Private ruling: Carrying on a business
Date of advice: 6 September 2018
Published: December 2018
Ruling period: Income year ending 30 June 2018.
Date scheme commenced: 1 July 2017.

Ruling: Q1: Were you carrying on a business of share trading during the 217-18 income year? | A1: No.

Relevant facts and circumstances: You commenced your share activities a number of years ago with $X being initially invested and currently have more than $Y invested in your share activities. You fund your share activities using funds sourced from your savings and earned from your share activities. You used the services of a number of on-line brokers, during the 2017-18 income year that you use daily to purchase or sell shares, or to check share prices. You watch the market and access your accounts on a daily basis, including weekends to see after-market announcements. You estimate that you spend less than 20 hours per week on the share trading activities. You have two types of trade, being: ● Share trading 1, which is day trading with shares generally held for a number of days, using quantitative analysis ; and ● Share trading 2, which is short-term trading, holding period of a period of months, using both quantitative and qualitative analysis. You have entered into more than 30 trades in the 2017-18 income year, with less than 10 trades not being executed due to not reaching the pre-set support level. You do not have a business plan in relation to your share activities. You do not impose stop losses but look at the factors that have caused the share prices to fall to determine if you will or won’t sell. You keep spreadsheets of your trades which include the dates of trades, quantity of shares and prices. The trading size, capital employed and holding period are decided based on your qualitative and quantitative analysis of the shares. The methods of analysis you use varies, and how you react to market fluctuations is dependent on a quantum of external factors, such as market conditions, market sentiments, public announcements in addition to macro and micro economic factors. In general you use the following methods of analysis: ● technical analysis, ● fundamentals, and ● looking at the market from a global, local, and industry perspective You received statements from your brokers for the 2017-18 income year in relation to your share activities, a summary of which follows: ● shares were purchased prior to 1 July 2017 and were not sold during the 2017-18 income year, held for whole of the income year; ● shares were purchased prior to 1 July 2017 and were sold during the 2017-18 income year that were held for medium periods of less than six months during the 2017-18 income year prior to them being sold; ● shares were purchased and sold during the 2017-18 income year which had holding periods ranging from short periods of less than a week, to medium periods of less than six months ● shares were purchased during the 2017-18 income year and not sold by 30 June 2018 which had holding periods of both short periods and long periods of longer than six months; ● Goods and services tax (GST) and brokerage fees were charged in relation to the purchase and sale by one broker. The other statement does not identify if any brokerage fees or GST is charged in relation to either the purchase or sale transactions; ● Both profits and losses were made on the sale of the shares. It is estimated that a total profit of $Z was made on the share activities calculated prior to expenses and costs, such as brokerage fees and Goods and Services Tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - The difference between a share holder (investor) and share trader (business): 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'. 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. 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? (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on: ● 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 businesslike 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. 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. Whether a share trading activity is carried on as a business is a question of fact and each case will be determined on its own facts. Application to your situation We have considered the relevant factors, as outlined above, when determining whether you were carrying on a business as a share trader during the 2017-18 income year and have made the following observations when making our decision: The frequency of the share trading, or the number of similar transaction is a significant characteristic of business activities. The higher the volume of trades, the more likely it is that a business of share trading is being carried on. Additionally, it would be expected that a business of share trading would involve the purchase of shares on a regular basis through a regular or routine method. Based on information sourced from your broker’s statements, you undertook the following number of trades over the 2017-18 income year you conducted XX buys and XX sells during the 2017-18 income year. This equates to on average just fewer than four trades per month, or less than one trade per week. There was no activity undertaken in a number of months. In most of the other months, the activities were fewer than five trades per month, with more than five trades being undertaken in the remaining months. The pattern of your share activities was not regular and repetitive. There were a number of months of inactivity which indicates that your share activities were not conducted on a regular basis. The low level of the repetition and regularity of your trades does not support that your activities were in the nature of commercial activities and are consistent with investment activities undertaken by an investor. You had a profit making purpose however the intention to make a profit is not on its own sufficient to establish that a business is being carried on. This is equally consistent with the motive one would ordinarily expect of an investor not engaged in carrying on a business of share trading. Your broker A statement indicates that brokerage plus Goods and Services Tax (GST) were charged for buy and sell transactions in addition to GST. Your broker B statements do not identify the amount of brokerage fees or GST, if any. Therefore, in relation to your broker A trades you needed to make a profit on the sale of the shares to cover the brokerage fees and GST from their purchase and sale before you had a prospect of making a profit. Based on the information provided it is estimated that you made a gain of $Z on your share activities in the 2017-18 income year prior to any expenses or costs being taken into consideration, such as brokerage fees and GST. Note: The