Edited version of private advice

Authorisation Number: 1052063738905

Date of advice: 1 December 2022

Ruling

Subject: Assessable income - carrying on a business

Question

Is your option trading considered to be carrying on a business for tax purposes?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.     You have previously retired from work.

2.     You cannot access your superannuation as you are not yet of preservation age.

3.     You are relying on the profit and gains from option trading as income.

4.     You have completed the ASX options trading course and are a level X qualified option trader under X.

5.     The gross premiums of options sold in the 20XX financial year was $X.

6.     Your profit from selling options was $X.

7.     You use the X platform with investment capital of $X.

8.     You have a business plan in respect of the planned trading activities.

9.     Your trading strategy is the use of put and call option contracts over blue-chip shares on the ASX.

10.  You have no intention to own shares for the long term.

11.  You observe dividend periods with the focus on put option premiums as the source of income.

12.  Call contracts will be written where options are exercised and shares are acquired to earn premiums at a minimal profit.

13.  Where these contracts expire, call contracts will continue to be written over the shares.

14.  You trade predominantly in weekly contracts to avoid exercises of options.

15.  You generally do not invest more than $X - $X in any one company to limit exposure.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

1.     Whether you are carrying on a business depends on the specific facts of each case.

2.     To determine if a person carries on a business, the relevant facts and circumstances of the business activity must be considered in relation to a list of factors developed through caselaw. Paragraph 13 of TR 97/11 sets out these factors, which include:

•        whether the activity has a significant commercial purpose or character;

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

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

•        whether there is repetition and regularity of the activity;

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

•        whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•        the size, scale, and permanency of the activity; and

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

3.     Paragraphs 12-16 of TR 97/11 provide that when determining whether a business activity satisfies these factors, certain considerations are essential to their application, particularly that:

•        The indicators must be weighed, but all cases turn on their own facts;

•        No single indicator is decisive;

•        The weight given to each indicator may vary from case to case; and

•        The indicators must be considered in combination and as a whole, and the decision depends on the general impression.

Application to your circumstances:

Purpose and intention in engaging in the activity, and an intention to make a profit from the activity

4.     You engage in several trades each week. You are retired from work, cannot yet access your superannuation, and you want to avoid drawing down on your capital and avoid reliance on government benefits.

5.     There is more than a mere intention to engage in an activity, as you are relying on trading options to derive income.

6.     You intend to make a profit from trading options, with your profit for the 20XX financial year amounting to $X.

The repetition, regularity, size, and scale of the business activity

7.     You are trading options contracts as an individual and according to your Transaction Summary Statement, you entered X put and call contracts during the 20XX financial year, done so on a weekly basis.

8.     Repetition and regularity of business activity has been displayed, and while scale and size in themselves are not determinative factors, you have shown the ability to produce what is required for your domestic needs which will suffice where there is an intention and reasonable expectation to profit, per paragraph 80 of TR 97/11.

Businesslike organisation and business plan

9.     You provided a detailed business plan. In this plan, it is stated that all trades deriving income are recorded. It also provides a strategy for trading, which includes:

•        put and call contracts over blue-chip shares on the ASX;

•        no intention to own shares for the long term, and dividend periods are observed with the focus on put option premiums as the source of income;

•        call contracts where options are exercised and shares are acquired to earn premiums; and

•        risk mitigation strategies such as limiting exposure to $X - $X in any one stock, and not entering a sell position without holding the capital in cash to ensure meeting the obligation.

10.  The business plan provided as well as the strategy described indicate an activity that is organised and carried on in a businesslike manner, with records being kept. The strategy shows a systematic approach to trading options contracts rather than in an ad hoc manner, consistent with both caselaw and ATO guidance in carrying on a business.

Activity carried on in a similar manner to that of the ordinary trade

11. The options trading undertaken is consistent with ordinary trade. It is a business activity that seeks to return short term profit on options.

Not a hobby or form of recreation or sporting activity

12.  You completed the ASX options trading course, and you are a level X trader on the X platform.

13.  There does not appear to be any indication that trading options contracts would be a hobby or form of recreation in the circumstances. Undergoing training to better trading capabilities, along with your situation regarding retirement and access to superannuation are all factors that support the position of carrying on of a business for taxation purposes.

A significant commercial purpose or character

14.  Whether the activity has a significant commercial purpose or character is closely related to the indicators discussed above. In the circumstances, relevant factors in support of this include:

•        a business plan;

•        the training undertaken;

•        the amount and frequency of trades; and

•        the intention to make a profit.

15.  As stated above, you have provided a business plan, completed the ASX options trading course, made a number of trades that would suggest a commercial volume, and demonstrated that you fully intend on making a profit from trading options.

16.  Therefore, your business activity has a significant commercial purpose or character.

Conclusion

17.  On the specific facts in this case, your options trading is considered carrying on a business for tax purposes based on the relevant indicia and pursuant to TR 97/11.

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