Edited version of private advice

Authorisation Number: 1052178107870

Date of advice: 10 October 2023

Ruling

Subject: Eligible investment business

Question 1

For the purposes of the definition of 'trading business' in section 102M of the Income Tax Assessment Act 1936 (ITAA 1936), will the Trustee of the Fund be taken to be carrying on a business of investing and trading in Bitcoin (BTC) and Ether?

Answer

Yes

Question 2

If the Fund is taken to be carrying on a business pursuant to Question 1, will the activities of the Fund of investing and trading in BTC and Ether constitute 'eligible investment business' as defined in section 102M of the ITAA 1936?

Answer

No

Question 3

Will the Fund be a 'trading trust' pursuant to subsection 102N(1) of the ITAA36?

Answer

Yes

This ruling applies for the following periods

Income year ended 30 June 2023

The scheme commenced

During the income year ended 30 June 2023

Relevant facts and circumstances

All references to legislation contained in this document are references to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.

The Fund is an unregistered, unlisted Managed Investment Scheme for the purposes of the Corporations Act 2001.

The Fund will invest predominantly in BTC and Ether.

Cryptocurrencies (sometimes referred to as 'digital currencies') such as BTC and Ether have the following features:

•                     They are not issued or regulated by a jurisdictional authority or any other single entity

•                     They are not tangible - all one holds is a private key

•                     They are not a widely accepted medium of exchange - although they may be exchanged with a willing party for money or the supply of goods or services

•                     They are not used generally as a monetary unit in pricing goods or services

•                     They do not give rise to a contract between the holder of the private key and another party

•                     They do not have any intrinsic value or value that is derived or dependant on the value of anything else - their value is solely based on the laws of supply and demand; and

•                     They do not provide an entitlement, claim, obligation or a right to receive anything that is capable of being enforced by action.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 subsection 230-45(1)

Income Tax Assessment Act 1997 paragraph 230-45(2)(e)

Income Tax Assessment Act 1997 subsection 230-45(4)

Income Tax Assessment Act 1997 subsection 230-45(5)

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1936 subsection 102N(1)

Income Tax Assessment Act 1936 paragraph 102N(1)(b)

Income Tax Assessment Act 1936 section 102M

Income Tax Assessment Act 1936 section 102MC

Income Tax Assessment Act 1936 section 102P

Income Tax Assessment Act 1936 subsection 159GP(1)

Reasons for decision

Question 1

Summary

You are carrying on a business as defined by subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Determining whether or not an activity amounts to carrying on a business is a matter of fact and degree.

Subsection 6(1) of the ITAA 1936 provides that, for the purposes of the ITAA 1936, 'business' has the meaning given by subsection 995-1(1) of the ITAA 1997. Subsection 995-1(1) defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' provides indicators that the courts have concluded are relevant when determining whether a business is being carried on. These indicators are no different in principle, from the indicators as to whether activities in any other area constitute carrying on a business.

The indicators provided in TR 97/11 are:

•                     Whether the activity has a significant commercial purpose or character (see paragraphs 28 to 38);

•                     Whether the taxpayer has more than just an intention to engage in business (see paragraphs 39 to 46);

•                     Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (see paragraphs 47 to 54);

•                     Whether there is repetition and regularity of the activity (see paragraphs 55 to 62);

•                     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 (see paragraphs 63 to 67);

•                     The size, scale, and permanency of the activity (see paragraphs 77 to 85);

•                     Whether the activity is better described as a hobby, a form of recreation or a sporting activity (see paragraphs 86 to 93).

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on.

No one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators.

The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Application of the indicators to your circumstances

Whether the activity has a significant commercial purpose or character

Broadly, the activity has a significant commercial purpose or character (i.e., investing in complex investments for wholesale or significant investors).

Whether the taxpayer has more than just an intention to engage in business

This indicator is particularly related to:

•                     whether the activity is preparatory or preliminary to the ultimate activity;

•                     whether there is an intention to make a profit; and

•                     whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity.

In relation to this indicator it is noted that the relevant scheme facts indicate that there is an intention to make and distribute profits.

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

The Fund has not only the intention but also the prospect of profit from the activity.

Whether there is repetition and regularity

It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business.

