Edited version of your private ruling

Authorisation Number: 1011995811805

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Ruling

Subject: Am I in business as an options trader

Question: For the year ended 30 June 2011, can your option trading activity be on revenue account?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011.

The scheme commenced on

1 January 2009.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Relevant facts

You commenced trading options in January 2009.

You have studied and researched your option trading activity extensively.

You have developed a business plan for your option trading activity and you follow it.

You have various profit making trading strategies and also a stop loss strategy.

You research the financial market everyday in regard to your option trading activity.

You trade in options regularly; for the year ended 30 June 2011, you had a substantial amount of the following transactions:

· buy to open transactions;

· sell to close transactions; and

· positions left to expire.

You have not exercised any of your options to purchase the underlying share, you deal only in options.

You have set up a designated home office to carry out your option trading.

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

· Answers to the share trading questionnaire signed and dated by you.

· Your option trading summary.

· Account statements in your name covering the private ruling statement period.

· Options summary.

· Page 5 of 6 of your Individual tax return 2011.

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 70-10 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

For the year ended 30 June 2011, your option trading activity can be on revenue account.

Detailed reasoning

'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether the option trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained.

In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) Hill J stated 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.'

And more recently re-iterated in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470:

"The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained."

Apart from case law, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. Whilst TR 97/11 specifically discusses primary production activities, the factors can be applied to other types of businesses, such as options trading.

As with case law, no one indicator is determinative. The indicators must be considered in combination and as a whole. Whether a business is carried on depends on the large or general impression gained.

Factors and application to your circumstances

Nature of activity and purpose of profit making

An options trader is a person who carries out business activities for the purpose of earning income from buying and selling options. Generally, options purchased for the purpose of making a profit on sale would be re-sold within a relatively short period of time.

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business of options trading exists, there is usually a business plan of how the activities will be conducted.

A business plan might show, for example:

· an analysis of each potential investment;

· analysis of the current market value and various segments of the market;

· research to show when or where a profit may arise;

· the basis of decisions as to when to hold or sell options;

· how to stop losses;

· how the business will be financed; and

· how the business will commence and be set up with regard to equipment and resources.

Your business plan contains all of these components, this along with the answers provided in your share trading questionnaire, signed and dated by you, clearly show the nature of your activity as having a profit making purpose and to be business like.

Repetition and regularity of the activities

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

You had a significant amount of transactions for the year ended 30 June 2011. The buys and sells were spread evenly throughout the financial year. There was a consistency of trading evidenced by regular trade activity each month.

Organisation in a business-like manner and the keeping of records

Generally, an options trading business would involve study of daily and longer-term trends, analysis of a company's annual report and current status, plans to take into account contingencies and market fluctuations and the seeking of advice from experts. If records of purchases and sales of options were not kept, it would be more difficult for a person to demonstrate that a business of option trading was being carried on.

You keep records of your monthly statements, trading activity, analysis reports and your options trading account detailing your trades.

You research companies and use various charts and indicators to determine which options to purchase or sell.

Your approach is well organised and business like.

Volume of trading

A higher volume of purchases and sales of options is more likely to indicate that a business is being carried on.

You had a high volume of transactions for the year.

Amount of capital injected

You commenced your options trading account with a certain amount, recently injected a further amount and plan to deposit regular capital amounts into your trading account each month until your trading provides the capital required.

Your current job enables you to supplement your trading capital and you state that you can obtain more working capital if required via a loan with a certain bank and by selling your brand new car if necessary.

Conclusion

The factors or indicators that give the overall impression that you are carrying on a business of option trading for the year ended 30 June 2011 are:

· you had a profit making intention;

· you traded options in a regular, routine and systematic manner;

· you operated in a business like manner, that is you followed your business plan and used a degree of sophistication, your trading was not left to chance;

· there was a discernable pattern of trading;

· you commenced your options trading account with a certain amount of capital and recently injected a further amount. You plan to deposit regular capital amounts into your trading account each month until your trading provides the capital required;

· there was high number of trades and a high turnover;

· you maintained a separate home office and had a dedicated computer for carrying out your option trading activities; and

· you spend a significant amount of time on your options trading activity, you look at charts everyday, seven days a week. You check your positions everyday and from there manage and make decisions.

The overall impression gained is that you were in the business of option trading for the year ended 30 June 2011.

Note 1: Non commercial loss rules

You will need to consider the non-commercial loss rules. The following facts sheets:

Non-commercial losses: overview; and

Non-commercial losses: the assessable income test.

have been included for your reference and are located on the ATO website, www.ato.gov.au.

Specifically, you will need to pay attention to the income requirement and the assessable income test, a brief summary follows:

Non-commercial losses

If you have a net loss from a business activity you carry on as an individual, the non-commercial loss rules will apply. These rules determine whether you can use your business loss to offset income from other sources.

Income requirement

For the 2009-10 and later income years, you first need to meet the non-commercial losses income requirement.

You meet the income requirement if as an individual your income for non-commercial loss purposes is less than $250,000.

Income for non-commercial loss purposes is the sum of your:

Taxable income (ignoring any business losses);

· total reportable fringe benefits;

· reportable superannuation contributions; and

· total net investment losses - including financial investment losses and rental property losses.

If you meet the income requirement, you need to satisfy one of four tests, to work out if you can offset your loss against your other income.

The four tests are;

· Assessable income test;

· Real property test;

· Other assets test; or

· Profits test.

Assessable income test

To pass the assessable income test, assessable income from your business activity, (options trading) must be at least $20,000 in the income year. If you pass the assessable income test, you can claim your losses in the current year.

For you, the premiums receivable from your business of trading options will be assessable income. Refer to ATO Interpretative Decision ATO ID 2009/57 Income Tax Exchange Traded Options: derivation of premiums receivable (ATO ID 2009/57). A copy is provided for your reference.

Note 2: Trading Stock

Options are not trading stock as defined in section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997). ATO Interpretative Decision ATO ID 2004/526 Income Tax Options Trading (ATO ID 2004/526) gives the ATO view and states that options are not trading stock. A copy is provided for your reference.

In summary, this means that when you complete your income tax return there will be no trading stock calculation. It is also incorrect to input the value of the underlying stock (share) as part of a trading stock calculation in situation where you do not acquire the underlying stock (share).