Private ruling: Am I in business - share trading
Date of advice: 30 November 2020
Published: January 2021
Ruling period: Year ended 30 June 20XX | 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 and 20XX-XX income years? | A1: No

Relevant facts and circumstances: You commenced researching share trading with the intent of purchasing blue-chip shares (low to medium risk sector). You opened an individual trading account and a joint trading account. You do not have full-time employment and receive minimal income from other sources. Your spouse works full-time and is due to retire from 20XX or beyond. You commenced transacting in shares some time in or around from 20XX either from your individual trading account or from your joint trading account. You research the internet daily, watch stock analysis on daily news feeds, receive magazine subscriptions and through other necessary channels. You conduct your share transactions from your mobile phone and home computer. You spend a minimum of 30 minutes to two hours (sometimes) per day on share trading. You keep records of your trading account statements and an excel spreadsheet to determine profit. You do not keep records on your research observations, as your research is from open source information. In the future you will install the appropriate stock accounting methods to be applied through cost of goods and valuations at years end. The purpose of the techniques you employed in your transactions was to work toward a profitable day-trade type activity. You do not have a written business. You and your spouse initially agreed to start at $XX,XXX, but this increased to $XXX,XXX. All of your transactions during the 20XX-XX and 20XX-XX income years were in relation to shares in one company except for one purchase of shares in another company. In the 20XX-XX income year you totalled XX buy transactions and X sell transactions. In the 20XX-XX income year you totalled X buy transactions and X sell transactions. Your limit of stock on hand will be $XXX,XXX once stock increases. You may hold shares for less than 48 hours, but generally you hold the shares for longer than this. You are the final decision maker on when to buy or sell shares over your spouse. You are registered with an ABN. In your income tax return for the year ended 30 June 20XX, you reported a franked dividend amount of $X,XXX and $X,XXX for the year ended 30 June 20XX. Also, you reported the capital profits you made on shares as capital gains in these two income tax returns. You have not borrowed any additional funds at this point or have a redraw facility. Your contentions You consider yourself to be carrying on a small business as a share trader.

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 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 115-25

Reasons for decision: Summary: The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. If your 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 significantly, the activity may no longer constitute the carrying on of a business. Generally, where you carry out business activities for the purpose of earning income from buying and selling shares you are considered to be a share trader. Your shares are treated as trading stock with the income from your sales included in your assessable income under section 6-5 of the ITAA 1997 ( Income Tax Assessment Act 1997 (ITAA 1997)), and the expenses incurred to acquire the shares 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 or the ITAA 1997. However, if you hold your shares for the purpose of earning income from dividends and capital growth, you will be regarded as a share investor. Your shares would be treated as capital gains tax (CGT) assets with any gains from the disposal of the shares included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997). 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. There is also a comprehensive body of case law in respect to share trading activities. This case law has established the following factors as relevant considerations in such cases: (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/loss is regarded as arising from a discernible pattern of trading (f) the volume of the taxpayer's operations 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, and (f) whether the taxpayer is engaged in another full-time occupation. | Detailed Reasoning - Application to your circumstances: By applying the overall facts you provided you are not in the business of trading shares. Specifically, you are regarded as a share investor and your shares are treated as CGT assets. Any gains from the disposal of the shares is 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). If you dispose of shares that you have held for more than 12 months than the CGT discount can be applied (section 115-25 of the ITAA 1997). Following TR 97/11 and the comprehensive body of case law in respect to share trading, you do not satisfy relevant factors: 1. 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 in the 20XX-XX income year you completed XX buy transactions and X sell transactions; and in the 20XX-XX income year you completed X buy transactions and X sell transactions. The small number of transactions is an indicator of share investing rather than a business of share trading. 2. For activities to constitute the carrying on of a business, they should be carried on in a similar manner to other businesses in the industry. You do not have an accounting system that records your shares as trading stock; only an excel spreadsheet to determine profit. You envisage in the future you will install the appropriate stock account methods through cost of goods and valuations, possibly from 20XX and beyond. You do not have a relevant licence or qualifications or a registered business name. You undertake your share activities from your personal phone and personal home computer. You do not have a detailed business plan, or a sophisticated trading method. You have not borrowed any additional funds at this point or have a redraw facility to increase your share activity at any time to maximise any potential gains / returns. You have mainly researched domestic markets that are considered in the low risk sector and buy your shares in this sector. You have not purchased any shares that are volatile or in the high-risk sectors to realise short term gains. During the 20XX-XX and 20XX-XX income years, all of your share transactions apart from one involved a single stock. It is considered that ordinarily, a share trading business would be trading in a number of different stocks. To summarise, for the 20XX-XX and 20XX-XX income years, your number of share transactions was small and your activity was not being operated in a similar manner to other share trading businesses (for example, you essentially dealt with one stock). Having regard to your circumstances, it is considered that during the 20XX-XX and 20XX-XX income years you were a share investor rather than carrying on a business as a share trader. Consequently, you correctly reported the capital profits you made on the share transactions as capital gains rather than as business profits.