There is a clear intention to undertake investing and trading activities in BTC and Ether with repetition and regularity.

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

The activity is similar to the activities of other managed investment funds in terms of marketing, investor engagement and targeting, custodial arrangements, management and investment expertise.

Whether the activity is planned, organised, and carried on in a business-like manner such that it is directed at making a profit

The processes and procedures underpinning the activities of the Fund, including the associated agreements with third parties, demonstrate that 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

It is common for the size, scale and permanency, and repetition and regularity indicators to be intricately linked. As the repetition of an activity increases so does the amount of work that is completed and subsequently the income that is received.

The amount of initial capital that is required to be invested by investors is substantial, as is the size and scale of the amount of capital intended to be raised.

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

The nature of the trust and the terms and content of the trustee's duties must be determined having regard to all relevant circumstances, including the events surrounding the establishment of the trust, the trust instrument and associated information such as a prospectus.

There is an investment business plan which clearly has a profit making intention. The size, scale and regularity of the activities indicate that this activity is a business and not an activity which is better described as a hobby, a form of recreation or a sporting activity.

Conclusion

The direct investing and trading of BTC and Ether by the Fund meets the following indicia:

(a)          the activity has a significant commercial purpose or character (i.e., investing in complex investments for wholesale or significant investors);

(b)          the Fund's activities, including actively promoting the Fund and seeking investors, demonstrate more than a mere intention to engage in business;

(c)           the Fund has both the purpose and prospect of profit;

(d)          there is a clear intention of the Fund to undertake investing and trading activities in BTC and Ether with repetition and regularity;

(e)          the activity is similar to that of other managed funds in terms of marketing, investor engagement, custodial arrangements, management and investment expertise;

(f)            the processes and procedures underpinning the activities of the Fund, including the associated agreements with third parties, demonstrate that the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit; and

(g)          the minimum investment amount, the minimum investment term and the Fund's intention to raise a substantial amount of capital, demonstrate that the size, scale and permanency indicia is met.

Overall, it can be concluded that the Fund is carrying on a business of investing and trading in Cryptocurrency.

Question 2

Summary

Investing or trading directly in BTC and Ether does not constitute 'eligible investment business' as defined in section 102M because the assets:

•                     do not come within the list of financial instruments in paragraph (b) of the definition of 'eligible investment business' in section 102M, and

•                     are not financial instruments that arise under financial arrangements for the purposes of paragraph (c) of that definition.

Detailed reasoning

Eligible Investment Business

The business of the Fund will not be a trading business for the purposes of Division 6C if it constitutes an eligible investment business as defined in section 102M (or, more specifically, it consists wholly of 'eligible investment business'). Considering the list contained in the definition, the business of the Fund would be an eligible investment business if:

(a)          The investing or trading is in bonds, debentures, stock or other securities (per subparagraph (b)(ii) of the definition);

(b)          The investing or trading is in future or forward contracts (per subparagraph (b)(v) and (vi) of the definition);

(c)           The investing or trading is in currency swap contracts (per subparagraph (b)(viii) of the definition);

(d)          The investing or trading is in similar financial instruments (per subparagraph (b)(xiii) of the definition); and/or

(e)          The investing or trading is in financial instruments arising under financial arrangements (per paragraph (c) of the definition).

Each of these will be considered in turn.

Investing or trading in bonds, debentures, stock or other securities (per subparagraph (b)(ii) of the definition)

BTC and Ether would not constitute a bond, debenture or stock, but regard must be had to whether they can be a security (or, more accurately, 'other security') for the purposes of subparagraph (b)(ii) of the definition.

The term security is not defined for the purposes of Division 6C, or generally for the income tax law more broadly.

Taxation Ruling TR 96/14 discusses the concept of 'security' for the purposes of sections 26BB and 70B, which is defined in subsection 159GP(1) and includes in paragraph (a) of the subsection:

stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security

Paragraphs 24 to 29 of TR 96/14 consider what is meant by the term 'other security' in this context and note, broadly, there are two possible definitions of 'security':

•                     the broad and more modern concept of a 'security' being any form of investment, and

•                     the narrow and more traditional concept of a 'security' being a debt or claim the payment of which is secured,

then goes on to conclude:

29. Having regard to the above discussion, and whilst appreciating the difficulty of finding one genus in paragraph (a), it is our view that the term 'or other security' in the context in which it is used only encompasses instruments that evidence an obligation on the part of the issuer or drawer to pay an amount to the holder or acceptor, whether during the term of the instrument or at its maturity. We have drawn this conclusion because each of the listed instruments in paragraph (a) evidences such an obligation. These types of securities will generally be recognised as debt instruments.

