Private ruling: Carrying on a business
Published: July 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: A1: Yes

Relevant facts and circumstances: You conduct trading in exchange traded options (ETOs). The ETOs you trade relate to underlying shares. Your intention in conducting this activity is to profit over the long term via exploiting short term opportunities in ETOs. You have professional qualifications and employment experience relevant to this activity. You understand the risks you take and you are highly skilled in this area. You run a risk model which determines the risk that you run. The ETOs are traded through an Exchange Traded Option (ETO) trading account you hold with a financial institution. When you buy a put option you have the right, but not the obligation, to sell the underlying shares for the specified exercise price. When you sell a put option, you are obliged to buy the underlying shares at the exercise price if you are allocated an exercise notice. When you buy a call option you have the right, but not the obligation to buy the underlying shares for the specified exercise price. When you sell a call option, you are obliged to sell the underlying shares at the exercise price if you are allocated an exercise notice. When you exercise a bought option or are exercised against on a sold option, you are required to acquire or dispose of the underlying shares. The shares that you acquire or dispose of as a result of options being exercised are not held on capital account. For a bought call option or a sold put option, you can choose to not buy the shares by exiting your position in the options market. For a sold put option this is achieved by entering into the options market and buying the put option back. For a bought call option this is achieved by selling the call option. You use various strategies in the conduct of your trading. You spend many hours per week on your options trading activity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: 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. Taxation Ruling TR 97/11 provides that the following factors are relevant considerations in determining whether a business exists: (a) the nature of the activities and whether they had the purpose of profit-making; (b) the complexity and magnitude of the undertaking; (c) an intention to engage in trade regularly, routinely or systematically; (d) operating in a business-like manner and the degree of sophistication involved; (e) whether any profit/loss was regarded as arising from a discernible pattern of trading; (f) the volume of the taxpayer's operations and the amount of capital employed by him. The following factors are particularly relevant in respect of share/options traders: (a) repetition and regularity in the buying and selling of shares/options; (b) turnover; (c) whether the taxpayer was operating to a plan, setting budgets and targets, keeping records; (d) maintenance of an office; (e) accounting for the share/options transactions on a gross receipts basis; and (f) whether the taxpayer was engaged in another full-time profession. In your case, you had a profit making intention, you injected large amounts of capital into your option trading and you traded options with a high turnover in a regular and systematic manner. You operated in a business-like manner using a degree of sophistication; your trading was not left to chance. The magnitude of the trading, the amount of capital employed and the repetition in buying and selling shares are all factors which would point towards the existence of a business in the year in question. You also devoted significant time to your options trading and you have relevant experience and a dedicated computer for carrying out your options trading activities. The overall impression gained from the facts provided is that you were carrying on a business of options trading in the 2013-14 financial year.

Subject: Carrying on a business: Were you carrying on a business of trading exchange traded options (ETOs) in the 2013-14 financial year?