Private ruling: Deductibility of Share Trading Losses
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you able to deduct losses made on share trading activities under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: 


Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: The general deduction provision in section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they: 1. are incurred in gaining or producing assessable income; or 2. are necessarily incurred in carrying on a business for the purpose of gaining or producing such income. However, no deduction is allowed under section 8-1 of the ITAA 1997 for expenses to the extent to which they are of a capital, private or domestic nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible by a specific division of ITAA 1997 or the Income Tax Assessment Act 1936 . There are two possible scenarios as to how the securities trading activities can be treated for income tax purposes. These scenarios, and their consequences, are as follows: 1. Business income - you would be a share trader, the shares would be regarded as trading stock and any income would be included in your assessable income. 2. Investment/Speculator - You would be regarded as a share investor or speculator. The shares would be capital gains tax (CGT) assets, any gains earned from the disposals of the shares would be incomes as a capital gain and any losses sustained from the disposals will be a capital loss. Business is defined in section 995-1 of the ITAA 1997 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Whether the trading activities of the taxpayer amounts to the carrying on of a business are dependent on the facts provided ( Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689). Whilst the existence of a business or otherwise is a question of fact, a number of indicators have emerged from case law which is considered relevant in considering this question. In Taxation Ruling TR 97/11 the Commissioner has discussed the relevant of these factors in considering whether an activity amounts to the carrying on of a business. The relevant indicators include but are not limited to: (a) the nature of the activities and whether they have the purposes 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. | Detailed Reasoning - The nature of the activities and profit making intention: The question is whether the taxpayer's activities may be characterised as those of a share trader with an active turnover of shares and the intention to make profit from sales, or a passive investor with an intention to earn income from dividends. The intention to make a profit is not, of its own, sufficient to establish that a business is being carried on. Shares may be held for either investment or trading purposes, and profits on sale are earned in either case. It is necessary to consider not only the subjective intention to make a profit, but also the objective facts of the case. This includes evidence of how the activity has actually been carried out, or evidence of how the activities will be conducted. It might be expected that shares purchased for the purpose of making a profit on sale would be re-sold within a relatively short period of time, whereas shares held as an investment would be held over a medium to long term. Prior to 20XX, the shares that you owned were held for long term investment with the average holding period being over 9 months. However, following the 20XX year, the frequency of your trades increased and the average holding period decreased. By the 20XX year the average holding period was a few days. This indicates a profit making intention rather than investing to achieve capital growth. This is indicative of a person carrying on a business. | Detailed Reasoning - The complexity and magnitude of the undertaking: Prior to the 20XX income year, you made limited trades throughout the year, completing only a few capital sale contracts. By the 20XX year, the number of trades had increased significantly. You monitored the stock market as well as brokers reports, stock market reports, financial media and financial web pages in determining which trades to make. The magnitude of your undertaking since 20XX has been reasonably substantial and complex in that you conducted a study of the shares on a regular ongoing basis before any decisions were made as to buying and selling. | Detailed Reasoning - The repetition and regularity of the activities: Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions, or the number of similar transactions. You have steadily increased the number of transactions undertaken each year. In the 20XX year you performed a significant number of separate share transactions. It is considered there is repetition and regularity in your share transactions and that the trading activity is indicative of a share trader. | Detailed Reasoning - Organisation in a business like manner, the keeping of books, records and the use of a system.: You have a business plan that, in addition to strategies, forecasts the amount required to be generated in order to provide for your living expenses. You utilised an accounting software package to keep a track of all trading undertaken and you regularly review the balance sheet and profit and loss against a business plan to ensure that the agreed strategies are being followed. You both spend a certain period each day undertaking research and trades. Overall the trading activities are organised to a sufficient degree to give the impression that the activities are conducted in a business like manner. | Detailed Reasoning - Profit/Loss arising from a discernible pattern of trading: You have been actively trading shares since 20XX. The number and regularity of the trading activities display a discernible pattern of trading. | Detailed Reasoning - The volume of operations and the amount of capital employed: Although not a definitive factor, the higher the volume of purchases and sales of shares, the more likely it is that a taxpayer would be regarded as being in business. Similarly, the larger the amount of capital employed in the activity the more likely the taxpayer will be regarded as carrying on a business. The volume of trading and amounts invested in your share trading activities would be regarded as significant levels for a trader. Therefore the operation would be considered to be consistent in size and scale with that of carrying on a business. Furthermore, you consider the share trading activities to be your primary source of income and you do not hold any other jobs. You undertake at least 4 hours a day researching and analysing the markets in order to decide which shares to trade in. | Detailed Reasoning - Conclusion: The level and volume of trade is considerable, there is evidence of a discernable trading pattern and it appears that generally the shares were held for a short period of time. These factors all indicate that during 20XX income year you were in the business of share trading. As you were carrying on a business of share trading during the 20XX year of income, any losses you experience from trading will be deductible under section 8-1 of the ITAA 1997 as the losses would be necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: The taxpayer and their spouse have been investing in shares for an extended period of time when the taxpayer and their spouse opened a margin loan account. | Prior to 1 July 20XX, the taxpayers held a number of shares on capital account for longer term investment. A limited number