Private ruling: deductible trading losses
Published: November 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and answers: | Are you carrying on a business of share trading? | No. | Are you entitled to a deduction for the losses incurred as a result of your share trading activities? | No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-(1)

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature. Where losses are of a capital nature, they are generally accounted for under the capital gains tax provisions in Part 3-1 of the ITAA 1997. A taxpayer who is carrying on a business of share trading is entitled to apply their share trading losses as a deduction against their assessable income under section 8-1 of the ITAA 1997, while a share market investor is entitled to apply their share trading losses against any current or future capital gains under the capital gains tax provisions in Part 3-1 of the ITAA 1997. The distinction between a share market investor and carrying on a business of share trading has been established in the body of law through many court cases. In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, the following were stated as indicators of carrying on a business: (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: (a) repetition and regularity in the buying and selling of shares; (b) turnover; (c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records; (d) maintenance of an office; (e) accounting for the share transactions on a gross receipts basis; (f) whether the taxpayer is engaged in another full time occupation. In the Federal Court case of Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689 ( Radnor ), the taxpayer was held not to be carrying on a business of share trading because there was no pattern of buying and selling and a low volume and frequency of transactions. Here, the taxpayer, for the most part, held their shares for extended periods of time of more than twelve months and often for many years. In your case you are not considered to be in the business of share trading for the following reasons: · The strategy that you embark on when carrying on your share trading activities is to identify quality stocks with good long term growth potential, this approach is not consistent with a person who is in the business of share trading. A person who is in the business of share trading would be conducting more regular transactions and looking for short term growth and high turnover. · There is no pattern or regularity in your share trading activities with regards to the buying and selling of your shares. · You have purchased a number of different stocks, however the majority of your capital has been used to purchase a specific share. This is also not consistent with a share trader who would have a more diversified investment portfolio. · Although you have kept records of your transactions and operate to a strategy you do not have set budgets and targets. · While you spend a number of hours a week on your share trading activities, you are otherwise employed full time. · You disposed of a portion of your shares due to margin calls. An indicator of carrying on a business is to trade in a businesslike and sophisticated manner. Forced selling does not fulfil this indicator. That you had forced sales because of major margin calls reinforces that you were an investor not a share trader. On the balance, your share activities do not have the character of carrying on a business but rather the character of an investor. Therefore the losses that you have incurred are capital in nature and subject to the Capital Gains Tax provisions. Accordingly, you are not entitled to a deduction for losses that resulted from your share trading activities, under section 8-1 of the ITAA 1997.

Relevant facts: You commenced share trading activities. | You have a margin loan account. | You use the margin loan (borrowing to invest) for the benefit of wealth acceleration, diversification and liquidity, your current balance is about 90% of the limit. | You undertake a trading strategy which is based on the fundamental analysis of individual stocks. | You identify quality stocks with good long term growth potential and buy stocks at prices that are substantially less than their intrinsic value. | You believe that every stock has an intrinsic value which is roughly equal to the net present value of its future cash flows, and over time share prices tend to move towards intrinsic value and this will allow for the compounding of returns and profitability. | Your business plan consists of reading and analysing company announcements and reports and buying stocks for less than their intrinsic value. Where necessary you cut your losses if the value of the stock drops by more than a set percentage. | You do not have a profit and loss statement. You do not have any projected profit and loss statements. | In the current income year you conducted a small amount of buy transactions and sell transactions. | Since the global financial and European crisis, stocks have been volatile with large movements in prices and even with your conservative margin portfolio you are at times forced to sell your stocks (margin call) and crystallize your losses. | At present you have a small remaining balance in your savings margin loan facility. | The equipment that you use in your share trading activities is the following: | · margin lending facility | You have a university qualification. | You are not a member of any share trading organisations and have not sought any professional or expert advice in setting up or conducting your share trading activity. | You subscribe to a number of publications. | You spend a number of hours per week on your share trading activities. | Not withstanding your share trading activities, you are employed fulltime by banking institution. | Your total income for the current income year will not exceed $250,000.