This same reasoning arguably applies to subparagraph (b)(ii) of the definition, which is broadly worded the same as paragraph 159GP(1)(a). It is also relevant to note that applying the broader concept of 'security' to subparagraph (b)(ii) of the definition is inconsistent with the rest of paragraph (b), which explicitly deals with the broader investments in their own subparagraphs (e.g., shares in subparagraph (b)(iii)). It is clear that neither BTC or Ether creates a debt or the ability to claim a payment from another, and so would not fall within the definition of security for the purposes of subsection 159GP(1). Similarly, the Fund's investing or trading directly in BTC and Ether would not satisfy subparagraph (b)(ii) of the eligible investment business definition.

Investing or trading in future or forward contracts (per subparagraph (b)(v) and (vi) of the definition)

The online Macquarie Dictionary provides the following definitions of futures and forward contracts:

•                     Futures Contract - 'a contract to buy or sell a fixed amount of a commodity, security or currency at a specified price on a specified future date', and

•                     Forward Contact - 'a contract in which a seller agrees to deliver to a buyer a given quantity of assets on an agreed date in the future at an agreed price'.

A 'direct' holding of BTC or Ether is unlikely to involve a 'contract' but, assuming that it meets this requirement, it does not provide anyone with either the right to acquire, or obligation to provide, anything whether now or at a future date. Therefore, such a holding cannot be considered to be a futures or forward contract.

The Fund's investing or trading directly in BTC and Ether, therefore, would not satisfy subparagraph (b)(v) or (vi) of the eligible investment business definition.

Investing or trading in currency swap contracts (per subparagraph (b)(viii) of the definition)

A currency swap contract can be defined as 'exchange of interest - and sometimes of principal - in one currency for the same in another currency'.

As noted above, the mere holding of BTC or Ether is unlikely to involve a contract. Even if it were found that a contract was in existence, there would be no exchange between two currencies. This is because neither BTC nor Ether afford the holder any rights to receive anything. So the holder could not demand an exchange of the cryptocurrency for another currency. Furthermore 'digital currencies', such as BTC and Ether, are not foreign currencies for Australian income tax purposes,[1] so that even if an exchange with a currency was determined, it would not be an exchange of one currency for another.

The Fund's investing or trading directly in BTC and Ether, therefore, would not satisfy subparagraph (b)(viii) of the eligible investment business definition.

Investing or trading in similar financial instruments (per subparagraph (b)(xiii) of the definition)

Subparagraph (b)(xiii) includes within an eligible investment business investing or trading in 'any similar financial instrument'. This subparagraph was inserted alongside (b)(v) to (xii) by the Taxation Laws Amendment Act (No. 4) 1988. In the Explanatory Memorandum it was stated that the 'effect of this amendment is therefore that a public unit trust may conduct a wider range of business activities than is currently permissible, without being taxed as a public trading trust'.[2] In particular, it was noted:

The reference to "any similar financial instruments" in subparagraph (b)(xiii) is intended to obviate the need for further amendments to the definition of the term "eligible investment business" if further acceptable variants of existing financial instruments are developed. A public unit trust will therefore be able to trade or invest in new financial instruments and not be treated as a public trading trust provided that the new financial instrument invested in or traded in is similar to any of the types of financial instruments referred to in the proposed expanded definition of "eligible investment business."[3]

Inherent in the definition is that the investing or trading needs to be in a financial instrument itself (i.e., BTC and Ether themselves need to be financial instruments). What is meant by 'financial instrument' in the context of paragraph (b) is considered in detail in the next section. This section will focus on whether BTC and Ether are 'similar' to one of the 'financial instruments' listed in paragraph (b) of the eligible investment business definition.

