Edited version of private ruling

Authorisation Number: 1011698079712

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Ruling

Subject: CGT - exchange traded option

Questions

1. Is the premium from the grant of the option assessable under the capital gains tax (CGT) provisions in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes

2. Does CGT event C2 in section 104-25 of the ITAA 1997 happen to the taxpayer on the close-out of an exchange-traded option (ETO)?

Answer: Yes

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a Self Managed Super Fund that owns a number of shares in a publicly listed company. You do not carry on a business.

You propose to create a call option through an internet broker, sell the call option at market and earn a fee/premium.

You may close out the call option at a later time if you decide not to sell the shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-25

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

Income Tax Assessment Act 1997 Subsection 104-40(5)

Income Tax Assessment Act 1997 Subsection 134-1(1)

Income Tax Assessment Act 1997 Section 116-65

Income Tax Assessment Act 1997 Subsection 116-65(2)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Paragraph 104-25(1)(a)

Income Tax Assessment Act 1997 subsection 104-25(3)

Income Tax Assessment Act 1997 subsection 104-10(2)

Further issues for you to consider

We consider your application raises the following issue which is not considered in this ruling:

Does the proposed investment activity satisfy the relevant provisions of the Superannuation Industry (Supervision) Act 1993?

You may apply for another ruling on this issue if required.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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

The Self Managed Super Fund does not carry on a business of investment or securities trading. Fees derived from the writing of an option would be treated as a capital gain.

An option is an intangible asset. It is also a CGT asset as defined in subsection 108-5(1) of the ITAA 1997. A call option in respect of shares is an option that gives the taker (buyer) the right, but not the obligation, to buy the underlying shares at a specified price on or before a specified date.

CGT Treatment of options

The option is granted

CGT event D2 happens when a taxpayer grants an option. The time of the event is when the option is granted. The capital gain or loss arising is the difference between the capital proceeds and the expenditure incurred to grant the option.

The option is granted and then the option is exercised

Under subsection 104-40(5) of the ITAA 1997 the capital gain or loss from the CGT event D2 is disregarded if the option is exercised. Subsection 134-1(1), item 1, of the ITAA 1997 refers to the consequences for the grantor of the exercise of the option.

Where the option binds the grantor to dispose of a CGT asset section 116-65 of the ITAA 1997 applies to the transaction.

Subsection 116-65(2) of the ITAA 1997 provides that the capital proceeds from the grant or disposal of the shares (CGT asset) include any payment received for granting the option. The disposal of the shares is a CGT event A1 which occurs under subsection 104-10(3) of the ITAA 1997 when the contract for disposal is entered into.

You would still make a capital gain at the happening of the CGT event D2 in the year the event occurs (the time the option is granted). That capital gain is disregarded when the option is exercised. Where the option is exercised in the subsequent tax year, the CGT event D2 gain is disregarded at that point. An amendment may be necessary to remove the gain previously included in taxable income for the year in which the CGT event D2 occurred.

Closing out an option

The establishment of an ETO contract is referred to as opening a position (ASX Explanatory Booklet 'Understanding Options Trading'). A person who writes (sells) a call or put option may close out their position by taking (buying) an identical call or put option in the same series. This is referred to as the close-out of an option or the closing-out of an opening position.

CGT event C2 happens when a taxpayer's ownership of an intangible CGT asset ends. Paragraph 104-25(1)(a) of the ITAA 1997 provides that ownership of an intangible CGT asset ends by cancellation, surrender, or release or similar means.

CGT event C2 therefore happens to a taxpayer when their position under an ETO is closed out where the close-out results in the cancellation, release or discharge of the ETO.

Under subsection 104-25(3) of the ITAA 1997 you make a capital gain from CGT event C2 if the capital proceeds from the ending are more than the assets cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base (calculated in accordance with subdivision 110-B of the ITAA 1997).

Note

The close-out of an option position is not the same as the sale of an asset. When an option position is closed out, there is no transfer of rights between two parties. CGT event A1 therefore cannot happen when an option position is closed out, there being no change in ownership of the asset from one entity to another as required by subsection 104-10(2) of the ITAA 1997.