Private ruling: Business - am I in business - share trading
Date of advice: 30 January 2018
Published: June 2018
Ruling period: Year ended 30 June 20XX.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Were you carrying on a business of share trading during the 20XX-XX financial year? | A1: Yes.

Relevant facts and circumstances: You do not have any formal qualifications, expertise or training in market analysis or share trading. You used personal savings to fund your activities but also have a redraw account if you need additional funds. You had traded in shares prior to the 20XX-XX financial year. You had an opening stock value of $XXX,XXX at the beginning of the 20XX-XX financial year and a closing balance of $XXX,XXX at the end of the 20XX-XX financial year. You used the services of an online broker, and then shifted to an alternative trading broker to trade shares during the financial year. For the financial year you made a loss of $XXX,XXX. You anticipate making profit in future financial years. You entered into more than 200 buy contracts more than 100 sell contracts during the financial year. You mainly traded in Company A, being less than 50%, Company B, being less than 20% and Company C, being less than 20%. The value of shares purchased was over $XX,XXX,XXX and the value of shares sold was over $XX,XXX,XXX. You did not purchase any shares as long term investments or to earn dividends. However you have received amounts of dividend proceeds through holding Company A and Company B shares while waiting for the exit point. Almost all of shares were held for less than 50 days with over half of trades being completed within 10 days, with nearly half being completed either on the same day or the day after purchase. The Average Holding Period (AHP) for the shares purchased and sold during the financial year was less than 10 days. Your business plan consists of: ● Buying shares with a high turnover and a tight spread, so large orders can get filled; ● Making small percentage gains by holding larger parcels of shares for very short periods of time; ● Not holding any shares for more than 12 months; ● Leaving a buffer of cash for extreme conditions to ensure you have funds available so you do not miss out on good value shares that have dropped for no apparent reason; and ● Re-assess your position using any new information that may have come to light that has caused the share to drop and make the decision to hold longer or sell. You do not use stop losses as you believe they get triggered unnecessarily. You have a home office you use to conduct your share trading activities. The home office includes laptops, a phone, a printer, internet connection, an office desk and chair and filing cabinets for your records. You keep all relevant paperwork and records of all transaction provided from your online broker including contact notes, end of year statements and dividend receipts. Your research includes reading the financial newspapers daily, searching online forums, and having a finance web site set as your home page with international and domestic share market information. This gives you quick access to relevant market indices so you can keep track of events overseas and overnight that may influence your shares. You study world news and events such as an overseas country’s economy which you believe to have the greatest impact on iron ore price and consequently mining shares and or a country which is thought to be the next major development/investment opportunity. You make decisions on whether to buy, hold or sell based on historical movements. Different movements apply to different companies, if history dictates that a share price constantly moves 10% every few days then you don’t sell until this marker is met (or close to being met). You do not invest more than 10% of your capital in speculative shares. You aim to make a profit at least more than the income generated if the capital were invested in the best cash savings rate account You spend about 40 hours each week on your share trading activities. You are employed on a part time basis.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 44 | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 102-10

Reasons for decision: Summary: You are considered to have carried on a share trading business. | Detailed Reasoning - Detailed reasoning: There are two possible scenarios as to how share trading activities may 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, your shares are trading stock, income from sales are included in your assessable income under section 6-5 of the ITAA 1997, and expenses incurred to acquire the shares are deductible under section 8-1 of the ITAA 1997. Other expenses incurred in the course of carrying on the business would also be deductible under relevant provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997. 2. Investment income In this scenario, you would be regarded as a share investor. Your shares are treated as CGT assets, any gains from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10 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. 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. Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on. Taxation Ruling TR 97/11 ( Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are: Whether the activity has a significant commercial purpose or character, ● Whether the taxpayer has more than an intention to engage in business, ● Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity, ● Whether there is repetition and regularity of the activity, ● Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business, ● Whether the activity is planned, organised and carried out in a business-like manner, ● The size, scale and permanency of the activity, ● Whether the activity is better described as a hobby, a form of recreation or a sporting activity. Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. There is no one factor that is decisive of whether a particular activity constitutes a business Based on the factors of your situation, we have considered the following indicators: | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: The activity of buying and selling shares is a commercial activity, particularly where shares held in the short term only for resale at a profit and limited dividends are received. Given the moderate level of your transactions, the limited holding period of your shares and the small amount of dividends received compared to the amount invested it could be considered that your activities are of commercial purpose or character. | Detailed Reasoning - Whether the taxpayer has more than an intention to engage in business: You have been engaged in share trading activity previously and have carried over an opening balance as your capital investment into the business. You completed a large number of buy and sell trade’s worth over $XX,XXX,XXX. Based on the information provided, it is viewed that you had more than an intention to engage in the business of share trading. | Detailed Reasoning - 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. In your case you have carried out more than XXX buy contracts more than XXX sell contracts in the financial year, a number of these trades being same day trades with a majority of shares being held for 10 days or less, and nearly all shares being held for less than 50 days. Your average holding period for all shares traded during the financial year was less than 10 days with the longest held share being held for around 100 days for one parcel of shares and the shortest being shares traded on the same day. While you held Company B shares for the longest period of time, around 20 days, shares held in all other companies purchased during the 20XX-XX financial year were held for less than 20 days. Trading in Company A accounted for nearly half of all trades in the financial year, with an average holding period of less than five days. The number of trades in conjunction with the limited holding period could be considered to be a commercial level of share trading which could indicate that a business of share trading was carried on. | Detailed Reasoning - Scale and Permanency of Share Trading Activities: The scale of your share trading activities could also be considered significant in that your share purchases amounted to over $XX,XXX,XXX, while you sold shares to the value of over $XX,XXX,XXX in the financial year. These figures may be considered to be beyond mere passive capital investment, and may support that a business of share trading was carried on. | Detailed Reasoning - 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. You have not developed a detailed business plan or trading strategy and you do not incorporate a stop loss approach to your trades as you believe they get triggered unnecessarily when the market may rebound. You have not borrowed any additional funds at this point in time to increase your trading activity and maximise your potential gains. However, you do have a redraw account on your mortgage if you need addition funds. You complete widespread research of the local and international markets and economy before each purchase transaction and you monitor your share trading activity daily. You hold your shares for only a short length of time and you trade in commercial quantities for substantial consideration with a majority of trades being five figures amounts and the remainder of trades being six figure amounts with the largest amount traded being over $XXX,XXX. | Detailed Reasoning - Conclusion: Based on the information and documents supplied we consider that you were carrying on a share trading business during the 20XX-XX financial year. Accordingly, your income is assessable as ordinary income under section 6-5 of the ITAA 1997, while your losses are deductable under section 8-1 of the ITAA 1997.