Edited version of private ruling

Authorisation Number: 1011437287250

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Ruling

Subject: Treatment of receivable call option premiums

Question

Whether the premiums received by the Taxpayer from writing exchange traded options (ETOs) are subject to the capital gain provisions of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes, the premiums received by the Taxpayer from writing ETOs are subject to the capital gain provisions of Part 3-1 of the ITAA 1997.

This ruling applies for the following period/s:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Taxpayer is a self-managed superannuation fund (SMSF) that is a complying superannuation fund.

The Taxpayer owns shares as part of its investments for the Fund's members.

As part of the Fund's investment strategy, the Fund from time to time sells calls over shares held and receives consideration for the sale of this right from unrelated parties. This "premium" grants the purchaser the right to acquire the shares from the fund at an agreed price during an agreed period of time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-40

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 295-85

Income Tax Assessment Act 1997 Subsection 295-85(2)

Income Tax Assessment Act 1997 Subsection 295-85(3)

Income Tax Assessment Act 1997 Subsection 295-85(4)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The premiums received by the Taxpayer from writing ETOs are subject to the capital gain provisions of Part 3-1 of the ITAA 1997 if none of the exceptions in either subsection 295-85(3) or 295-85(4) of the ITAA 1997 apply to the Taxpayer.

Detailed reasoning

Paragraph 295-85(2)(a) of the ITAA 1997 provides that where a capital gains tax (CGT) event happens to a CGT asset of a complying superannuation fund, sections 6-5 and 15-15 of the ITAA 1997 will not apply and instead the CGT provisions of Part 3-1 of the ITAA 1997 will apply. An exception to this is contained in paragraph 295-85(3)(b) of the ITAA 1997 for CGT assets of the Fund that are:

· debenture stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security

· a deposit with a bank, building society or other financial institution

· a loan (secured or not), or

· some other contract under which an entity is liable to pay an amount (whether the liability is secured or not).

An option is a CGT asset as defined in subsection 108-5(1) of the ITAA 1997 and options are specifically cited as an example of a CGT asset (see note 1 to subsection 108-5(2) of the ITAA 1997).

CGT Event D2 (granting of an option) will apply on the writing of an ETO by the Fund (section 104-40 of the ITAA 1997). Therefore, unless an ETO falls within one of the exceptions listed in paragraph 295-85(3)(b) of the ITAA 1997, the CGT provisions will be the only provisions to apply.

Relevant Exceptions

An ETO is a contract to buy or sell a financial product such as a share. The terms of an ETO are standardised and set by the ASX. ETOs are held until expiry or exercise, or are closed out by entering into an equal but opposite position. An ETO is not a debt instrument and therefore it will not fall within the meaning of the phrase 'or other security' for the purposes of subparagraph 295-85(3)(b)(i) of the ITAA 1997.

An ETO does not satisfy either subparagraph 295-85(3)(b)(ii) or 295-85(3)(b)(iii) of the ITAA 1997.

Subparagraph 295-85(3)(b)(iv) of the ITAA 1997 is broader than subparagraph 295-85(3)(b)(i). It includes a broad range of contracts under which there is a liability to pay an amount.

However, Taxation Ruling TR 96/14 states that, in having regard to paragraphs (a), (b) and (c) of the definition of 'security', only those contracts that have 'debt like obligations' will usually fall under paragraph (d) of the definition of 'security'.

In accordance with TR 96/14, there are not sufficient debt-like obligations attaching to an ETO for it to fall under paragraph (d) of the definition of 'security'. Further, deferral of income is not a feature of an ETO arrangement.

Therefore, an ETO will not satisfy paragraph 295-85(3)(iv) of the ITAA 1997. Accordingly, an ETO is not an asset that falls within any of the exceptions in paragraph 295-85(3)(b).

Further, an ETO is not trading stock (ATO Interpretative Decision ATO ID 2004/526). Therefore, the exception for trading stock in subsection 295-85(4) of the ITAA 1997 will not apply.

As no exceptions in either subsection 295-85(3) or 295-85(4) of the ITAA 1997 apply to the Taxpayer, the premiums received will not be assessable income of the Taxpayer under section 6-5 of the ITAA 1997 but will be capital proceeds of the ETO under the CGT provisions of Part 3-1 of the ITAA 1997.

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