Private ruling: Am I carrying on a business of share trading
Date of advice: 18 August 2017
Published: December 2017
Ruling period: Year ending 30 June 201B
Date scheme commenced: 1 July 201A

Ruling: Q1: Am I carrying on a business of share trading? | A1: No

Relevant facts and circumstances: You commenced trading shares in 201A. You initially contributed approximately $X in capital to commence your share trading activity and then further amount of $X during the period. You have purchased shares from a number companies, including the mining, resource and medical sectors. You particularly purchase shares for short term investment, normally holding them for a period of between one day to three months, and selling them when they increase in value by 20-25%. You make the decision to sell the shares by comparing their performances against comparable industries and the business operations of the company. You do not acquire shares for the purposes of dividends. You spend around 15 hours per week researching shares using the daily analysis of market wide research and share specific developments. You have become informed through reading various reviews and reports. In the year ending 30 June 201B you conducted approximately XX share transactions including approximately XY buy transactions and approximately YY sell transactions through your account. The value of shares purchased in the 201A-1B financial year was approximately $70,000 and the value of shares sold in the 201A-1B financial year was $50,000. The average holding period for the shares purchased and sold in 201A-1B was around 60 days which was in accordance with your business plan. You held a number of shares for periods beyond the maximum prescribed period within your business plan. A strategy you intend to employ in your 201B-1C business plan to minimise losses includes employing tight trailing stop losses and increased weighting toward risk adjusted returns. However, you did not utilise stop losses in the 201A-1B income year. You keep records of your transactions in a spreadsheet to analyse your trading performance and to inform your future decisions. At home, you conduct your share trading activities in an office using a computer and internet connection. You work full time in a professional role and are unable to share trade during the day. Your professional qualifications and experience allows you to understand risk management and analysing financial data and models.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5. | Income Tax Assessment Act 1997 section 8-1 Summary | You are not considered to be carrying on a business of share trading due to the small amount of capital invested and the lack of repetition and systematic approach to carrying on your activities in a business-like manner. | 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 business is being carried on is a question of fact. The following factors are considered to be relevant to share traders when determining whether or not their activities in relation to shares amount to a business being carried on: | ● 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; | ● whether the taxpayer is engaged in another full-time profession. | Based on the factors of your situation, we have considered the following indicators: | Repetition and regularity | 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. | For the 201A-1B income year you made approximately 30 buy transactions, and approximately 20 sell transactions. In your most active period of trading you made less than 10 purchases, and less than 10 sales. For 10 of the months in this period you made less than 5 transactions per month, which is less than one per week. | Overall, this is not considered to be a high level of share transactions, and is not in keeping with the level of activity that would be expected of a person who was in business as a share trader. | Whether your activity is conducted according to a plan | You have a business plan where you will sell shares after they have increased in value by 20-25%, after being held for a time period between one day and three months. You do not employ any loss mitigation strategies. | In any case, you have on only one occasion sold shares after their value increased by 20%, and you have held shares for longer than three months. | Although you have a rudimentary business plan in place, it is not sophisticated, and you have not followed you plan when making your decisions on when you sell your shares. | These figures are considered to be characteristic of a small scale activity. | Planned, organised and carried out in a business-like manner | Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry. | Your share strategy does not display the sophistication that may be expected of a share trader. Your plan to sell shares after they have increased by 20-25% is a higher benchmark than would generally be expected to be employed by a person in business as a share trader, and your lack of loss mitigation strategies is also not in keeping with how a share trader would make their decisions on when to sell shares. | You have also used your own personal funds for share trading. Usually, a share trader would have access to a line of credit or alternative source of finance which is leveraged when trading shares. | Overall, it is not considered that your share activities are carried out in a manner that supports that a business of share trading is being carried on. | Conclusion | In the weighing up of the relevant factors it is considered that the overall impression is that you are not carrying on a business of share trading. You share losses of the 201A-1B income year would be capital losses, and must be carried forward to be offset against capital gains made in future income years.