Edited version of private advice

Authorisation Number: 1052174374002

Date of advice: 5 October 2023

Ruling

Subject: Am I in business - share trader

Question

Is the income that you have received from the share transactions assessable as business income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You started trading to generate income from the stock market crash that occurred due to the COVID- 19 pandemic and capitalising on the market uncertainty due to the pandemic. You invested in both overseas and local market.

You started on one trading platform and then changed to another platform. This platform is available in desktop and application based medium. You use these platforms to track the purchasing and selling of shares. However, apart from this platform there is no other system in place to record any expenses or other associated costs.

The shares that you invested in were a blend of small-cap, high-growth, highly volatile, high-volume, blue-chip stocks. These shares traded are exclusively common/ordinary shares and no margin was employed in the trading activities.

When starting out on the overseas/ local market you used your personal savings.

The overseas market account was closed via liquidation of shares a total withdrawal of funds. When looking at the transaction history of the overseas market there is a total loss from selling of shares.

You used a trading strategy that was a combination of day trading and swing trading which is distinguished by the absence of a margin loan.

Within the trading strategy you applied a price point to sell/trade the shares. This was a mixture of a take - profit approach where if a particular stock increased in a single day of trading the take-profit is executed involving the liquidation of a percentage of the shares, depending upon certain factors. Regarding the swing trading strategy that was used on the 'blue chip' and high-risk stocks it was reliant upon several factors including new releases, earnings, share buybacks.

You traded a number of times within the year between both the overseas and local stock market, the majority occurring in the overseas stock market compared to the local market.

When looking at the information you have provided it has been identified that there are several shares that have been purchased and held for 6 months or more and have then been sold within the 2021-22 financial year. Also, the summary provided show that you have received dividends from the holding of these shares.

In the 2021-22 financial year due to changes occurring in both markets you engaged in a different course of action. These changes resulted in you liquidating most of the shares that had been purchased to minimise the loss amount.

In relation to the hours spent on the trading activity you have advised that it is a commitment of less than standard part time working hours per week. While for the 2021-22 financial year you were not working full-time you were involved in part-time or casual employment.

Before you started trading shares you spent time completing research into the initial market crash. After this time you have used free public online platforms and groups to complete research, study and opinion gathering.

However, you have not sought professional guidance or spent money on gaining knowledge about the industry.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Reasons for decision

Tax treatment of gains and losses resulting from share transactions

There are two 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:

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. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10 of the ITAA 1997.

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 ITAA 1997, while your expenses would be deductible under section 8-1 of the ITAA 1997.

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.

The Commissioners view on carrying on a business is set out in Taxation Ruling TR 97/11. Whilst TR 97/11 considers the carrying on of a business of primary production, the principles applied in TR 97/11 have been applied by the courts in determining whether a business of share trading is carried on.

The question of whether you were engaged in share trading is essentially based on the facts of your situation. This matter has been addressed in a number of court cases. In AAT Case 6297 (1990) 21 ATR 3747 (Case X86), 90 ATC 621 (AAT Case 6297), listed the following specific indicators of carrying on a business for someone carrying on a share market activity:

(a)          the nature of the activities and whether they have the purpose of profit-making

(b)          the complexity and magnitude of the undertaking

(c)           an intention to engage in trade regularly, routinely, or systematically

(d)          operating in a business-like manner and the degree of sophistication involved

(e)          whether any profit or loss is regarded as arising from a discernible pattern of trading

(f)            the volume of the taxpayer's operation and the amount of capital employed by him

and more particularly in respect of share traders

(g)          repetition and regularity in the buying and selling of shares

(h)          turnover

(i)            whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

(j)            maintenance of an office

(k)           accounting for the share transactions on a gross receipts' basis

(l)            whether the taxpayer is engaged in another full-time occupation.

In the case of share trading repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

In your case, in the 2021-22 financial year you made several transactions on the overseas share market with some of these transactions purchasing shares within the year and most of these transactions selling shares that you had from the previous financial year or bought within year. Generally, most of the purchase transactions were within the first half of the year and most of the selling transactions occurred within the second half of the year.

While transactions occurred within each month, on average there was less than 20 transactions per month.

Also, within the 2021-22 financial year you made a small number of transactions on the local share market. All these transactions occurred in the second half of the 2021-22 financial year and for each month active on the local share market there was less than 10 transactions.

Upon looking at the data provided outlining the transactions over the year, there is no identifiable pattern in the buying or selling of shares. Looking at the holding pattern for your shares there is also no followed pattern to the time in which the shares are held before selling as shares have been held for at least 6 months before selling. Also, in some cases you have received dividends paid out to you which would be reflective of a share investor.

Although you had a few transactions per month which is suggestive that a business of share trading was being carried on, the repetition and regularity of your trading falls short of what would be expected of a share trading business.

When looking at the specific requirements of a share trader as outlined above. You have advised that apart from using an online platform to track the buying and selling of shares. You do not have a business plan/ growth plan apart from the strategy for the actual share. You have advised that minimal records have been maintained relating to costs and expenses that may be related to running a share trading business.

Before starting trading in the share market, you have undertaken one month of research but have not sought guidance from a third-party professional to assist in providing knowledge or advice.

You have advised that for the 2021-22 financial year you spent less than standard part time working hours per week focused on the share trading while you were also employed in other work either on a part time or casual basis.

You did have a strategy in place of day trading with a take-profit approach and swing trading. Day trading was used for the more common stock. For the swing trade strategy which was used on the high-risk stock it was based upon outside factors such as earnings and release of information.

This strategy changed in the 2021-22 financial year due to an increase in interest rates in both countries you have chosen to liquidate the shares from the overseas market.

The funding for the venture into the stock market was from personal savings with no outside loan obtained.

You have not established a pattern of trading in shares and your share purchases are not performed in a systematic manner. Although you spend less than standard part time working hours per week on share activities and keep records of your transactions, your situation is not indicative of a share trading business. You generally hold your shares for more than six months. After considering the above factors and your specific circumstances, it is considered that you were not carrying on a business as a share trader during the 2021-22 financial year. Your trading activities were not repetitive or regular. You would be regarded as a share investor rather than a trader.

As you were not carrying on a business any profit from your share market activity would not be assessable under section 6-5 of the ITAA 1997. As the disposal of your shares will be a CGT event A1 any gains you have made on the sale of those shares will be a capital gain and assessable under section 102-5(1) of the ITAA 1997.

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