Issue
Is an options trader entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for margin calls paid to the Options Clearing House (OCH)?
Decision
No. An options trader is not entitled to a deduction under section 8-1 of the ITAA 1997 for margin calls paid to the OCH.
Facts
The taxpayer deals in exchange traded options. The taxpayer is required to deposit a sum of money with the OCH. If prices move against the taxpayer the OCH makes a margin call for funds to restore the balance to the amount of the original deposit.
Reasons for Decision
Section 8-1 of ITAA 1997 allows a deduction for losses or outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income provided the losses or outgoings are not capital, private or domestic in nature.
In order for a loss to be an allowable deduction, the loss must be a realised, rather than a notional loss. The margin calls are amounts outlaid to keep the taxpayers contract open. The losses on margins paid are not realised, and therefore not deductible, until the contract has been closed out.
When an options contract is closed and a gain is made, the margin is refundable to the taxpayer and the assessable gain does not include the margin payments. When a loss is made it is deductible when the contract is closed. The margin call payments which in effect fund the loss, are not deductible under section 8-1 of the ITAA.