ATO ID 2005/164: Capital Gains Tax: CGT event C2 - close-out of an exchange traded option
Date of decision: 24 May 2005
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Does CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to a taxpayer on the close-out of an exchange-traded option (ETO)?

Decision
Yes. CGT event C2 in section 104-25 of the ITAA 1997 happens to a taxpayer on the close-out of an ETO.

Facts
The taxpayer bought call and put options (ETOs) over certain listed shares on the Australian Securities Exchange (ASX). The ETOs were subsequently closed out by the taxpayer writing (selling) call and put options in the same series. The taxpayer was not carrying on a business of transacting in ETOs on the ASX options market.

Reasons for decision
Summary: An option is an intangible asset. It is also a CGT asset as defined in subsection 108-5(1) of the ITAA 1997. Options are specifically cited as examples of CGT assets (see Note 1 to subsection 108-5(2) of the ITAA 1997). A call option in respect of shares is an option that gives the taker (buyer) the right, but not the obligation, to buy the underlying shares at a specified price on or before a specified date. A put option in respect of shares gives the buyer the right, but not the obligation, to sell the underlying shares at a specified price on or before a specified date. The establishment of an ETO contract is referred to as opening a position (ASX Explanatory Booklet 'Understanding Options Trading'). A person who takes (buys) a call or put option as an opening position may cancel their right to exercise by writing (selling) an identical option. This is referred to as the close-out of an option or the closing-out of an opening position. (Similarly, a person who writes (sells) a call or put option may close out their position by taking (buying) an identical call or put option in the same series.) CGT event C2 happens when a taxpayer's ownership of an intangible CGT asset ends. Subsection 104-25(1) of the ITAA 1997 provides that ownership of an intangible CGT asset ends by cancellation, surrender, or release or similar means. CGT event C2 therefore happens to a taxpayer when their position under an ETO is closed out where the close-out results in the cancellation, release or discharge of the ETO. The close-out of an option position is not the same as the sale of an asset. When an option position is closed out, there is no transfer of rights between two parties. CGT event A1 therefore cannot happen when an option position is closed out, there being no change in ownership of the asset from one entity to another as required by subsection 104-10(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 15-15 section 25-40 subsection 104-10(2) subsection 104-25(1) subsection 108-5(1) subsection 108-5(2) section 118-20
Subject references: Call options Put options Capital gains tax Capital losses CGT assets CGT capital proceeds CGT cost base CGT reduced cost base Securities rights & options