ATO ID 2009/58: Exchange Traded Options: deductibility of premiums payable
Date of decision: 30 June 2009
Year of income: Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008
Business line: Private Groups and High Wealth Individuals

Issue
Where an individual taxpayer carries on the business of trading in exchange traded options (ETOs), are the premiums payable from that activity deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time an ETO Contract is registered with the Australian Clearing House (ACH)?

Decision
Yes. Where an individual taxpayer carries on the business of trading in ETOs, the premiums payable from that activity are deductible under section 8-1 of the ITAA 1997 at the time an ETO Contract 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 taking an ETO contract it is registered with the ACH. On registration the taxpayer becomes obliged to pay a premium. This premium represents an unconditional fee for taking the ETO contract.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income provided the losses or outgoings are not capital, private or domestic in nature. Taxation Ruling TR 97/7 provides a broad guide that a taxpayer incurs an outgoing at the time a present money debt is owed that cannot be escaped. It is not necessary that money has been physically paid out in order for that outgoing to have been incurred (see W Nevill & Company Ltd v. Federal Commissioner of Taxation (1937) 56 CLR 290; (1937) 4 ATD 187; (1937) 1 AITR 67). However, what is necessary is that there is a presently existing liability which must be more than 'impending, threatened or expected' ( New Zealand Flax Investments Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 179 at 207; (1938) 5 ATD 36 at 49; (1938) 1 AITR 366 at 378). The taxpayer is in the business of trading in ETOs. Buying ETO contracts form an integral part of the conduct of that business. The premiums due on buying ETO contracts are necessarily incurred in carrying on a business for the purpose of producing assessable income and are deductible under section 8-1 of the ITAA 1997. The premium on a bought ETO contract is incurred when the ETO contract is registered with the ACH. It is at that point in time that a presently existing liability is created and the outgoing is incurred for the purposes of section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: W Nevill & Company Ltd v. Federal Commissioner of Taxation (1937) 56 CLR 290 (1937) 4 ATD 187 (1937) 1 AITR 67
Related public rulings and determinations: Taxation Ruling TR 97/7
Related ATO interpretative decisions: ATO ID 2009/57 | ATO ID 2009/59
Subject references: Call options Carrying on a business Deductions & expenses Put options