Private ruling: Are you engaged in business of share trading or considered an investor
Date of advice: 26 July 2017
Published: November 2017
Ruling period: Year ending 30 June 201B | Year ending 30 June 201C
Date scheme commenced: 1 July 201A

Ruling: Q1: Were you carrying on the business of share trading? | A1: No | Q2: Can you incorporate the discount received on the employee share scheme shares in the cost base of these shares? | A2: Yes

Relevant facts and circumstances: You are employed as a professional. Through your employment at A Ltd, which commenced from late 200X and then T Company, you have been able to acquire shares under employee share schemes (ESS). These acquisitions occurred as follows: ● A Ltd issued employee share options to staff that vested in 2 tranches (50% each tranche). The first tranche vested 12 months after your employment date and had an exercise price that was XX% above the market price of Atlas shares on the employment date. The second tranche vested 24 months after the employment date and had an exercise price that was YY% above the market price of Atlas shares on the employment date. ● You exercised your employee share scheme option in 200Y and 201Z. ● You didn’t expect to receive dividends when you exercised your options, as A Ltd had only recently commenced relevant operations. ● The high prices that were received by A Ltd through their relevant operations caused their shares to rise during 200Y to 201V. ● You received shares as part of the ESS in 201A when your employer merged with T Company. You further purchased shares in T Company from the market in 201V. You have also purchased shares in other companies. You have focused on purchasing non dividend paying shares. You do not have a business plan. To minimise risk when buying shares in companies in speculative industries, you analysed ASX announcements, company plans, market demand for products and the company’s financial performance over the previous three years. You set yourself a general profit target of between 200-300% before considering selling any shares, but make adjustments based on price sensitive updates and information from other financial websites. You have reported growth in shares you hold and undertook the following sell transactions from the period 201V to 201B: ● To realise profits from the growth in A Ltd, you sold XYZ units in two transactions in 201V. You held these shares for more than 450 days. ● You sold X,000 units in C Company, which equated to a percentage of your total share holding in this company in 201V, having held those shares for 83 days. ● You held your shares in S Company for X days before selling all of the units in 201D. ● You have sold shares SE Company in 201E. You held these shares for X days. ● You have sold shares in T company in 201B. The average days you held these shares was X days. You have retained ownership of most of your shares in related industries, as you forecast these industries will obtain high prices for their products. You have not sold any shares that you hold in four other companies over the period 201V to 201C. You buy and sell transactions for the financial years ending 30 June 201B and 201C are as follows: Year ending Buy transactions Sell transactions Value of buy transactions Value of sell transactions 30 June 2016 1 $Y,000 30 June 2017 1 $Z,000 The sole buy transaction in the financial year ending 201B relates to the purchase of shares in one company in 201B which have not been traded. The sole sell transaction in the financial year ending 201C relates to the sale of shares in one company. The net proceeds from the sale of your shares have been considered on capital account in previous tax returns and you have claimed losses arising from the liquation of two companies. You make your business decisions in relation to trading shares via monitoring the Australian economy, global markets, trading volumes and ASX announcements and through information obtained through your Commsec share watch list. You derive information via online forums involving share traders and specialist websites that contain financial updates on share marketing activities. You are a certified practising accountant and cautiously make decisions in relation to your share trading via considering your net assets, the type of product intended for sale, and operational sustainability. You provided a summary of your share trading from 201V to 201C indicating that you have engaged in around X buy transactions and around X sell transactions.

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 995-1, | Income Tax Assessment Act Division 83A

