Edited version of your private ruling

Authorisation Number: 1012531370144

Ruling

Subject: Options trading loss using full service broker

Questions and Answers:

1. Are your losses incurred on your options (ETO) trading account revenue losses from carrying on a business of ETO trading rather than a capital gains tax (CGT) loss?

Yes.

2. For the income years after you closed your ETO trading account, can you claim a deduction for the portion of interest expenses incurred in relation to the connected borrowings?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You borrowed funds to invest in the ASX. You sourced a full-service stockbroker, who engaged in ETO trading on your behalf. Over a period of six months, two hundred ETO transactions occurred, including both buying and selling (writing) puts and calls, both long and short. Within six months of trading, you lost the entire amount invested.

You reported these losses in your tax returns as capital losses.

You have now stopped this trading, closed the trading account and are now paying back the borrowings.

You also advised you have an economic inability to repay (extinguish) the borrowing in full for the following reasons:

· There is a mortgage on your principle place of living.

· The last 12 months of income from wages has fluctuated due to your unemployment. You were unemployed and reemployed, which meant your husband was the only income earner partially throughout the year.

· You have a mortgage on an investment property, which is negatively geared.

· Your children are still living at home.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-5

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Where losses are of a capital nature, they are generally accounted for under the CGT provisions in Part 3-1 of the ITAA 1997.

The distinction between a share market investor and carrying on a business of share trading has been established in the body of law through many court cases. In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, the following were stated as indicators of carrying on a business:

(a)  the nature of the activities and whether they have the purpose of profit-making;

(b) the complexity and magnitude of the undertaking;

(c) an intention to engage in trade regularly, routinely or systematically;

(d) operating in a business-like manner and the degree of sophistication involved;

(e) whether any profit or loss is regarded as arising from a discernible pattern of trading;

(f) the volume of the taxpayer's operation and the amount of capital employed by him;

and more particularly in respect of share traders:

(a) repetition and regularity in the buying and selling of shares;

(b) turnover;

(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

(d) maintenance of an office;

(e) accounting for the share transactions on a gross receipts basis;

(f) whether the taxpayer is engaged in another full time occupation.

For example, in AAT Case 4847 (1988) 20 ATR 3182; (1988) 89 ATC 171, a taxpayer purchased twenty parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987. No share was held for more than five months. The Tribunal ruled the shares were purchased as trading stock in the carrying on of a business because the shares were bought and sold repeatedly with a view to making a profit and because all shares were sold within a year of purchase.

In the Federal Court case of Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689 (Radnor), it was decided the taxpayer was not carrying on a business. Here, the taxpayer company was owned and controlled by the trustee of three trust estates and was the investment vehicle for holding all the assets from which income flowed to the trust estates. Ultimately, the question of whether the taxpayer was carrying on a business was decided in having regard to the volume and frequency of transactions in stocks and the activities of the taxpayer being characterised as investment in shares to obtain dividends. It was held the question of whether a taxpayer is not carrying on a business cannot be conclusively answered by saying that a taxpayer is a trustee (which is a view recently published by the Tax Office in Taxation Determination TD 2011/21).

Taxation Ruling TR 2004/4 allows deductions for interest expenses incurred following the cessation of relevant income earning activities, where a taxpayer can demonstrate a legal or economic inability to repay the loan is suggestive of the loan not having been kept on foot for purposes other than the former income earning activities.

In your case, the ETO trading activity on your personal account, conducted by the stockbroker, was indicative of carrying on a business because the activity exhibited an intention to engage in trade regularly, routinely or systematically; operating in a business-like manner with a very high degree of sophistication and; high repetition and regularity in the buying and selling of ETOs. It follows your trading losses, as well as the interest expense incurred, is deductible on revenue account under section 8-1 of the ITAA 1997 (and are therefore not CGT losses).

As for your on-going interest expenses related to your ETO activity, we are satisfied your loan has not been kept on foot for purposes other than the former income earning activities. Therefore, we confirm in this ruling the relevant interest expenses may be deducted up to 30 June 2017. For income years after that time, you may apply for another private ruling as 30 June 2017 approaches.