Edited version of private ruling

Authorisation Number: 1011664394728

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Ruling

Subject: Options trading

Will the capital gains tax (CGT) provisions in Part 3-1 of the Income Tax Assessment Act 1997 (1997) apply in relation to your options trading activity to allow you to apply any current unapplied net capital losses against any future capital gains?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2007

Relevant facts and circumstances

You trade in call and put options and you commenced trading a number of years ago.

You have provided the following information:

· your intention in trading in call and put options was to make a profit

· you have not been able to ascertain the amount of time spent per week trading in the call and put options

· you subscribed to share information resources and read most financial journals

· you chose the call and put options based on the information you had obtained by reading as much as possible in relation to the companies you dealt in

· your strategy in regard to buying and selling options was to try to buy low and sell high

· you do not have a business plan for your option trading

· you do not set budgets and targets in relation to your option trading

· you funded your option trading from work related income, investments and from funding sourced from your superannuation income and investments

· you did not borrow any money to fund your option trading

· you do not have any qualifications in option trading, but have attended many seminars on share and option trading

· you were employed in full time employment and you then retired and

· you have been including capital gains and capital losses from the option trading activity in your income tax returns since you commenced trading.

You have provided copies of trading statements for your call and put option trading activities for the recent years, and they form part of, and should be read in conjunction with this private ruling.

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 15-15

Income Tax Assessment Act 1997 Section 25-40

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 108-5(1)

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

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Taxation Ruling TR 2005/15 discusses the income tax consequences of entering into financial contracts for differences (CFD's). Although you are not trading in CFD's, CFD trading is a similar kind of activity to options trading due to its leveraged and trend based nature, and the guidelines in TR 2005/15 can therefore be applied in your case.

TR 2005/15 states that gains or losses can have the following income or CGT consequences:

· A gain or loss will be assessable income under section 6-5 of the ITAA 1997 or an allowable deduction under section 8-1 of the ITAA 1997 respectively where the transaction is entered into as an ordinary incident of carrying on a business, or in a business operation or commercial transaction for the purpose of profit making.

· A gain will be assessable income under section 15-15 of the ITAA 1997 where a taxpayer enters into a contract in carrying on or carrying out a profit-making undertaking or scheme, and the gain from it is not assessable under section 6-5 of the ITAA 1997. A loss from a contract where the gain would have been assessable under section 15-15 of the ITAA 1997 is an allowable deduction pursuant to section 25-40 of the ITAA 1997.

· A gain or loss from a contract entered into for the purpose of recreation by gambling will not be assessable income under section 6-5 or section 15-15 of the ITAA 1997 or deductible under section 8-1 or section 25-40 of the ITAA 1997. A capital gain or capital loss from a contract entered into for the purpose of recreation by gambling will be disregarded under paragraph 118-37(1)(c) of the ITAA 1997.

The CGT provisions in Part 3-1 of the ITAA 1997 will apply if none of the above situations apply.

Ordinary incident of carrying on a business

Whether there is a business being carried on is a question of fact and involves an inquiry into matters such as whether the transactions are entered into in a systematic, organised and 'businesslike' way; the repetition or regularity of the transactions; the scale of the transactions; whether the transactions are related to, or part of, other activities of a businesslike character; the purpose of the taxpayer; the degree of skill employed in how the taxpayer engages in the transactions.

In your case, we have considered the following factors:

· you commenced trading in options after you had retired from full time employment

· you aim to make the most of the rising and falling market fluctuations by buying low and selling high to make a profit

· you did not employ any compelling businesslike method and you did not have a business plan

· you do not have any qualifications in option trading, however, you have attended seminars on share and option trading

· you have studied and researched option trading through publications and other reference material, and

· you have provided trading statements for the recent years, which outline the number of option trades that you made during each month.

After weighing up the factors related to your case, there is not one factor which provides any weight to the fact that you were carrying on a business as an option trader. The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. There is no obvious pattern or regularity to your option trading, and you did not trade during some months. You have not advised how much time each week you spent on your option trading and based on the information that you have provided, you have not displayed repetition and regularity in your option trading that a person in the business of option trading would display.

You are therefore not considered to be carrying on a business in option trading in the income years under consideration.

Profit-making undertaking or scheme

Section 15-15 of the ITAA 1997 states that assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. This section does not apply to a profit that:

· is assessable as ordinary income under section 6-5 of the ITAA 1997, or

· arises in respect of the sale of property acquired on or after 20 September 1985.

As the options constitute property acquired by you on or after 20 September 1985, the profits arising from your option trading will not be included in your assessable income under section 15-15 of the ITAA 1997, and any losses will therefore not be an allowable deduction under section 25-40 of the ITAA 1997.

No profit making purpose

It is possible in some cases that the facts will establish that a person entered into the contract for purposes other than to make a profit. In such a case, the gain or loss will not be on revenue account.

You have stated that your intention in trading in call and put options was to make a profit, and we consider that it is expected that these types of transactions are usually entered into with the purpose of profit-making.

We therefore consider that the 'no profit making purpose' tax treatment of these types of transactions will not apply in your case.

CGT provisions

As we have determined above that the gains and losses from your option trading activity will not be on revenue account, the CGT provisions in Part 3-1 of the ITAA 1997 will apply in this case.

An option is an intangible asset and also a CGT asset as defined in subsection 108-5(1) of the ITAA 1997.

CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen to any options you dispose of. CGT event C2 under section 104-25 of the ITAA 1997, relating to cancellation, surrender and similar endings, will happen when your position under an option is closed out, where the close-out results in the cancellation, release or surrender of the option.

You will be able to apply any current unapplied net capital losses as a result of these CGT events against future capital gains.