Reasons for decision: Summary: You are not carrying on a business of share trading as your approach to purchasing shares was not carried on in a business like approach, primarily consisting of trading shares you had already acquired under an employee share scheme (ESS) and acquiring other speculative shares for long periods of time and not trading such stocks. The volume of transactions was significantly small and the volume of shares acquired were small, leading to the conclusion that you are a passive investor. | Detailed Reasoning - Am I in business as a share trader: There are two possible scenarios as to how share trading activities can be treated for income tax purposes. These scenarios, and their consequences, are as follows: (1) Business Income In this scenario, you would be a share trader, the shares would be regarded as trading stock and any income/losses would be included in your assessable income. (2) Investment/Speculator In this situation, you would be regarded as a share investor or speculator. The shares will be capital gains tax (CGT) assets, any gains earned from the disposal of the shares would be income as a capital gain and any losses sustained from the disposals will be a capital loss. Any dividends and other similar receipts would be included in your assessable income. 'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Whether a share trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained. The following case law supports the concept of impression gained about the distinction between a share market investor/speculator and someone who is carrying on a business of share trading. In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) Hill J stated 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.' And more recently re-iterated in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470: “The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained.” The factors that are considered relevant in determining whether an activity is carried on as a business have been addressed in a number of court cases. In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), and more recently in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 ( Shields v DFC of T (Cth )) and Smith the following were stated as factors to be considered; ● the nature of the activities and whether they have the purpose of profit-making; ● the complexity and magnitude of the undertaking; ● an intention to engage in trade regularly, routinely or systematically; ● operating in a business-like manner and the degree of sophistication involved; ● whether any profit or loss is regarded as arising from a discernible pattern of trading; ● the volume of the taxpayer's operation and the amount of capital employed; and more particularly in respect of share traders, ● repetition and regularity in the buying and selling of shares; ● turnover; ● whether the taxpayer is operating to a plan, setting budgets and targets, keeping records; ● maintenance of an office; ● accounting for the share transactions on a gross receipts basis; and ● whether the taxpayer is engaged in another full time occupation. In a recent decision handed down by the AAT on 5 August 2010, Smith, it was found that Mr Smith was not in the business of share trader during the year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit making because: ●he held his shares for periods longer than a share trader generally would; ●took DRP's and dividends; ●his activities did not demonstrate, to the Tribunal’s satisfaction, repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business; ●the applicant did not maintain a separate office; ●the applicant worked fulltime in a very responsible position at Babcock & Brown. The AAT Member qualified this by stating “ although I do not put much weight on that, I was concerned that he was unable to indicate what kind of time he spent on buying and selling shares”. ●he did not keep any separate accounting but relied on third party systems (BT and the WBC platform). The tribunal concluded that “ The evidence points strongly to, and my overall impression is, that Mr Smith was not conducting a business either in 2007, or in 2008, that he was not in business, and not in the business of share trading. I was satisfied that he had more disposable income than previously, and invested it in shares as an investor might. I have preferred the submissions of the Respondent in that regard”. To summarise, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account. | Detailed Reasoning - Applying the criteria to your circumstances: For the year ending 30 June 201C and 30 June 201B, it has been determined that you were not carrying on a business of share trading. | Detailed Reasoning - Year ending 30 June 201B: The factors or indicators that give the impression that you were not carrying on a business of trading in shares for the year ending 30 June 201B are as follows: ● The manner in which you traded shares did not show regularity, routine and a system of operation that is expected of someone operating a business as a sharetrader. There was only one trade for the year ending 201B. There were no sell transactions. ● A significant amount of your share trading activities occurred during 201V. This coincided with you selling units in A Company in 201V. These shares were retained for more than 450 days. You have continued to hold the remaining shares in A Company obtained through your ESS. You have made small purchases of additional A Company shares on the market, but have not traded these stocks. ● Shares purchased by you during the year ending 30 June 201B consists of A company shares only. Share traders are more likely to have a diversity of shares that they buy and sell, whilst you only made a modest purchase of A company shares to the value of $J,000. You did not employ any sophisticated share trading technique in managing your share acquisitions, but purchasing shares in the same company in which you already held shares obtained from an ESS. ● Since obtaining your A Company shares through your ESS, you have retained three quarters of the original A company shares in anticipation of the share price rising due to research you conducted in relation to high exporting of resources overseas. ● There is no regularity in the trading of shares you have held with companies in which you originally acquired shares in 201V. In fact, your share portfolio consists of shares held in XY companies, of which there are four that you have sold during the period since you owned these shares. That means that you retained around XZ% of your originally purchased shares without trading them. As a result, for the year ending 30 June 201B, your share buying and selling activity is indicative of a share investor and should be considered on capital account. | Detailed Reasoning - Year ending 30 June 201C: The factors or indicators that give the overall impression that you were not carrying on a business of trading in shares for the year ending 30 June 201C are as follows: ● There were not enough trading to give the overall impression that you were carrying on a business of share trading for this financial year. There was zero buy transactions and only one sale transaction that related to shares held in T Company, which yielded net proceeds of $P,000. Zero buy transactions and one sale transaction is not sufficient trading to categorise your share activity as a business in this year. ● You held your units in T company for an average number of X days. ● There was clearly no repetition and regularity in your buying and selling of shares. You had one sell transaction that occurred in 201B, with no other sell or buy transactions. There was no demonstrated systematic trading pattern, nor were the operations carried out in a business like and sophisticated manner to be considered as a share trader, as opposed to a passive share investor. As a result, for the year ending 30 June 201C, your share buying and selling activity is indicative of a share investor and should be considered on capital account. | Summary: An ESS interest, including a share or right of which it forms part, is taken to have been acquired for its market value, rather than its discounted value. | Detailed Reasoning - Detailed reasoning: Where the discount on an ESS is taxed under the upfront method in section 83A-25 of the ITAA 1997, being the year of acquisition of the interest, the ESS interest and the share or right of which it forms part, is taken to have been acquired for its market value at the time the employee initially acquired the ESS interest. For ESS interests that are taxed under the deferral method, that is at the ESS deferred taxing point, the share or right of which it forms part, is taken to have been reacquired for its market value immediately after that deferred taxing point.