The online Macquarie Dictionary defines 'similar' to mean 'having likeness or resemblance, especially in a general way'. The Oxford Dictionary of English (3 ed.) defines it as 'having a resemblance in appearance, character, or quantity, without being identical'. A 'similar financial instrument' would therefore be one with similar characteristics to one or more of the preceding 12 categories of 'financial instrument' listed in paragraph (b). This arguably requires a high degree of commonality such that they are merely a 'variant' of a pre-existing financial instrument listed in paragraph (b); it is not sufficient to simply be a 'financial instrument' as commonly understood.

This narrow interpretation is supported by the overarching context of Division 6C. Division 6C prescribes a consequence for a trust whose business does not wholly consist of eligible investment business: classification as a 'trading business' with the potential adverse consequences of company (rather than trust) taxation under Division 6C and other parts of the income tax legislation. Put another way, meeting the 'eligible business investment' requirement has the potentially beneficial tax outcome of allowing for trust rather than company taxation. The concept of 'eligible investment business' is narrowly defined and any additions to the definition via subparagraph (b)(xiii) should be similarly narrowly defined.

This narrow interpretation is also consistent with the subsequent introduction of paragraph (c) of the definition of 'eligible investment business' in section 102M by the Tax Laws Amendment (2008 Measures No. 5) Act 2008 (discussed further below) which, arguably in recognition of the limited scope of subparagraph (b)(xiii), provides a broader principles-based rule to allow for further expansion of the list of eligible 'financial instruments' without having to continually amend the provision itself.

The financial instruments in the preceding subparagraphs of paragraph (b) involve:

•                     ownership interests in a company or unit trust

•                     the provision and repayment of a sum of money

•                     derivatives, or

•                     life insurance policies.

Fundamentally, the listed financial instruments are underpinned by contractual or other legal rights which afford the parties involved a collection of enforceable rights against the world. Having regard to the relevant features underpinning BTC and Either, while the rights associated with BTC (and possibly Ether) may be said to be propriety in nature, this is attributable to the value placed on them by the community of users, rather than from them being a chose in action which gives rise to a legal action or claim against anyone.[4] BTC and Ether of themselves do not provide any legal rights or obligations to the holder. Given this, it is difficult to see how they are similar in character to any of the financial instruments in the preceding subparagraphs of paragraph (b).

The Fund's investing or trading directly in BTC and Ether, therefore, would not satisfy subparagraph (b)(xiii) of the eligible investment business definition.

Investing or trading is in financial instruments arising under financial arrangements (per paragraph (c) of the definition)

Paragraph (c) includes within an eligible investment business, 'investing or trading in financial instruments (not covered by paragraph (b)) that arise under financial arrangements, other than arrangements excepted by section 102MA'. This paragraph was inserted by the Tax Laws Amendment (2008 Measures No. 5) Act 2008.

In the Explanatory Memorandum it was stated that the amendment, 'will expand the range of permitted financial instruments that a managed fund may invest in or trade by extending the scope of financial instruments covered by the eligible investment rules to include financial instruments that are not already covered by paragraph (b) of the definition of 'eligible investment business''.[5] The paragraph is to facilitate the inclusion of the number and variety of financial instruments that have arisen since the introduction of section 102M.[6]

Financial instrument

Common to both subparagraph (b)(xiii) and paragraph (c) is that the investing or trading be in financial instruments.

The term 'financial instrument' is not defined specifically for the purposes of Division 6C, or for the income tax law more broadly. The term must therefore be construed by reference to its ordinary meaning, in the context of section 102M and Division 6C more broadly. In the absence of a clear indication to the contrary, the term should be used consistently throughout the Act, but particularly so throughout the same section.

Turning to the wording used in subparagraph (b)(xiii) and paragraph (c), there is nothing to suggest that 'financial instrument' should take on a different meaning between those provisions but, rather, the opposite is arguably the case. Paragraph (c) makes it clear that it is only concerned with 'financial instruments' that do not come within paragraph (b).

For an investment to be a 'financial instrument' not falling within paragraph (b) it arguably needs to first be a 'financial instrument' for the purposes of paragraph (b), but then fall out because it does not meet the express requirements of that paragraph (e.g., not explicitly listed in the paragraph, or sufficiently similar to a listed instrument). This necessarily means that financial instrument in subparagraph (b)(xiii) cannot be read more widely than financial instrument in paragraph (c), since the one in paragraph (b) is essentially a subset of the one in paragraph (c). Given that the surrounding words achieve the distinction between the provisions (the requirement in subparagraph (b)(xiii) of similarity and paragraph (c)'s exclusion), there is no need then for financial instrument itself to be further differentiated on its meaning.

