Edited version of private advice

Authorisation Number: 1051859367299

Date of advice: 9 July 2021

Ruling

Subject: Am I in business of options trading - non-commercial losses

Question 1

Is the partnership considered to be carrying on a business of options trading?

Answer

Yes.

Question 2

Is the income earned from the options trading activity income of the partnership and assessable to each of the partners?

Answer

Yes.

Question 3

If the options trading activity is considered a business, then will section 35-30 of Income Tax Assessment Act 1997 (ITAA 1997) apply to allow the offset of these losses against other assessable income?

Answer

Yes.

Question 4

Are options considered trading stock?

Answer

No.

Question 5

Does the assessable income get reported in the taxation return on a 'gross receipts basis' or 'net receipts basis'?

Answer

This is an invalid question as it is not regarding a relevant provision. General guidance has been provided on this issue.

Reasons for decision

Carrying on a business

Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on.

Taxation Ruling TR 97/11 (Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are:

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is repetition and regularity of the activity

•         whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised and carried out in a business-like manner

•         the size, scale and permanency of the activity

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Weighing up the relevant factors pursuant to the criteria stipulated in TR 97/11 it is considered that your activity demonstrates significant commercial purpose, repetition and regularity of activity and is carried out in a similar manner to that of the ordinary activity in that trade.

Although your business has made a loss it is concluded that the business had purpose of profit as well as a prospect of profit and that activity would not be described as a hobby or form of recreation.

Based on these conclusions it is considered that the partnership was in the business of options trading.

Partner income

Section 90 of the Income Tax Assessment Act 1936 (ITAA 1936) defines the net income of a partnership, as assessable income of the partnership as if the partnership were a resident taxpayer, less allowable deductions.

Under section 90 of the ITAA 1936 the members of the partnership are taxable in their individual shares of the net partnership income whether distributed to them or not. Subsection 92(1) provides that the assessable income of a partner in a partnership shall include so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident. A partner's interest in the net partnership income or partnership loss is usually determined in accordance with the partnership agreement.

Taxation Ruling TR 94/8 sets out factors that will be considered to determine the existence of a business partnership. No one factor is conclusive and each case will depend on its facts and surrounding circumstances.

The existence of a partnership for income tax purposes is determined based on the facts of each case. The existence of a partnership agreement is not necessary. The intention and conduct of the parties will be decisive.

The partnership trades in its name with joint accounts. You operate the partnership on a 50/50 split based on capital contribution. Any net income the partnership generates from the activity would be assessable to each partner on this basis.

Non-commercial loss

For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless:

•         you satisfy the income requirement and you pass one of the four tests

•         the exceptions apply, or

•         the Commissioner exercises his discretion.

Taxation Ruling TR 2001/14 sets out the Commissioner's interpretation of the operation of Division 35 of the ITAA 1997. Paragraph 13 of TR 2001/14 states that where an individual satisfies at least one of the four tests and 'meets the income requirement' the loss deferral rule does not apply.

In your situation, you satisfy the income requirement (that is your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, does not exceed $250,000) and you meet at least one of four tests.

Based on these conclusions you would satisfy the requirements under Division 35 of the ITAA 1997 to allow the offset of these losses against other assessable income.

Options are not trading stock

Section 70-10 of the ITAA 1997 defines trading stock to include anything produced, manufactured or acquired which is held for the purposes of manufacture, sale or exchange in the ordinary course of business.

ATO Interpretative Decision ATO ID 2004/526 says that exchange traded options 'do not fall within the definition of trading stock in section 70-10 of the ITAA 1997'. The reason for this is that 'participants do not buy or sell a physical instrument'.

Options themselves are not trading stock however, once they are exercised and the shares are purchased that forms part of trading stock. The cost of the shares would be the sum of the amount paid for the rights or options plus the price of the share or unit when rights or options are exercised.

Future years

You can change from conducting an activity as a business to that of being a hobby and vice-versa over time as your level of activity changes. You should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business.

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

You were a resident of Australia for tax purposes during the relevant financial year. The total of your taxable income and reportable super contributions for the relevant financial year meets the income requirement under section 35-10 of the ITAA 1997.

You operate your activity as a partnership.

Capital contributions have been made on a 50/50 basis.

The business is funded by both equity and debt.

You hold formal qualifications that include related subjects.

You have a home office from which you conduct options trading and business management activities.

You manage the day to day operations of the activity. You work approximately xx hours a week on the activity.

You have worked on a part-time basis as an employee for another business.

You commenced the options trading activity in xxx 20XX.

You trade in both the Australian and an overseas market, with a focus on the overseas market.

You use a bespoke financial model that allows records of each option and share to be managed.

You use a use a tailored trading strategy to undertake all options and shares trading.

You use brokers to facilitate your options trades.

You maintain several subscriptions to options research and analysis firms which provide you with share and options screening to determine when potential trades are undertaken.

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 35-10

Income Tax assessment Act 1997 section 35-30

Income Tax assessment Act 1997 section 70-10