Edited version of your written advice

Authorisation Number: 1012800382947

Ruling

Subject: Binary Options trading

Question 1:

For the year ended 30 June 2015, did you carry on a business of share trading binary options?

Answer 1:

No.

Question 2:

For the year ended 30 June 2015, did you pass the assessable income test of the non-commercial loss provisions?

Answer 2:

No. (This question has no application given you are not carrying on a business of share trading binary options.)

Question 3:

For the year ended 30 June 2015, did you carry out commercial binary options trading with a profit making purpose?

Answer 3:

Yes.

Question 4: Can you offset your loss from your binary option trading against your other income, in your income tax return for the year ended 30 June 2015?

Answer 4:

Yes.

This ruling applies for the following period

Year ended 30 June 2015.

The scheme commences on

1 July 2014.

Relevant facts and circumstances

In your private ruling application you stated that:

• Sometime during the year ended 30 June 2015, for a short period, you conducted short term trading of binary options through an on line trading firm;

• You devoted considerable time, effort and money to your binary option trading;

• Your binary option trading was not your main source of income because you had full time employment;

• The on line trading firm provides services in trading binary options;

• Binary option trading is generally short term trades for periods as short as 30 seconds through to roughly a week;

• Your trades were mostly of 10 to 30 minutes duration;

• Your aim was for a fast turnaround to build up your account;

• If your trades failed to hit their strike rate, then your strategy was to enter into corrective trades (to diversify trades over stock, currency and commodities over a longer period such as a week, as you thought it was easier to predict longer term outcomes compared to the short term);

• You spent at least 20 hours a week reviewing trading alerts from the on line trading firm, conducting your own research, discussing possible trades with the on line trading firm advisors, placing trades via the on line trading platform and monitoring the market during the course of the trades;

• A normal trading day routine for you would involve reviewing alerts and research provided by the on line trading firm, conducting other research, discussing possible trades with the on line trading firm advisors, placing trades via the on line trading platform and monitoring your trades from between certain hours while the overseas markets were open;

• Over the course of the short trading period you carried out many trades involving large amounts of money;

• Overall your trades were unsuccessful resulting in losses;

• In addition to the funds provided by you, the on line trading firm provided bonus funds of a substantial amount;

• As a result of your losses you were unable to continue your trading of binary options.

• The following documents are to be read with and form part of the scheme for the purposes of this private binding ruling:

• Screenshot of the home page of the website of the on line trading firm;

• Summary of your binary option trading listing details of all of the binary option trades that you placed with on line trading firm.

• Spreadsheet summary from your bank detailing the amounts of money used to trade binary options with the on line trading firm;

• Bank document downloaded from your internet bank account detailing money transfers to the on line trading firm and the associated transaction fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 15-5,

Income Tax Assessment Act 1997 Section 25-40,

Income Tax Assessment Act 1997 paragraph 118-37(1)(c) and

Income Tax Assessment Act 1936 sub-section 25(1).

Reasons for decision

Summary

You were not carrying on a business of binary options trading in the year ended 30 June 2015. However, you were carrying out commercial binary options trading with a profit making purpose.

You can offset your loss from your binary option trading against your other income, in your income tax return for the year ended 30 June 2015.

Detailed reasoning

The principles set out in Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences (TR 2005/15) and ATO Interpretative Decision ATO ID 2010/56 Assessable income: derivation of income - spread betting (ATO ID 2010/56) have been applied.

Participation in binary options trading has been identified as a commercial transaction and seen as speculation on a financial risk similar to what is discussed in the ATO views contained in TR 2005/15 and ATO ID 2010/56.

Therefore in adopting the above view, where binary options trading is carried on as a business, the gains from the binary options transactions will be accounted for under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and the losses under section 8-1 of the ITAA 1997.

If the binary option trading is not carried on as a business, but is however carried on as either:

• commercial binary options trading with a profit making purpose; and/or

• a profit making undertaking of binary options trading,

then any profit will be assessable on revenue account as either ordinary income and accounted for under section 6-5 of the ITAA 1997, or the profit will be assessable as a profit making undertaking in accordance with section 15-15 of the ITAA 1997.

In your case the alternatives have been considered and it has been concluded that your binary options trading in the year ended 30 June 2015 was;

• commercial binary options trading with a profit making purpose, and therefore the resulting loss will be a loss on revenue account under section 25-40 of the ITAA 1997.

Carrying on a business

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) specifically refers to primary production. However the same principles apply to all businesses. The indicators of carrying on a business which the courts have considered to be relevant include:

a. whether the activity has a significant commercial purposes or character;

b. whether the taxpayer has more than just an intention to engage in business;

c. whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

d. whether there is regularity and repetition of the activity;

e. whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business;

f. whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit;

g. the size, scale and permanency of the activity, and

h. whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922). The indicators must be considered in combination and as a whole.

In applying factors (a) to (h) from TR 97/11 to determine whether you were carrying on a business, it is acknowledged that the activity undertaken by you had some characteristics that aligned with it being a business, rather than a hobby such as the purpose of profit, and it was characterised by regular and repetitive activity, but only for a short period.

However, whilst your binary option trading had a commercial purpose, it is unclear what previous experience you had with financial markets and what preparatory activities you carried out to ensure that you would be in a position to carry out the activity in a commercially viable manner. Your binary options trading as it was being conducted was inherently unprofitable. It is clear that you did not carry on the activities in a similar manner to that of ordinary traders in the business of financial investments because you ceased the activity after a short period due to the losses incurred; there was no permanency in your activities.

Thus, after consideration all of the relevant indicators and the circumstances of your case, it is considered that you were not carrying on a business of binary options trading.

Commercial binary options trading with a profit making purpose; and/or

A profit making undertaking of binary options trading. (Not carrying on a business of binary options trading.)

Section 6-5 of the ITAA 1997 states that: 'Your assessable income includes income according to ordinary concepts, which is called ordinary income.' Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business.

The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer), that:

The authorities establish that a profit or gain so made [in an isolated transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides the ATO view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5 of the ITAA 1997.

The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers'.

Paragraph 16 of TR 92/3 states that:

If a taxpayer who is not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

For example, paragraph 19 of TR 2005/15 confirms the principles established in Myer and TR 92/3 are applicable to financial contracts for differences where the profit or loss was made in either a business operation or a commercial transaction for the purpose of profit making.

TR 2005/15 states at paragraph 23 that:

…speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets.

In concluding that speculation on a financial risk can be characterised as being commercial, TR 2005/15 bases that conclusion on the following attributes of a financial contract for differences:

• it cannot be assigned;

• it does not provide ownership of the underlying asset;

• they are essentially contracts of speculation productive of a gain or a loss stemming from exposure to a short term financial risk; and

• the risks assumed are all the basic subject matter of the financial services industry.

It is considered that binary options have the same characteristics. They are commercial transactions.

Binary options trading are seen as commercial transactions, this combined with the fact that you had a profit making purpose, means that had you made net profits from the venture / activity in the year ended 30 June 2015 they would have been assessable as either ordinary income under section 6-5 of the ITAA 1997, or assessable under section 15-15 of the ITAA 1997 as a profit making undertaking. Consequently your binary option trading losses are deductible under section 25-40 of the ITAA 1997. You may offset your trading loss against your other income.

Your binary option trading loss should be included at label D15 of your income tax return supplementary section. Note; there is no trading stock equation, binary options are not trading stock, you do not own the underlying asset.

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