Therefore, irrespective of what the term is taken to mean, it should have the same meaning in both provisions.

The Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 5) Bill 2008 notes that 'the meaning of a financial instrument is discussed in the Australian Accounting Standards AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement'.[7] Accounting Standard AASB 132 sets out 'principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities'.[8] It defines a financial instrument as 'any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity'.[9]

Looking at the AASB 132 definition of a 'financial asset' and 'financial liability', it is unlikely that a 'direct' holding of BTC or Ether would meet either definition. In their base form, the party merely holds a private key. The private key does not afford the party any enforceable right to value. The key needs to be transferred to a willing party to realise its value, a value that only exists within a community of like-minded parties. It therefore cannot be said that BTC or Ether are financial assets or financial liabilities in their base form.

For completeness, regard will be had to the ordinary meaning of 'financial instrument'. The Oxford Handbook of International Financial Terms[10] defines it as follows:

Generic term for those securities or contracts which provide the holder with a claim on an obligor. Such instruments include common stock, preferred stock, bonds, loans, money market instruments, and other contractually binding obligations. The common feature which differentiates a financial instrument from a commercial or trade credit is the right to receive cash or another financial instrument from the obligor and/or the ability to exchange for cash the instrument with another entity (cf. NEGOTIABLE INSTRUMENT). The definition can also include instruments where the claim is contingent, as with derivatives.

BTC and Ether in their base form are not contracts and do not entitle the holder of the private key to any right nor impose any obligations on another. Once acquired, the party holds a private key and nothing more. Accordingly, neither BTC nor Ether would satisfy the ordinary meaning definition of 'financial instrument'.

The inability of BTC and Ether to constitute a financial instrument prevents investing or trading directly in them from satisfying subparagraph (b)(xiii) and paragraph (c) of the eligible investment business definition.

Financial arrangement

For completeness, consideration will also be given to whether BTC or Ether are 'financial arrangements' for the purposes of paragraph (c) of the eligible investment business definition.

A financial arrangement is defined under subsection 230-45(1) of the ITAA 1997[11].

The concept of 'financial arrangement' was introduced as part of the Taxation of Financial Arrangements ('TOFA') provisions in Division 230 of the ITAA 1997 by the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009.

Division 230 of the ITAA 1997 is about the tax treatment of gains and losses from certain financial arrangements. The Division broadly assesses gains as assessable income, and allows losses as deductions (i.e., revenue account treatment).

It is unlikely that BTC or Ether would be a 'financial arrangement'.They each may be an arrangement in the broad sense of section 995-1 of the ITAA 1997, but they cannot be said to be an arrangement under which a cash settlable legal or equitable right to receive a financial benefit (or a cash settlable legal or equitable obligation to provide a financial benefit) is present. This is because they do not provide an entitlement, claim, obligation or a right to receive anything that is capable of being enforced by action.

However, even if we assume that they do provide a right or an obligation, it cannot be said that such right or obligation is cash settlable. Any sale or transfer to a third party would not involve settling the rights or obligations under the cryptocurrency asset, but rather settling of separate rights or obligations under the contract of transfer or exchange of the cryptocurrency asset.

Given the position reached, above, it is arguably not necessary to consider the following other 'cash settlable' extensions:

1.            dealing with the right or obligation, or with similar rights or obligations, in order to generate a profit from short-term fluctuations in price, from a dealer's margin, or from both,[12] and

2.            the financial benefit being readily convertible into money, a right to receive money or a financial arrangement, and there is a market for the financial benefit that has a high degree of liquidity and either, there is minimal risk that the financial benefit will decrease in value, or it is intended to raise/provide finance or be converted/liquidated into money, a right to receive money or a financial arrangement.[13]

In respect of 1) it is unlikely that the investment activities of the Taxpayer would meet this requirement. The types of arrangements contemplated by this provision appear to be those that will effectively always be 'cash settled' in that, the short-term nature of the arrangements or applicable offsetting positions, mean that the holder of the rights will only ever relinquish interests by disposing of the rights for money or a money equivalent; they will never deal with the underlying commodity. In this case the Taxpayer's investment strategy is to invest in BTC and Ether to provide investors with returns linked to the appreciation of these assets, it will not seek to actively trade in the cryptocurrency. The Taxpayer will likely dispose of its cryptocurrency at points when market conditions are favourable, however, this does not rise to the level of 'dealing' required for paragraph 230-45(2)(e) of the ITAA 1997.