following shares have not been taken into consideration when determining whether you made a proft/loss in the 2017-18 income year because we do not have sufficient information to determine if you made a profit/loss in relation to those shares because details in relation to their purchase were not provided: ● XX Company D shares purchased prior to 1 July 2017 and sold during the 2017-18 income year; and ● XXX Company C shares purchased prior to 1 July 2017 and sold during the 2017-18 income year. The information supplied outlines that largest increase share price change that occurred during your hold periods was XX% and the lowest increase in share price change was X%. A number of your trades were made in relation to relatively low increase price changes, being fewer than XX%, and it is considered unlikely that share traders would operate on such conservative margins. A share trader seeks to minimise the risks involved in their activities by holding shares in the short term and losses are not tolerated past a certain level, and/or from having stop losses in place. It is stated that you do not have stop losses but look at factors that will cause share prices to fall, such as macro-economic factors and market fluctuations. If it is a macro-economic factor, and the overall market drops in one particular day, there is no reason to sell. Based on the information sourced from the broker A statement, you purchased your Company L shares in a number of transactions, which you had not sold as at 30 June 2018, and which you have held for long periods of more than six months. These periods are lengthy, longer that would be viewed as reasonable holding periods for a share trader. The information supplied outlines that your largest decrease in share price change was XX% in relation to your Company G shares, with the lowest decrease in share price change being XX% in relation to your Company I shares. A loss of XX% is viewed as a significant loss at a level higher than would be expected by a share trader who would have sought to minimise their loss. You used the services of a number of on-line brokers, however the use of brokerage services does not necessarily evidence that you are carrying on a business. Based on the information provided in the broker’s statements in relation to the period the shares were held during the 2017-18 income year for short periods, medium periods and long periods. In summary: ● the shares purchased and sold during the 2017-18 income year were held for between same day sale and 87 days; and ● the shares purchased during the 2017-18 income year, but have not been sold, were held for between 130 days to 233 days. As those shares have not been sold at this point we are not able to determine the total number of days those shares will be held before they are sold. While a number of your trades occurred within a medium period of you holding the shares, as outlined above in relation to your Company L shares, the period of time a number of those shares were held is viewed as being longer that would be viewed as reasonable holding periods for a share trader. Investors generally maintain limited records of their transactions, such as buy and sell contracts, for capital gains tax purposes and keep spreadsheets to maintain information in relation to their buys and sells. If records of purchases and sales of shares are not kept, it is more difficult for a taxpayer to establish that a business of share trading is being carried on. You keep the statements provided by your brokers in addition to preparing a summary of your trades and keeping spreadsheets in which you include the dates of trades, quantity of shares and prices. . You have not advised us that you keep any other records such as profit or loss statements in relation to your share activities. It is not viewed that your record keeping is any different to someone who is an investor. Your budgeting consists of mainly optimising trade size based on risk profile. You currently have more than $XXX,XXX.XX invested in your share activities. However, the amount of capital invested on share activities is not viewed as a crucial factor for determining whether a business of share trading is being carried on. The quantum of capital alone does not transform share activities into the carrying on of a business. Nor in this case does it suggest that a business was being carrying on rather than making a capital investment. It is stated that you acquired Company A shares prior to the 2017-18 income year, calculated at being less than XX% of your holdings. You received dividends in relation to those shares in the 2017-18 income year. You also have Company B shares that you do not include in your share activities with your broker/s. You have not provided any information and/or documentation to demonstrate that your shares, other than the Company B shares, were held on revenue account in a business of dealing in shares in the way that might ordinarily be expected if such a business was being carried on. Other than the Company B shares, you have dealt with all of your shares in terms of your records in the same way, such as including them your summary of share trades undertaken during the 2017-18 income year and being included in your trades, with the purchase of the XXX Company A shares during the 2017-18 income year being included in both. It is reasonable to expect that both a share investor and a share trader would use technical materials and advice from experts in relation to their activities. The sources of technical materials and expert advice that you receive and use in relation to your share activities is not viewed as any more/different to what a share investor would use as it is information that is in most cases generally available to most persons involved in share activities. It is stated that you spend less than 20 hours per week on your share activities. Business is about efficiencies including the efficient allocation of resources and in seeking a business level of return on funds invested to receive a business level of return for effort. In your situation, it is estimated that you spent XXX hours during the 2017-18 income year on your share activities, making a small number of trades, for a small return. Given the amount of time you spent on your share activities it is not viewed that your effort per trade is of a business level of return for your effort and that there has been an efficient allocation of your time and resources. Based on the information and documentation provided and taking all of the available facts into consideration, and on weighing the various factors as outline in TR 97/11, we have determined that you were not carrying on a business of share trading during the income year ended 30 June 2018.