The following outlines Grow's policy around trustees who include options, or any derivative*, as part of their SMSF investment portfolio.
*Derivative includes options, futures, CFDs, forwards, swaps, FOREX pairs, or anything that derives its value from an underlying asset of any type.
Article Contents
Investing versus Trading
Here's a concise summary of the difference between investing in listed options and actively trading them:
Investing in Listed Options
Strategy: This strategy typically involves buying options to gain exposure to an expected price movement in an underlying asset, such as a stock. For example, one might buy a call option to benefit from an anticipated upward movement in the stock price.
Duration: Positions are often held longer, aligning with the investor's strategic view on the market or stock.
Risk Management: This strategy focuses on managing risk through position sizing and selecting options with appropriate strike prices and expiration dates.
Goals: Often aims to profit from directional movements or hedge against potential losses in a portfolio.
Grow is OK with customers who invest in listed options as part of their strategy.
Actively Trading Listed Options
Strategy involves frequently entering and exiting positions to capitalize on short-term market fluctuations. It can include strategies like scalping, day trading, or swing trading.
Duration: Positions are typically held for short periods, sometimes just minutes or hours.
Risk Management: Requires constant monitoring of market conditions and quick adjustments to manage risk, often using techniques like stop-loss orders.
Goals: Aims to profit from rapid price movements, exploiting volatility and market inefficiencies.
In summary, investing in options tends to be more strategic and long-term, while actively trading options is more tactical and short-term, focusing on quick profits from market volatility.
Grow does not support customers actively trading listed options in their SMSF.
Derivatives Risk Statement required
A Derivatives Risk Statement (DRS) is a crucial document for Self-Managed Super Funds (SMSFs) that invest in derivatives, including options.
This statement is required by the Superannuation Industry Supervision Act (SISA) when a charge is given over the fund's assets in relation to derivative investments.
The DRS supplements the SMSF's investment strategy, outlining the policies and guidelines for using derivatives, analysing associated risks and ensuring compliance with regulatory requirements. It must detail how derivatives fit into the fund's overall investment strategy, including risk management and control measures such as monitoring open positions, ensuring sufficient cover for obligations, and setting stop-loss levels.
Grow SMSF cannot provide a Derivatives Risk Statement (DRS document for your SMSF. You must source your own DRS (your SMSF can pay for this).
Cryptocurrency options not allowable
Although cryptocurrency investments are allowable inside an SMSF, cryptocurrency-related options or derivatives are not allowed in a Self-Managed Super Fund (SMSF) due to several regulatory and compliance issues:
Regulatory Breach: The Superannuation Industry Supervision (SIS) Act prohibits SMSFs from giving a charge over their assets, except in specific cases involving approved bodies listed in Schedule 4 of the SIS Regulations. Cryptocurrency exchanges are not considered approved bodies, so any derivative transactions involving a charge over SMSF assets would breach these regulations.
Lack of Approved Authorities: There are no approved crypto exchanges listed under the SIS Act, which means that any derivatives or options trading involving cryptocurrencies would not meet the necessary regulatory standards.
Risk of Non-Arm's Length Income (NALI): If an SMSF were to engage in cryptocurrency derivatives, there is a risk that any income derived could be considered NALI if the transactions are not conducted at arm's length. This would result in the income being taxed at the highest marginal rate.
Compliance and Auditing Challenges: SMSFs must maintain accurate records and comply with strict auditing requirements. Cryptocurrency transactions, especially those involving derivatives, can complicate these processes due to their volatility and the need for specialized documentation.
Investing in cryptocurrency-related options or derivatives in an SMSF is not permissible due to regulatory restrictions, the absence of approved authorities, and potential compliance issues.
Citations:
Accounting for options in an SMSF
Accounting for options trading in a Self-Managed Super Fund (SMSF) can be complex and time-consuming for several reasons:
Capital Gains Tax (CGT) Considerations: SMSFs must account for options on the capital account, which involves tracking capital gains and losses. This requires detailed records of each transaction, including premiums received or paid and the market value of options at the end of each financial year.
Variability in Broker Reports: Different brokers use different terminologies and formats for option reports, making it challenging to standardise data. For example, terms like "transfer price," "traded price," and "opening price" may refer to the cost price for accounting and tax purposes.
Manual Accounting Required: Most accounting software does not natively support options transactions, necessitating manual journal entries to record each transaction accurately. This includes creating mini-financial statements to summarise complex reports and calculating net cash flows between accounts.
Cash and Margin Accounts: Options trading often involves multiple cash accounts (e.g., linked and cash margin accounts), which can complicate cash flow tracking and require additional manual reconciliation.
Tax Treatment of Open Positions: At the end of each financial year, open option positions must be valued at market price, and any unrealised gains or losses must be accounted for. This adds complexity, especially when options are closed out or exercised1.
Overall, the combination of CGT requirements, reporting variability, and the need for manual accounting makes options trading in an SMSF particularly challenging.
Citations:
Personal Options Trading versus SMSF Options Trading
Even if you've actively traded options in your name, it doesn't mean it's suitable or works the same in an SMSF.
Personal Trading
Tax Treatment: When trading options in a personal capacity, the tax treatment is generally more straightforward. The focus is on the net profit or loss from all transactions. This means that the overall difference between money in (e.g., premiums received) and money out (e.g., premiums paid) determines the net profit or loss for tax purposes.
CGT Considerations: While capital gains tax (CGT) applies to options trading, the net outcome of all transactions is typically what matters for tax reporting. This approach simplifies the accounting process, as individual transactions do not need to be tracked extensively for CGT purposes.
SMSF Trading
Tax Treatment: In contrast, SMSFs must account for options trading on the capital account. This means that each transaction must be individually recorded and accounted for. At the end of each financial year, any open positions must be valued at their market price, and unrealised gains or losses must be considered.
CGT Considerations: SMSFs are required to track and report each option transaction separately for CGT purposes. This includes calculating gains or losses on each option as it is closed or expires and valuing open positions at year-end. This detailed tracking is necessary because SMSFs are taxed on capital gains, and the ATO requires accurate records to ensure compliance with CGT rules.
In summary, personal trading focuses on the net outcome of all transactions for tax purposes. In comparison, SMSFs must meticulously track each transaction and open position for CGT reporting, making the process more complex and time-consuming.
Fees for SMSFs Trading Options
In general, any SMSF that invests or trades in listed options or any derivative via their SMSF with Grow will pay higher accounting and admin fees than an SMSF that only invests in listed shares/stocks, etc.
If an SMSF invests in listed options and holds them long-term, the additional fees will be minimal, as the investment is very similar to purchasing a stock or share.
If an SMSF actively trades in options (or other derivatives), the additional fees will be substantial due to the additional manual accounting work required.
The exact amount will vary, but trustees should set aside $4,500 - $5,500 for annual accounting fees if an active options trading strategy is used. Grow may request these fees be paid in advance to ensure funds are available to pay our fees regardless of the outcomes of your trading strategy.
For clarity, an SMSF actively trading in options is not eligible for any of the fixed-fee packages listed on the Grow website.
We also acknowledge that it can be challenging to determine the exact line between what is the occasional investment in options, versus actively trading and that it may change year-to-year. In these situations, we'd typically revert to a time-cost basis to determine the fees, which is the fairest method of determining a fee based on the work involved.