Edited version of private advice

Authorisation Number: 1051906326280

Date of advice: 12 October 2021

Ruling

Subject: Commissioner's discretion special circumstances - business - options trading

Question 1

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

Answer 1

Yes. After considering all the relevant indicators and the circumstances of your case, it is considered that you were carrying on a business of options trading.

Question 2

Will the Commissioner exercise the discretion to allow you to include any losses from your business activity in the calculation of your taxable income for the 20XX financial year?

Answer 2

No. In your circumstances the Commissioner would not exercise discretion to include any losses in the calculation of your taxable income for the 20XX financial year.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have XX years of previous experience within the trading and finance industry.

You carry out options trading of ASX index options. You do not have other employment in the period of the trading. The trading profits were your main source of income in the relevant periods.

You complete all trading activity yourself using broking platforms and systems.

The intention of your trading is to produce a profit.

You invest capital, an amount as high as $XX sourced from cash reserves and borrowing, to fund the trading activity.

You have no formal business plan.

You maintain records of your options trading transactions.

You did relevant research and developed a trading strategy that you use to determine when to buy and sell options. The trading strategy includes selling both Put and Call options on the index as this creation of open risk positions generates premium (income).

You advised that sell "out of the money" options such that you will produce profit if the index stays within a certain range.

You advised that the further the index moves outside of your desired range, the more time and collateral it takes you to trade out of "in the money" positions.

You had XX buy and XX sell transactions in the 20XX financial year.

You stated that you suffered significant losses due to the volatility that the COVID-19 caused to the stock market, which caused you to close positions you no longer had the collateral to support.

You stated you did not satisfy the less than $250,000 income requirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Reasons for decision

Carrying on a business

Where a person trades in options as a business, the associated income and deductions are assessable as under section 6-5 and section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Therefore, it is necessary to determine whether your options trading activity is regarded as a business.

The Commissioner's view on carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). 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. These factors equally apply to other types of businesses. No individual factor is determinative but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•                    Whether the activity has a significant commercial purpose or character;

•                    Whether the taxpayer has more than just 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 and 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 on in a business-like manner such that it is directed at making a profit;

•                    The size, scale and permanency of the activity; and

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

Applying the relevant indicators to your circumstances

Nature of activity and purpose of profit making

Whilst a business plan will help to establish that you are carrying on a business it is not compulsory, or conclusive, of trading activity amounting to the carrying on of a business.

In your case, you have no formal business plan in place however you have indicated you have a degree of skill in options trading from your previous experience within the finance industry. Using your knowledge, you have established an options trading system, based on relevant research, which you use to determine when to buy and sell options and you have continued to use for many years.

Your intention is to trade options with a short term turnaround to produce profits by buying and selling options 'out of the money' as defined by your trading strategy. Your trading activity provides you with your main source of income.

Repetition and regularity of the activities

The repetition of activities by the same person over a period is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

In your case, the Commissioner considers that you regularly committed your time to place all the trades and complete all trading activities yourself. The XX buy and XX sell transactions you made in the 20XX financial year were considered carried out in a repeating and regular manner.

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

A business is characteristically carried on in a systematic and organised manner. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. If records of purchases and sales were not kept, it would be more difficult for a person to demonstrate that a business was being carried on.

In your case, you continued utilising relevant broking systems to make your transactions, based on an established trading strategy that was developed based on relevant research. This aligns with a business-like manner operation. In addition, you keep record of your options trading transaction and statements.

Volume of trading

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business.

You made XX buy transactions and XX sell transactions in the 20XX financial year based on the options trading system you have been using for many years. This indicates a comparably high volume of trading.

Amount of capital injected

You ordinarily have significant capital invested in your options trading activity, which can vary year to year but can be as high as $X.

Hobby or recreation

Given the commercial nature of options trading, your trading activity is not better described as a hobby.

The overall impression gained from the facts provided is that your options trading activity had significant commercial character, carried out in a business-like manner with the intention to produce a profit. Therefore, you were carrying on a business of options trading in the 20XX financial year.

Commissioner's discretion for special circumstances

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

•                    the Commissioner exercises his discretion.

In your case, you do not satisfy the income requirement under subsection 35-10(2E) nor do any of the exceptions under subsection 35-10(4) of the ITAA 1997 apply to your circumstances.

The special circumstance discretion may be applied in situations where your business activity is affected by special circumstances outside of your control.

The interpretation of Commissioner's discretion is provided in Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion (TR 2007/6). TR 2007/6 states that special circumstances are those circumstances which are sufficiently different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

Ordinary economic, weather or market fluctuations that may be reasonably predicted to affect the business activity would not be considered special circumstances. These fluctuations are expected to occur on a regular or recurrent basis when carrying on a business activity and affect all businesses within a particular industry.

The existence of a volatile market and the associated fluctuations are expected to occur on a regular or recurrent basis when carrying on an options trading business. The COVID-19 pandemic, although not expected to occur as frequent as some other market events, is considered one of the market factors or events that contributed to the market fluctuations. It is therefore not regarded as special circumstances under paragraph 35-55(1)(a) of the ITAA 1997 for your trading activity.

In your case, the Commissioner would not exercise discretion to include any losses in the calculation of your taxable income for the 20XX financial year. Therefore, the losses from your business would be subject to the loss deferral rule in subsection 35-10(2) of the ITAA 1997. That is, the losses from your options trading cannot be offset against your other income in the 20XX financial year but instead will be carried forward to later years when there is a profit from your options trading activity or if you meet the requirements of the division 35 to be able to claim the deferred loss in a later year.