In respect of 2), it is unlikely that either subsection 230-45(4) or (5) of the ITAA 1997 would be met in this case: the former would not be met because the unregulated and extremely volatile nature of the 'crypto' market means that there is substantial risk that the value of the asset will decline; and the latter would not be met given the Taxpayer's purpose in acquiring the Cryptocurrency is for capital appreciation, not conversion into cash.[14]

The inability of BTC and Ether to constitute a financial instrument already prevented investing and trading in such from satisfying paragraph (c) of the eligible investment business definition but, if it had not, the financial instrument could not have been said to have 'arisen' under (or resulted from) a financial arrangement.

Question 3

Summary

The Fund is a trading trust pursuant to section 102N.

Detailed reasoning

Division 6C in Pt III of the ITAA 1936 (comprising sections 102M to 102T) treats certain trusts, known as public trading trusts, as companies. The trustees of such trusts are taxed at the company rate and distributions to beneficiaries are taxed as dividends. However, trusts that confine their investments to 'eligible investment business', as defined in section 102M (that is, certain 'passive-style' investments such as investing in land for rent or certain financial instruments), will remain subject to the general trust taxation rules in Division 6.

Trading trust

Subsection 102N(1) provides that a unit trust is a trading trust for the purposes of Division 6C of Part III if at any time during the relevant year of income, the trustee carried on a 'trading business' or was able to control directly or indirectly, the affairs or operations of another person in respect of the carrying on by that other person of a trading business.

Section 102M defines a trading business to be a business that does not wholly consist of 'eligible investment business', also defined in section 102M.

This definition is modified by section 102MC which provides for a 2% of gross revenue de minimis rule. Under this rule a trust can derive up to 2% of its gross revenue from non-eligible investment business, other than income from business activity that is not incidental and relevant to the eligible investment business.

As per the answer to Question 1, the Trustee of the Fund is considered to be carrying on a business. It is considered that this business consists of investing and trading in Crypto Assets, specifically BTC and Ether.

Also, as per the answer to Question 2, investing and trading in BTC and Ether are not 'eligible investment business' as defined in section 102M.

The de minimis rule in section 102MC will not apply as the Fund will invest predominantly in BTC and Ether.

Conclusion

The Fund is a unit trust and the Trustee of the Fund carries on a business of investing and trading in BTC and Ether (which are not 'eligible investment business' as defined in section 102M and the de minimis rule in section 102MC does not apply).

Therefore, throughout the Ruling Period, the Fund is a unit trust that will carry on a trading business such that it will be a trading trust for the purposes of section 102N.

[1] See definitions of 'foreign currency' and 'digital currency' in section 995-1 of the ITAA 1997.

[2] Clause 46 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1988.

[3] Clause 46 of the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1988.

[4] Page 1 and 4 of Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997.

[5] Paragraph 5.19 of the Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 5) Bill 2008.

[6] Paragraph 5.18 of the Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 5) Bill 2008.

[7] Paragraph 5.19 of the Explanatory Memorandum to the Tax Laws Amendment (2008 Measures No. 5) Bill 2008.

[8] Paragraph 2 of Accounting Standard AASB 132 Financial Instruments: Presentation.

[9] Paragraph 11 of Accounting Standard AASB 132 Financial Instruments: Presentation.

[10] Oxford University Press, published online in 2023.

[11] Section 102M notes that financial arrangement for the purposes of Division 6C has the same meaning as in the ITAA 1997, which is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by sections 230-45 and 230-55 of the ITAA 1997.

[12] Paragraph 230-45(2)(e) of the ITAA 1997.

[13] Paragraph 230-45(2)(f) and subsection 230-45(3) of the ITAA 1997.

[14] See Example 2.11 in the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008.