Private ruling: Securities rights and options
Published: November 2013
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 21 March 2011

Ruling: Q1: Was the payment by the taxpayer of an amount per share, in exchange for the increasing the selling price of the taxpayer's trading stock (being shares), deductible under ITAA97 section 8-1? | A1: Yes | Q2: Is the amount deductible when paid? | A2: Yes

Relevant facts and circumstances: You have advised that you are carrying on the business of buying and selling shares and exchange traded options. The options are on revenue account. You enter into borrowing arrangements with third parties to finance purchases of trading stock and business activities generally. Under loan agreements entered into the lender acquired an option which required the taxpayer (at the option of the lender) to sell shares at a nominated price. By the beginning of 2006 shares had increased in price. The taxpayer was under a (contingent) obligation to sell its shares at the lower price to the Lender. The taxpayer was therefore unable to profit from any further increases in the share price above that level. The Borrower entered into an agreement which had the effect of increasing the price at which its shares in could be sold. The taxpayer agreed to pay consideration in exchange for varying the sale price.

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

Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 states: 8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a*business for the purpose of gaining or producing your assessable income. * denotes a term defined in section 995 of the ITAA 1997 Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions provides (at paragraph 5) that, as a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (As at 6 May 1998) provides guidance on the meaning of the term incurred. In particular, paragraph 3 states: 3. In most cases where a loss has not been realised or an outgoing has not been made, a presently existing pecuniary liability, at the end of the relevant income year, will be a necessary prerequisite to an expense being 'incurred' for the purposes of subsection 51(1) ( Coles Myer Finance 93 ATC 4220; 25 ATR 95; Nilsen Development Laboratories Pty Ltd & Ors v. FC of T 81 ATC 4031; 11 ATR 505). You are in the business of trading in exchange traded options. You are not the holder of the option but the writer of the option and you have varied the price of the option you originally wrote. You are in the business of options trading and in accordance with section 8-1 of the ITAA 1997 and ATO ID 2009/58 Income Tax Exchange Traded Options: deductibility of premiums payable ( ATO ID 2009/58) the consideration you paid of $xx.cccc per share is deductible. For the purpose of section 8-1 of the ITAA 1997 and ATO ID 2009/58 the consideration is deductible at the time it was paid as it was then that a presently existing liability was created and the outgoing was incurred. | Detailed Reasoning - This ruling applies for the following period: 1 July 2010 to 30 June 2011 | Detailed Reasoning - The scheme commences on: 21 March 2011 | Detailed Reasoning - Relevant facts and circumstances: You have advised that you are carrying on the business of buying and selling shares and exchange traded options. The options are on revenue account. You enter into borrowing arrangements with third parties to finance purchases of trading stock and business activities generally. Under loan agreements entered into the lender acquired an option which required the taxpayer (at the option of the lender) to sell shares at a nominated price. By the beginning of 2006 shares had increased in price. The taxpayer was under a (contingent) obligation to sell its shares at the lower price to the Lender. The taxpayer was therefore unable to profit from any further increases in the share price above that level. The Borrower entered into an agreement which had the effect of increasing the price at which its shares in could be sold. The taxpayer agreed to pay consideration in exchange for varying the sale price. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1