of capital sale contracts were made during the year and the average holding period for the shares was more than 9 months. | The shares held in capital account were transferred to trading stock at cost in July 20XX. | The taxpayers have been actively share trading since that time. | The taxpayers use their qualifications, expertise and training with respect to their share trading activities, which include. | A course which included studies in economics and accountancy. | Business owner, general manager and CEO for a number of years. This role developed the skills necessary to identify the requirements and operate a successful business | Share trading course held at the Stock Exchange. The course explained the function of the exchange, how the exchange started and the way it worked; how to buy and sell; investments versus trading; different types of instruments; share issues, share dilutions; risks and benefits; market indices and market sectors, etc. | Share trading course at a University. This course focused on computer trading and the use of spreadsheeting to assist in identifying moving averages for entry and exit points. | The taxpayers supplement the above with regular subscriptions to Ian Huntley's Your Money Weekly, Fat Prophets, Australian Stock Report, Marcus Today and Slipstream Trader. The taxpayers also follow broker research and analysis leading up to share trading activities. | Using the above qualifications, skills and research the taxpayers developed a business plan for the share trading activities. The business plan is to provide for the living costs of the taxpayers with a budgeted income of $XX per month. In order to achieve this, the taxpayers budget for purchases of $XX per month. After taking into account information costs, office expenses and accounting, the share trading business is budgeted to generate a profit of $XX per annum. | The taxpayers do not hold any other jobs and consider the sharetrading business as their permanent and primary occupation. The taxpayers contribute at least 4 hours a day as the trading activities require regular and prolonged involvement to achieve the required result. Detailed analysis of subscriptions and analytical information from broking houses is undertaken on a daily basis. The taxpayers use an online broking platform which includes fully integrated charting and real time streaming. | The taxpayers only trade in equities and CFDs mainly in the ASX 200. The taxpayers only risk a small percentage of the business capital on each trade; they incorporate stop losses and avoid trading in the final 30 minutes of a trading day. The taxpayers largely restrict their trades to ASX 200 large cap mining and financial shares. High risk speculative investments are avoided. The share trading strategy is based on technical analysis of overbought and oversold conditions, support and resistance levels, momentum reversal indicators, investor sentiment, and 'look ahead' analysis of economic conditions. | The taxpayers' strategy is to buy as near as possible to the correction lows and sell as near as possible to the rally tops, keeping profits from the rallies, and then making some of the gains all over again in the next rally. No shares within the trading platform are held long term for the purposes of receiving dividends. | The taxpayers buy when the market is trending up and they look at the watch list and select those that have the highest probability of a strong sustainable move using filters like volume and resistance. The taxpayers look to buy the shares whose volume supports the shares upward move and which have little overhead resistance which prevents them from moving much higher. The taxpayers hold when the share is performing in the line of the broader share market and sell when the share is underperforming to the broader share market or the taxpayers have reached the target or can see trend reversal. The taxpayers like to have a similar size trade each time. If the taxpayers feel that it is a higher risk trade, the taxpayers use a smaller amount. | The taxpayers prefer to trade strong companies and therefore use fundamental analysis to decide what share to trade, including if the beta is more or less than one, its weight in GICS sector and if it has Revenue, NPAT and NPAT Margin are all rising. The taxpayers use technical analysis to identify trends, like two moving averages, one shorter and one longer, make buy or sell decisions dependant on how they crossover and use momentum indicator MACD to determine an up or down trend. RSI is also used to determine if the share is overbought or oversold. | The taxpayers always use stop losses however there do not always protect the trade, for example where the market price of the share is gapping past the set limit. | The taxpayers operate the share trading business from a fully equipped office which is used only for the share trading business. The office includes a computer with 50GB high speed ADSL 2+ internet, printer, scanner, copier, fax and phone. | The capital used within the share trading business was $XX in 20XX and was combined with a margin loan which enabled the taxpayers to trade at a value of $XX. The taxpayers obtained security and capital from other assets providing a further line of credit of $XX. | During the 20XX year a total of XX buying transactions and XX selling transactions were entered into. The sales revenue for the 20XX year totalled $XX with purchases of $XX. A net profit of $XX was generated for the 20XX financial year. | The volume and number of trades per year continued to increase. | A daily trading record is maintained by the taxpayers and all transactions are entered into an accounting software package. This package produces a profit and loss and balance sheet which is reviewed by the taxpayers on a monthly basis. These reports are reviewed and analysed against the business plan and capital to confirm the strategy is followed. | In Summary: Since 20XX the taxpayers worked solely in the business activity of monitoring the stock market and actively trading shares. The taxpayers spend at least 20-30 hours per week monitoring broker's reports, stock market reports, financial media and financial web pages in order to identify trading opportunities. | The taxpayers study company reports and announcements for the same purpose. Based on this analysis they purchase stocks that they perceive to be trading at their lows and sell when they believe they are at their peak given the current economic circumstances at the time. The taxpayers spread the trades across a number of stocks and use stop loss limits on all trades, at times there are ineffective due to price movements. | The taxpayers maintain a home office for the purpose of share trading and all the equipment necessary to undertake the business effectively. The business plan is to generate an income to support the taxpayers' cost of living. The taxpayers purchase mainly blue chip stocks with the source of funds from borrowed capital and an available line of credit. Within the trading portfolio the taxpayers hold no long term shares for the purpose of earning dividends and all shares are sold within a short period of time. The longest time between transactions was approximately two months. | The taxpayers have significant turnover in relation to selling and buying shares both in volume and in value and they organise their business affairs in a business like manner when it comes to the keeping of books and records and utilizing systems.