Edited version of your written advice

Authorisation Number: 1051347552453

Date of advice: 9 April 2018

Ruling

Subject: Carrying on a business – options trading

Question

Were you carrying on a business of options trading in the 20XX to 20XX financial years?

Answer

Yes.

This ruling applies for the following periods:

Financial year ended 30 June 20XX

Financial year ended 30 June 20XX

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You started options trading again in 20XX.

Your intention at this point was to carry on a business of options trading.

In 20XX you spent $XX,XXX to establish a home office to carry out your option trading activities.

In 20XX you ceased employment to continue your option trading activities full time.

The option strategies you adopted were more complex in nature as they consisted of multiple call and put spreads on the same underlying instrument.

Due to this you researched the economics of the Country A economy, current employment statistics, real GDP, consumer confidence surveys, inflation and the political landscape.

In addition to this you subscribed to various online and offline publications.

Your share trading activities in the 20XX to 20XX financial years are summarised as follows;

You expected that your option trading activities would be successful and make a profit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-40

Income Tax Assessment Act 1997 Section Part 3-1

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

The Commissioner’s view about the tax consequences of financial contracts for differences (CFDs), which are financial derivatives with similarities to options, is found in Taxation Ruling TR 2005/15 (TR 2005/15). TR 2005/15 states a loss from CFD trading will be an allowable deduction under section 8-1 of the ITAA 1997 where the transaction is entered into as an ordinary incident of carrying on a business.

The Commissioner’s view on carrying on a business is found in Taxation Ruling TR 97/11 (TR 97/11). The indicators in TR 97/11 have been developed by the courts of law and are used for all cases about the carrying on of a business. Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year to year basis. Taxation Ruling TR 97/11 provides that the following factors are relevant considerations in determining whether a business exists:

a) the nature of the activities and whether they had 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/loss was regarded as arising from a discernible pattern of trading;

f) the volume of the taxpayer's operations and the amount of capital employed by him.

g) The following factors are particularly relevant in respect of share/options traders:

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

(b) turnover;

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

(d) maintenance of an office;

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

(f) whether the taxpayer was engaged in another full-time profession.

In your case, you had a profit making intention, you injected large amounts of capital into your options trading and you traded options with a high turnover in a regular and systematic manner. You operated in a business-like manner using a degree of sophistication; your trading was not left to chance.

The magnitude of the trading, the amount of capital employed and the repetition in buying and selling options are all factors which would point towards the existence of a business in the years in question.

You also devoted significant time to your options trading and you had a dedicated office for carrying out your option trading activities.

The overall impression gained from the facts provided is that you were carrying on a business of options trading in the 20XX, 20XX and 20XX financial years.