Private ruling: Am I in business as a share trader?
Published: November 2012
Ruling period: Income year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you carrying on a business as a share trader? | A1: No.

Relevant facts and circumstances: During the income year ended 30 June 2012, you made a number of share transactions, a summary of which follows: Income Year 2012 No. of purchases Less than 40 No. of sales Less than 30 Total purchase value Approx $800,000 Average purchase value Approx. $20,000 Total sale value Approx. $750,000 Average sale value Approx. $30,000 Average holding period Approx. 30 days You use a combination of your own funds and borrowed funds to purchase your share holdings. You invest mainly in stocks in a particular industry. You base your decisions of what to buy and when to sell using stop loss limits and movements within the market. You look at the performance of domestic and international stock markets, and also take into consideration consumer demand. You also consider a company's financial statements and updates released by a company when making your decisions to buy or sell shares. You also consider market fluctuations and their impact on your share holdings. Market fluctuations may cause you to reconsider your investment direction and method within the decision making process. You study market developments once or twice a week. Your main sources of information are newspapers and web sites. You use an on-line share broker, and you do not seek external advice. You use your home computer and your mobile phone to buy and sell shares. You do not accept a loss of more than $5,000 to $7,000 for each share holding. All of your transactions are recorded on your on-line brokerage account. You spend approximately 15 hours each week on your share transactions, and also work on other income producing activities.

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 102-5 | Income Tax Assessment Act 1997 section 102-10

Reasons for decision: Summary: There are two possible scenarios as to how gains and losses from share trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows: 1. Business Income In this scenario your share trading activities would be considered to constitute the carrying on of a business. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), while your expenses would be deductible under section 8-1 of the ITAA 1997. 2. Investment In this situation your share trading activities would be regarded as investing. Your shares would be considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares would be income as a capital gain. Any losses sustained on the disposal of your shares would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under 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. 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 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. It is then necessary to apply the criteria as outlined in TR 97/11 to your circumstances to determine if your activities amount to a business being carried on. Whether the activity has a significant commercial purpose or character The activity of buying and selling shares does have a commercial character as your transactions are conducted with the world at large. You are trading in commercial quantities, based on the average value of your share transactions. However, your relatively low level of share sales at less than 30 in a 12 month period does not support that your share transactions have a significant commercial purpose. Whether the taxpayer has more than an intention to engage in business You had more than an intention to engage in your activities, and did in fact complete share purchases and sales. Whether the taxpayer has a purpose of profit as well as a prospect of profit You had a profit purpose as well as a prospect of profit. Whether there is repetition and regularity of the activity This is considered an important indicator when determining whether or not a business is being carried on. Of particular importance in the case of determining if a business of share trading is being carried on is the level of repetition of share sales activity. For the income year ended 30 June 2012 you conducted less than 40 share purchase transactions, and less than 30 share sales transactions. You averaged less than three share sales by month which is not considered to be a significant or commercial level of transactions. This level of sale transactions does not indicate that a business of share trading was being carried on during this period. Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be: · a share trading strategy in place; · the realisation of short term gains; · selling of shares when a particular loss point was reached; · mitigation of risk through short holding periods and strict adherence to taking gains at a certain level and cutting losses at a certain level; · a high turnover of shares; · high levels of repetition of share sales; · high value of share transactions to take advantage of small movements in price; · use of finance to subsidise share trading activities. In your case your average holding periods for shares sold was less than 30 days during the income year ended 30 June 2012. The relatively short length of time that you are holding shares does support that you are realising short term gains. Each of your share trades is of a substantial size, which would allow you to make an acceptable level of profit from each transaction, even if the share price moved only in small increments. You are also using finance to subsidise your share transactions. However, you do not have a share trading strategy in place, and you are not conducting your share transactions at a high, or even substantial volume, and as a result the repetition of your activities falls short of what would be expected of a share trader. Overall, the method you are using to complete your share transactions confirms that in general you are carrying on activities in a similar manner to a share trader, however your turnover and repetition fall short of the level that would be expected of a share trader. Whether the activity is planned, organise and carried out in a business like manner You are keeping adequate records of your share transactions, however you are not undertaking any planning or budgeting activities, and do not have an overall strategy that is guiding your share transactions. The size, scale and permanency of the activity Generally, an activity conducted on a large scale would be more likely to be considered to be carrying on a business. However, a share trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake. The average value of your share transactions would be considered to be a commercial transaction value. However, the frequency of your sales transactions falls short of what would be expected when carrying on a business of share trading. Whether the activity would be better described as a hobby, recreational or sporting activity Your share transactions would not be better described as a hobby, recreational, or sporting activity. Conclusion Your activities do have some of the characteristics of a business as your activities have a commercial character, and are of a commercial value. You also have a profit motive, and are keeping adequate records of your activities, and are conducting your activities in a similar manner to a share trader. However, your activities lack planning and organisation, and you do not have a business plan or share trading strategy in place to support that your activities amount to a business being carried on. Importantly, your transaction level lacks the repetition and regularity that would be expected of a share trader. The weighing up all of the relevant factors indicates that a business of share trading was not being carried on for the year ended 30 June 2012. Your share purchases and sales would be considered to be investment activities. Any profits or losses from your share investments would then be subject to capital gains tax provisions, and any net capital loss that you have incurred from your share transactions will need to be carried forward to be offset against a future capital gain.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.