Edited version of private advice

Authorisation Number: 1051732930463

Date of advice: 12 August 2020

Ruling

Subject: Am I carrying on a business of share trading?

Question

Are you carrying on a business of Share trading?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You work as a sole trader, where you work just over XX hours per week.

You commenced share trading in mid- 20XX.

Your trading activity by month for the 20XX-XX financial year indicates that you completed a significant number of buy and sell trades.

During the market open you spend multiple hours daily on the share trading, subject to market conditions. You usually check process in the morning, midday and at close every trading day. The amount of time can fluctuate week by week depending on market conditions.

During evenings and on weekends you also spent a few hours per week on research and analysis, and you would also spend a few hours per week on updates from the research and analysis.

This equates to you spending over XX hours a week in total on the share trading activity.

Your 20XX-XX financial year profit and loss statement shows that you have made a business loss.

Business Plan and Trading Strategy

You use warrant products to gain short term exposure to mispriced Australian equities, mostly in the finance and insurance sector.

You follow one to two sectors at a time and watch about 5-10 stocks closely, and price movements inform trading decisions.

An analysis of each trade

You trade using a combination of warrants (mini long and instalment mini's) with different strike, maturity and stop/loss prices.

Each position is analysed in a relative value fashion to identify inconstancies (in pricing/risk) between similar businesses. You also constantly review sectors such as Australian Banks and their relative value to determine short term trade opportunities and market events.

You also conduct daily analysis of the current market via broker research and news via HSBC trading platform, CNBC, and afr.com.au.

You also complete an analysis of consensus broker forecasts relative to price and switching to more attractively priced positions as opportunities arise.

You maintain a daily financial model in excel with updates and versions saving in the cloud. Prices, capital amounts and lending ratios are monitored and updated constantly.

Experience and qualifications

You hold formal accounting qualifications attained through an Australian University.

You also hold other formal IT related qualifications attained through another Australian University.

You also have other IT related experience gained through other employment roles with financial institutions.

You invested a significant amount of capital which was leveraged approximately 40% to 60% depending on markets moves throughout the 20XX-XX financial year. This means that you borrow funds as part of trading warrants, which allows the portfolio of shares you owned to be between 150% to 300% of the actual capital you invested.

The majority of capital invested into the share trading activity in the 20XX-XX financial year was sourced from the sale of an shares held for investment which were sold in late 20XX.

Ongoing capital injections were sourced from sole trader / consulting / contracting income. Your 20XX-XX financial year sole trader income is estimated to be less than $XYZ.

You also use various warrants or Instalments Mini Products that have different gearing or strike prices to manage the risk of loss share trades.

Your trading objective is to make profit. Your analysis of each trade mentioned above is to identify companies that are mispriced in the short-term, hold an exposure to their value using warrants and to make a profit on their sale or trade.

The buy trades total amount was very significant as was the sell trades total amount.

The average number of days the shares were held for was less than 30 days.

The supplied report confirms that the majority of the share trades related to large organisations within the finance industry.

You established a business plan.

You also set up a home office for your share trading activities.

You also held shares as an investor at the 30 June 20XX which you sold in late 20XX. There was a resulting capital gain which will be recorded on your 20XX-XX financial year income tax return. Those shares were held for an average of over 200 days and your intention when purchasing those shares was to earn a dividend.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

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

Business income

In this scenario your share trading activities would be considered to constitute the carrying on of a business. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), while your expenses would be deductible under section 8-1 of the ITAA 1997.

Investment income

In this situation your share trading activities would be regarded as investing. Your shares would be considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares would be income as a capital gain. Any losses sustained on the disposal of your shares would be a capital loss.

Income from a profit-making undertaking or scheme

Your share trading activities would be considered to be a profit- making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. You would sell shares in the very short term, and generally you would not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share trading activities amount to the carrying on of a business. If a business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each result in a different tax treatment.

Carrying on a business of share trading

Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year to year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year that will not prevent them doing so in a later income year. Similarly when the extent of an activity falls below what is required for that activity to be commercially viable the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 provides a guide to indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. The following is your application to these indicators:

·         The buying and selling of shares is an activity with a goal of making profit, which gives the activity a commercial purpose.

·         You have repetition and regularity in your share trading activities, which is evidenced by the fact that you entered into a significant number of trades in the 2019-20 financial year.

·         You have allocated /invested a significant amount of capital into the activity, which was leveraged approximately 40% to 60% depending on market moves throughout the financial year. This meant that you borrowed funds as part of trading warrants, which allowed the portfolio of shares you owned to be between 150% to 300% of the actual capital you invested.

·         The buy trades amount was very significant and the sell trades amount was also very significant.

·         Whilst you were engaged in work as a sole trader (where you worked approximately 32 hours per week), you have devoted an appropriate amount of time (over 15 hours per week) to your share trading including completing market research and analysis, adopting sound record keeping and also establishing a sophisticated trading strategy.

·         The average number of days the shares were held for was less than 30 days, which indicates that the shares were held for short-term business-like purposes rather than for investment.

·         You established a business plan.

·         You set up a home office for your share trading activities.

The overall impression gained is that you will be in the business of trading shares.

However you also show that you are a share investor. Therefore you can have separate portfolios for investment purposes and for share trading and each will be treated differently.

To operate as a share trader and also as an investor you should ensure the two activities are kept separated and you keep sufficient records to identify how you treat each activity.

In conclusion your income from your share trading activities is assessable as ordinary income under section 6-5 of the ITAA 1997, whilst your deductions are allowable under section 8-1.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).