Edited version of your written advice

Authorisation Number: 1013066516297

Date of advice: 8 August 2016

Ruling

Subject: Am I in business as a share trader

Question 1

For the year ended 30 June 20XX, were you carrying on a business of trading in shares?

Answer 1

Yes

Question 2

For the year ended 30 June 20XX, will the losses from your business of trading in shares be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX.

The scheme commences on:

1 July 20YY.

Relevant facts and circumstances

You commenced your share trading on 1 July 20YY.

You trade with a broker and have an account number.

You initially invested a significant amount of capital into your share trading activity and currently have a similar amount invested. The source of this capital was from savings and from borrowed funds.

You can access additional funds via your Margin Loan if required and from your Bank's Line of Credit if required.

You made a larger number of trades in the year ended 30 June 20XX.

You had buying trades for a total buy value of a large amount.

You had a similar amount of selling trades of a large amount.

You have made a loss a trading loss in the year ended 30 June 20XX.

You established a business plan prior to commencing your share trading activity.

You attended a share trading course and a share charting course in 20YY. Because you have a certain amount of trades/volume throughout the year your broker provided you with more in depth reports and analysis and a better trading platform.

Your brokerage fees for the year were a certain amount.

You purchased software to assist you in your goals of share trading, improving your buy and sell indicators.

You chose to trade more speculative shares that came with greater risk however included more possible profit for your business due to volatility.

You purchased shares based on trading patterns, signals, buy/sell depth and volumes traded.

You purchase shares from all sectors but mainly small caps as it represents greater volatility with greater trading opportunities.

You only had one shareholding held as long term position it was purchased in 20ZZ.

You purchased no shares for the purpose of earning dividends.

You employ various trading strategies and techniques based on market sentiment, charting, analysing markets and you include a stop loss strategy to minimise risk and trading losses.

You monitor and study the share market and your share activity on a daily basis.

You have also signed up for various share services such as Morning star and Financial Review.

The following documents are to be read with and form part of the facts for this private binding ruling:

• Share trading questionnaire questions and answers.

• Share trading statement - confirmation of trades for the period 1 July 20YY to 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 70-10 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

Summary

For the year ended 30 June 20XX you were carrying on a business of trading in shares.

Detailed reasoning

There are two possible scenarios as to how share trading activities can be treated for income tax purposes. These scenarios, and their consequences, are as follows:

(1) Business Income In this scenario, you would be a share trader, the shares would be regarded as trading stock and any income/losses would be included in your assessable income.

(2) Investment/Speculator In this situation, you would be regarded as a share investor or speculator. The shares will be capital gains tax (CGT) assets, any gains earned from the disposal of the shares would be income as a capital gain and any losses sustained from the disposals will be a capital loss. Any dividends and other similar receipts would be included in your assessable income.

'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 a share 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. The following case law supports the concept of impression gained about the distinction between a share market investor/speculator and someone who is carrying on a business of share trading.

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; 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."

The factors that are considered relevant in determining whether an activity is carried on as a business have been addressed in a number of court cases.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), and more recently in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 (Shields v DFC of T (Cth)) and Smith the following were stated as factors to be considered;  

• the nature of the activities and whether they have the purpose of profit-making;

• the complexity and magnitude of the undertaking;

• an intention to engage in trade regularly, routinely or systematically;

• operating in a business-like manner and the degree of sophistication involved;

• whether any profit or loss is regarded as arising from a discernible pattern of trading;

• the volume of the taxpayer's operation and the amount of capital employed;

and more particularly in respect of share traders,

• repetition and regularity in the buying and selling of shares;

• turnover;

• whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

• maintenance of an office;

• accounting for the share transactions on a gross receipts basis; and

• whether the taxpayer is engaged in another full time occupation.  

Three cases provide examples of the application of these factors by the Administrative Appeals Tribunal (AAT). 

In Case W8 89 ATC 171; (1988) 20 ATR 3182 a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share trading. 

In contrast to that decision, Case X86, disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market. 

In a recent decision handed down by the AAT on 5 August 2010, Smith, it was found that Mr Smith was not in the business of share trading during the year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit making because:

•he held his shares for periods longer than a share trader generally would;

•took DRP's and dividends;

•his activities did not demonstrate to the Tribunal's satisfaction repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business;

•the applicant did not maintain a separate office;

•the applicant worked fulltime in a very responsible position at Babcock & Brown. The AAT Member qualified this by stating "although I do not put much weight on that, I was concerned that he was unable to indicate what kind of time he spent on buying and selling shares".

•he did not keep any separate accounting but relied on third party systems (BT and the WBC platform).

The tribunal concluded that "The evidence points strongly to, and my overall impression is, that Mr Smith was not conducting a business either in 2007, or in 2008, that he was not in business, and not in the business of share trading. I was satisfied that he had more disposable income than previously, and invested it in shares as an investor might. I have preferred the submissions of the Respondent in that regard".

To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

Conclusion - Applying the criteria to your circumstances

The factors or indicators that give the overall impression that you were carrying on a business of trading in shares for the year ended 30 June 20XX were:

• You had a profit making intention;

• you did not hold shares for long periods of time, most of the shares acquired were disposed of within a six month period of time;

• you did not purchase any shares to earn dividend income;

• you traded shares in a regular, routine and systematic manner;

• there were a high number of trades; there was a high turnover;

• there was a discernible pattern of trading;

• you operated in a business-like manner, that is you followed your business plan and used a degree of sophistication; your trading was not left to chance. Apart from conducting market analysis you also incorporated stop loss strategies to minimise risk and losses. Complementing this, you were a type of client with your broker that was provided with a higher and more in depth level of share market research from which to base your share trading decisions. You have also subscribed to various share analysis information and are a member of various stock market forums. You have attended share trading and charting seminars and courses. You have also signed up for various share services such as Morning star and Financial Review;

• you injected large amounts of capital into your share trading and still have a significant amount invested. These amounts of capital are significant. You had access to further additional capital if necessary;

• you have purchased software to assist you in your share trading and improve your ability to monitor buy and sell indicators. You have traded and conducting your share trading activity from your personal computer, your smart phone and via direct broker calls; and

• you spend between 25 and 30 hours a week on your share trading activities.

The overall impression gained is that you were in the business of trading in shares for the year ended 30 June 20XX.

Question 2

As you are in the business of trading in shares any gains will be assessable income under section 6-5 of the ITAA 1997 and any losses will be deductible under section 8-1 of the ITAA 1997.

Note

In regard to your one shareholding that you have held since 20ZZ you can treat the sale of those shares as the sale of shares on capital account provided you have accounted for it separately and treated it as a long term investment rather than as part of your share trading activity. You need to examine whether or not you converted this shareholding from an asset held on capital account to trading stock as at 1 July 20YY.

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