Private ruling: Am I in business - Share trader
Date of advice: 26 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you carrying on a business as a share trader for the 2016-17 income year? | A1: Yes

Relevant facts and circumstances: You have full time employment in the finance industry. You have an ABN which you trade shares under. During part of the 2016-17 income year, you took time off from your employment and decided to focus your time and energy on your share activity. You have conducted significant personal research but at this stage have no formal business plan written down. You have traded small amounts of capital on and off throughout the last 17 years and have actively monitored the financial markets over the last 20 years. You have been working in finance markets for 17 years. You have access to a number of paid subscriptions and several other research documents from professionals which provided access to macro-economic research analysis. Your trading strategy is to take advantage of the misalignment in market prices based on macro-economic fundamentals. Your primary strategy to reduce the impact of market fluctuations is to limit how much leverage you would take on during most occasions which would not be greater than 20:1. You injected a large amount of capital into your activity which you funded from your home equity. You do not have a separate bank account dedicated to your share activities. You have a home office, computer, internet access and smart phone which you use to conduct your share activities. You have an accountant that keeps detailed records of each transaction. You devote on average 40-50 hours each week during the period of your activity. During the period of your activity, you made over 200 buy and sell transactions. The total amount of each buy and sell transactions were significant. You have some ASX ordinary shares purchased held for long term investments but generally, you only held shares for a short period of time. You were engaged in your activities for less than a year until you ran out of capital and stopped trading. You made a loss during the 2016-17 income year. You are currently not trading during your full time employment as you are building capital to recommence your share 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: 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 below what is required for that activity to be commercially viable, 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 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 (ITAA 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. 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, 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, and l) whether the taxpayer is engaged in another full-time occupation. The overall impression gained from applying the above to your factual scenario is that you are in the business of trading shares. Specifically we refer to the fact that the magnitude of your transactions is reasonably substantial, your share trading shows repetition and regularity, you hold your shares for short periods, you have a home office, and the nature of the activity was something more than a mere academic pursuit or hobby. Accordingly the weighing up of the relevant factors indicates that you were carrying on a business as a share trader for the year ended 30 June 2017. Your share purchases and sales would be considered to be business activities. Consequently, 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.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.