Private ruling: Am I business - Share trader
Date of advice: 25 October 2017
Published: March 2018
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: DDMMYY

Ruling: Q1: Are you carrying on a business as a share trader for the 2015-16 and 2016-17 income years? | A1: Yes | Q2: Can you claim deductions for expenses in relation to your share activities? | A2: Yes

Relevant facts and circumstances: You are currently engaged in full time employment not related to share trading. You conducted regular share buy and sell trades during the 2015-16 and 2016-17 income years. You have an degree in a relevant field and have knowledge of statistical tools and techniques needed for financial data analysis. You also have a post graduate diploma in a relevant field with exposure to Financial Statement Analysis. You started reading books and subscribed to online channels in order to understand the fundamentals of stock market operations for a year prior to setting up the trading activity. You have subscribed to a number of journals and magazines on stock analysis and trading. You have a detailed business plan. You have a detailed strategy depending on the condition of the market and shares. Your intention is to gain a profit from your share activities. You nominate a percentage of capital to a trade as a contingency to meet any adverse outcomes and limiting the number of trades at a time. You injected a large amount of capital into your activities borrowed from your equity and approved by the lending institution. You use your residence as your primary premises when stationary. Otherwise you will use your tablet while in transit on public transport. During the time of your share activities, you incurred expenses in relation to your activity: ● Brokerage charges ● Internet usage charges ● Subscription fees paid for any reports and book magazines used for analysis ● Hardware devices In the 2015-16 year you commenced your activity making two buy trades. In the 2016-17 income year, you made a total of greater than 100 transactions with XX buys and XX sells. You do not hold any shares for long term investments or for the purpose of dividends. You have a detailed strategy depending on the condition of the market and shares. On average, you hold shares for about 12 days. You maintain records in relation to the market, reports, analysis, statements, invoices and details of each trade into a spreadsheet. You have provided a detailed statement of the transactions of your activity during the 2015-16 and 2016-17 income years. You review the performance of your share purchases daily. On average, you devote around 22-25 hours per week to your share activities. You have incurred a loss during your activity. You do not have plans to stop 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 division 40 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 section 102-10 | Income Tax Assessment Act 1997 division 900 Detailed reasoning | 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 years ended 30 June 2016 and 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. | Expenses incurred in relation to earning assessable income | Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides for general deductions for expenditure to the extent that it is incurred in the gaining or producing of assessable income, or in the carrying on of a business to gain or produce assessable income. No deduction is allowable to the extent that the expenditure is private, domestic or capital in nature. | A number of significant court decisions have determined that for an expense to be an allowable deduction: | ● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478, | ● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and | ● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344 ; FC of T v. Hatchett, 71 ATC 4184). | A deduction is only allowable if an expense | ● is actually incurred, | ● meets the deductibility tests, and | ● satisfies the substantiation rules. | Brokerage Fees | We have determined that your share trading activity was carried on as a business for taxation purposes. We consider that you are a share trader. | The brokerage fees are allowable deductions under section 8-1 of the ITAA 1997. | Internet Fees | You perform share trading activities outside of your normal employment work hours which require the use of the internet. | As the expenses directly relates to your incoming producing activities, you are entitled to a deduction for work related portion of the internet fees costs incurred under section 8-1 of the ITAA 1997. Please note that any establishment costs and/or application fee you may have incurred for the internet connection is considered capital in nature, and is not an allowable deduction. | Division 900 of the ITAA 1997 states the substantiation requirements in relation to internet use. | A diary record covering a representative four week period must be kept to show the nature of each use (income producing purpose or private use) and the period of time used. From this a reasonable estimate of work related internet use can be established for apportioning the deduction. | Subscriptions | Based on the information that you have provided and in accordance with the views set down in Tax Determination TD 2004/1 Income tax: are the costs of subscriptions to share market information services and investment journals deductible under section 8-1 of the Income Tax Assessment Act 1997? we accept that your subscription to online reports and magazines are an expense that you have incurred in producing your assessable income. There is sufficient nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of this income. Accordingly you are entitled to claim a deduction for the cost of your subscription to online reports and magazines. | Hardware Devices | A deduction is not allowable under section 8-1 of the ITAA 1997 for the cost of equipment as it is considered to be a capital expense. | However, a deduction is available under Division 40 of the ITAA 1997 for depreciation of a depreciating asset which is used during the income year for the purpose of producing assessable income. A computer is a depreciating asset for Division 40 purposes. | The cost of a depreciating asset includes an amount paid in relation to starting to hold the asset and includes the purchase price. The cost of a depreciating asset also includes the cost of installation. The costs relating to the installation of the computer and the network platform form part of the cost of your computer for depreciation purposes. | As you use your equipment for work related purposes, the relevant portion is an allowable deduction; however the relevant substantiation needs to be met. | Where equipment is used for private purposes as well as work related purposes, it is necessary to apportion the expenses to determine the work related use. Generally, work-related use can be determined from a diary showing the hours the equipment was used for work related purposes and the hours used for personal use. | Apportionment is a question of fact and involves a determination of the proportion of the expenditure that is attributable to deductible purposes. The Commissioner believes that the method of apportionment must be fair and reasonable in all the circumstances. | Although the original invoice shows the total cost, you also need records to show your work related use. | For future years, please ensure you keep a one month diary to show your work related usage. Where the necessary substantiation requirements have not been met, no deduction is allowable.


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