ATO Interpretative Decision
ATO ID 2009/57
Income Tax
Exchange Traded Options: derivation of premiums receivableFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where an individual taxpayer carries on the business of trading in exchange traded options (ETOs), are the premiums receivable from that activity derived under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time an ETO is registered with the Australian Clearing House Pty Ltd (ACH)?
Decision
Yes. Where an individual taxpayer carries on the business of trading in ETOs, the premiums receivable from that activity are derived as assessable income under section 6-5 of the ITAA 1997 at the time an ETO is registered with the ACH.
Facts
The taxpayer is an individual who carries on the business of trading in ETOs over listed shares on the Australian Securities Exchange's Options Market. The taxpayer routinely and systematically takes (buys) and writes (sells) ETOs with the expectation of profit.
The taxpayer uses a broker to trade in ETOs.
After writing an ETO contract it is registered with the ACH. On registration the taxpayer becomes entitled to receive a premium.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
In Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418 at 427-428; 71 ATC 4195 at 4200; (1971) 2 ATR 563 at 569-570, Gibbs J, in considering the meaning of the word 'derived' said:
The word 'derived' is not necessarily equivalent in meaning to 'earned'. 'Derive' in its ordinary sense, according to the Oxford English Dictionary, means 'to draw, fetch, get, gain, obtain (a thing from a source)'. It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which 'is calculated to give a substantially correct reflex of the taxpayer's true income' (Commissioner of Taxes (South Australia) v Executor, Trustee and Agency Company of South Australia Limited (Carden's Case) (1938), 63 CLR 108, at pp 152-4; 1 AITR 416, at pp 441-2). . . . In the course of a judgment with which Rich and McTiernan, JJ., concurred, Dixon, J., as he then was, said (at 63 CLR, p 155; 1 AITR, at p 442): 'Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form'.
The taxpayer's business involves the routine and systematic taking and writing of ETO contracts with the expectation of profit. The premiums received from these repetitious and recurring transactions represent ordinary income derived from the carrying on of a business of dealing in options. As these activities amount to the carrying on of a business, it is appropriate to account for the premiums received on a gross-receipts basis (see Investment and Merchant Finance Corporation Limited v. Federal Commissioner of Taxation (1971) 125 CLR 249 at 264; 71 ATC 4140 at 4147; (1971) 2 ATR 361 at 369).
Upon registration of an ETO with the ACH, the taxpayer becomes entitled to receive a non-refundable premium. It is at this point that a recoverable debt comes into existence.
For the purposes of section 6-5 of the ITAA 1997, the gross amount of the premium is derived when the ETO contract is registered with the ACH. This is the time when the amount has come home to the taxpayer in a realisable form (see The Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd (1938) 63 CLR 108 at 155; (1938 ) 5 ATD 98 at 132; (1938) 1 AITR 416 at 442).
Date of decision: 30 June 2009Year of income: Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008
Legislative References:
Income Tax Assessment Act 1997
section 6-5
subsection 6-5(2)
Case References:
Brent v. Federal Commissioner of Taxation
(1971) 125 CLR 418
71 ATC 4195
(1971) 2 ATR 563
(1971) 125 CLR 249
71 ATC 4140
(1971) 2 ATR 361 The Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd
(1938) 63 CLR 108
(1938 ) 5 ATD 98
(1938) 1 AITR 416
Related Public Rulings (including Determinations)
Taxation Ruling TR 98/1
ATO ID 2009/58
ATO ID 2009/59
Keywords
Acquisition of shares
Call options
Carrying on a business
Deductions & expenses
Derived
Income
Put options
Date reviewed: 14 August 2017
ISSN: 1445-2782