Private ruling: Business - expenses
Published: June 2012
Ruling period: Income year ending 30 June 2012 | Income year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for fees charged to use a readily realisable asset belonging to someone else as security against margin calls when carrying on a business of options trading? | A1: No.

Relevant facts and circumstances: You are carrying on a business of buying and selling options. In the course of your business you sell both call and put options, for which you receive a premium. As there is potential to incur large losses in option trading, the X requires you to lodge security to ensure that you can settle on your margin calls. This can be in the form of cash, or other readily realisable assets such as shares. You have the option of providing this security by borrowing an asset, such as shares for a fee. This asset is then made available to the X as security that you are required to lodge to cover your margin call position.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses or outgoings to the extent that they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, provided the losses or outgoings are not of a capital, private or domestic nature. When trading in options it is a regular practice to require a trader to pay a margin to secure a trader's potential obligations under a contract. hould the value of an underlying security of an option vary past a certain level a trader will be required to make a variation margin payment, known as a margin call. This then maintains a predetermined level of protection for the counterparty to the future's contract. Where a taxpayer is carrying on a business margin payments are considered to be contributions of capital to a fund to provide for contingencies of the business rather than outgoings incurred in meeting such contingencies. This view was supported in Ransburg Australia Pty Ltd v FC of T 80 ATC 4114; (1980) 10 ATR 663 (Ransburg's case). The facts in Ransburg's case were that Ransburg Australia Pty Ltd (Ransburg) had entered into an agreement with a related company to make a lump sum payment which would indemnify Ransburg against any payments that it was required to make in respect to holiday pay or long service leave. It was held that the payments were in effect investments of capital to meet revenue contingencies of the business and were not outgoings of revenue. In your case, the fees that you would incur in borrowing an asset as security against margin calls would replace the requirement for you to make a margin payment. Being able to borrow the asset for a fee instead provides you with a cost effective method of meeting your margin commitments, and frees up your cash to be invested or used in alternative arrangements. The fee paid to borrow the asset in effect replaces your need to make a margin call. As a margin payment is a capital payment, and the fee paid replaces the capital payment, the fee would be considered to retain the same character as what it has replaced. The fee paid to borrow a realisable asset to be used as security against margin calls would then be considered to be an investment of capital which has been set aside to provide for revenue contingencies of the business, rather than outgoings of revenue incurred in meeting such contingencies. As the outlay of a fee to borrow a realisable asset is an outlay of capital, or is capital in nature, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the payment.

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