA 1997, a LEPO over an equity interest will constitute a single arrangement.

Under this arrangement, the holder of the LEPO has a right to receive the underlying equity interest, an obligation to pay the premium, and on exercise, the obligation to pay the remainder of the premium and the strike price. The issuer of the LEPO holds the converse rights and obligations.

Subsection 230-50(1) of the ITAA 1997 provides that an equity interest is a financial arrangement. Under the LEPO arrangement, the holder has the right to receive the underlying equity interest, and the issuer has the obligation to provide this equity interest.

Relevantly, subsection 230-50(2) of the ITAA 1997 provides that an arrangement will be a financial arrangement for the purposes of subsection 230-50(2) if, under the arrangement, there is a legal or equitable right to receive or provide something which is a section 230-50 financial arrangement.

As the equity interest is a section 230-50 financial arrangement, and the holder and issuer have rights and obligations to receive and provide the equity interest under the LEPO arrangement, the LEPO arrangement will be a financial arrangement under subsection 230-50(2) of the ITAA 1997 (to the extent it is not a 230-45 financial arrangement - see paragraph 230-50(2)(b) of the ITAA 1997).

Question 5

Gains and losses from Division 230 financial arrangements must be calculated and brought to account under Division 230 of the ITAA 1997.

Relevantly, subsection 230-15(1) of the ITAA 1997 states:

"Your assessable income includes a gain you make from a financial arrangement"

In certain circumstances, an ASX listed option will be a financial arrangement (or financial arrangements) (see responses to questions 1-4). Accordingly, to the extent that the gain is made from a financial arrangement, a gain made from an ASX listed option will be assessable income under subsection 230-15(1) of the ITAA 1997.

Question 6

Gains and losses from Division 230 financial arrangements must be calculated and brought to account under Division 230 of the ITAA 1997.

Relevantly, subsection 230-15(2) of the ITAA 1997 states:

"You can deduct a loss you make from a 'financial arrangement', but only to the extent that:

(a) you make it in gaining or producing your assessable income; or

(b) you necessarily make it in carrying on a business for the purpose of gaining or producing your assessable income."

In certain circumstances, an ASX listed option will be a financial arrangement (or financial arrangements) (see responses to questions 1-4). Accordingly, to the extent that the loss is made from a financial arrangement, the loss made from an ASX listed option will be deductible under subsection 230-15(2) of the ITAA 1997, where there is the requisite nexus to assessable income.

Where ASX listed options are bought and sold for profit making purposes, any resulting loss will be made in gaining or producing assessable income. As there is a nexus between the making of the loss, and the gaining or producing of assessable income, the loss from the financial arrangement will be deductible under subsection 230-15(1) of the ITAA 1997.

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