Private ruling: Am I in business? - option trading – loss - deductions
Date of advice: 28 July 2017
Published: November 2017
Ruling period: Income year ending 30 June 2015; and | Income year ending 30 June 2016.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Were you carrying on a business of option trading during the 2014-15 and 2015-16 income years? | A1: No. | Q2: Can you claim deductions for any losses made from your option trading activities during the 2014-15 and 2015-16 income years under section 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: You attended an internet marketing seminar in relation to option trading. You purchased a training course which you undertook concurrently with your investment activities. After 20 September 1985, you purchased a membership in a program (the Program) from a website for which you paid a specified amount per month. You placed your first trade shortly after you had purchased the membership in the Program. You followed the trades and advice provided by the Program provider, or a representative, to develop your own system for locating trade opportunities and subsequently makes trades. You used the charting platform recommended by the Program provider which was referred to in the webinars. You paid a specified amount per month for a trading subscription which provided ideas, mentoring and trading recommendations. Your plan was to trade regularly and at the end of each month you would review your profit/loss for consideration of how much to trade in the following month. You had initially undertaken activities in relation to call and put options and then after a number of months had started placing spread options. You held the options on average for a number of weeks. You used your mobile phone and laptop to conduct your trading activities. You spent less than an hour per day on your trading activities, with the exception of one day when you would spend a number of hours viewing Program webinars and analysing potential trades and information. You did not have a business plan for your trading activities and had followed the trades provided live by the Program provider. You did not have a stop loss on your trades for a number of months after you commenced your option trading activities as you had not become aware of placing stop loss limits until you had learnt about them through the Program. You commenced your trading activities with initial capital of $XX,XXX to trade with. You used a trading platform to undertake your trading activities. All records of your activities were kept within the trading platform which you reviewed on a fortnightly/monthly basis depending on the number of trades you had on. You made less than 30 trades per month. You did not exercise any options to purchase shares. Over the period that you conducted your option trading activities, you made less than 70 buy to open transactions and less than 70 sell to close transactions and had invested and received the following amounts in United States dollars (US$) from your activities: ● invested $XX,XXX.XX; and ● received $XX,XXX.XX. You made a loss of US$XX,XXX.XX in relation to your option trading activities. After undertaking a review of option trading activities you decided not to contribute any further capital you had lost too much money. You ceased your option trading activities less than 12 months after you had commenced the activities. Your trading subscription ended around the time that you had ceased your option trading activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-40 | Income Tax Assessment Act 1997 Section Part 3-1 | Income Tax Assessment Act 1997 Section 118-20 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Carrying on a business: 'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Whether the option trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained. In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) Hill J stated 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.' And more recently re-iterated in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470: “The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained.” Apart from case law, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner’s view of the factors used to determine if you are in business for tax purposes. Whilst TR 97/11 specifically discusses primary production activities, the factors can be applied to other types of businesses, such as option trading. As with case law, no one indicator is determinative. The indicators must be considered in combination and as a whole. Whether a business is carried on depends on the large or general impression gained. We have taken the following into consideration when making our decision on whether or not you were carrying on a business in relation to your trading activities: ● You do not have a business plan in relation to your option trading activities and follow the trades provided live by the Program provider and advice provided by the Program provider; ● You used a charting platform at the suggestion of the Program ● You did not have a stop loss in place in relation to your option trading activities for the first two or three months of trading; ● Records of your trades are sourced from your Options Xpress account; ● You held the options on average for 2-3 weeks; ● You used your laptop and mobile phone to conduct your trading activities; ● With the exception of Wednesdays, you spent less than an hour each day on your activities and several hours on Wednesday due to viewing the live webinars provided by the Program; and ● For the period from May 2015 to April 2016 you had undertaken less than 70 buy to open transactions and less than 70 sell to close transactions. After considering the facts of your situation and weighing up the factors outlined above, it is considered that you were not carrying on a business in relation to your option buying and selling activities Based on the information that you have provided, you have not displayed repetition and regularity in your trading activities that a person in the business of option trading would display. There is not one factor which provides any weight to the fact that you were carrying on a business in relation to your option trading activities. The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Therefore, it is the view of the Commissioner that you were not carrying on the business of option trading during the 2014-15 and 2015-16 income years. As you are not viewed as carrying on a business in relation to your option trading activities, we will consider whether your activities were of a profit making nature, or isolated transactions, as follows: | Detailed Reasoning - Profits and Losses from isolated transactions: Our view on profits and losses from isolated transactions and whether or not they are income or deductions is contained in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income and Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible. More specifically to buying and selling options and the ability of this kind of activity to be classified as profit or losses from isolated transactions, refer to ATO Interpretative Decision ATO ID 2005/164 Income Tax Capital Gain Tax: CGT event C2 – close out of an exchange traded option (ATO ID 2005/164), specifically to Note 1 and Note 2 which state the following: Note 1: A profit or gain can constitute assessable income under section 15-15 of the ITAA 1997. To ensure that there is no double taxation under the income and CGT provisions, section 118-20 of the ITAA 1997 reduces the capital gain to the extent that an amount is also included as assessable income under another provision of the ITAA 1997. Note 2: A loss incurred may be deductible under section 25-40 of the ITAA 1997 if it arose from the carrying on or carrying out of a profit-making undertaking or plan and, had any profit been derived, such profit would have been included in the taxpayer's assessable income under section 15-15 of the ITAA 1997. Where a taxpayer enters into an option trading transaction in carrying out a profit making undertaking or scheme, any loss made from that transaction will be an allowable deduction under section 25-40 of the ITAA 1997. As outlined above, we do not view that you were carrying on a business in relation to your option trading activities. However, your activities were inherently commercial in nature and had a profit making intention. As the Commissioner generally regards option trading as 'an act of commerce’, your trading will be viewed as activities carried out by you as part of a profit making undertaking for the following reasons: ● the commercial character or nature of your option buying and selling; ● the short period of time that you held the options; and ● the number of transactions undertaken between the period May 2015 and April 2016. Therefore, any losses that you have made from your option trading during either the 2014-15 or 2015-16 income years can be claimed as deductions in the income year in which the loss was made. Note: While a capital gains tax (CGT) event C2 will occur on the close-out of an option, as outlined above, any capital gain or capital loss arising as a result of the CGT event will be reduced to the extent that it is included under another provision, such as section 25-40 of the ITAA 1997.