Private ruling: Business of share trading
Date of advice: 9 August 2022
Published: November 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you carrying on a business of share trading? | A1: No | Q2: If so, are the losses made from your share trading subject to non-commercial loss provisions of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Not applicable. | Q3: Is the loss from share trading deductible? | A3: No.

Relevant facts and circumstances: You run a services business as a sole trader. You started buying and selling of shares to make a profit in the short-term late in the financial year. Your intention was to make a profit by capitalising on the high price and low price of shares within a day or within a week. You did not have any intention to hold the shares in order to make capital gains in the future. You set up a home office to run your share trading activity. You did not have a business plan, did not use a professional broker, and did not borrow funds for the share trading activity. You did not have a plan to take into account market fluctuations and did not have a stop loss limit. You subscribed to some share trading publications and newsletters. You spent some hours per week on average on your share trading activity. The majority of your shares were sold within a week of purchase. Your share trading was not regular apart from a small part of the year. You still hold some shares which you have held for some time. You made a loss on the shares for that year. Your other income was less than $250,000 in the relevant income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Division 70 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The taxpayer was not carrying on a business of share trading in the relevant income year. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature. Where shares losses are from investment activity or of a speculative or one-off nature, they are generally accounted for under the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997. The first step in calculating a net capital gain is to reduce any capital gains by capital losses you made during the income year (section 102-5 of the ITAA 1997). For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement and you pass one of the four tests, • the exceptions apply, or • the Commissioner exercises his discretion. However, for this Division to apply, you must be carrying on a business. Section 995-1 of the ITAA 1997 defines a 'business' to include any profession, trade, employment, vocation or calling but does not include occupation as an employee. This definition, however, simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For the purpose of determining whether an activity is the carrying on of a business, it is necessary to turn to the definitions and determinations established in court cases. In the High Court of Australia case of Hope v Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16 ( Hope ), carrying on a business was described in the following ways: It is the words "carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. ...activities engaged in for the purpose of profit on a continuous and repetitive basis. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit...manifested the essential characteristics required of a business. Regarding this important business indicator of repetition and regularity of activities, Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production considers the meaning of business of primary production in the ITAA 1997. Paragraph 56 states: The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale. Where there are minimum levels necessary for this activity which the taxpayer fails to maintain, it may be that for a period the taxpayer has ceased to carry on a business... In respect of share market trading, AAT Case 6297 (1990) 21 ATR 3747; Case X86 90 ATC 621 ( AAT Case 6297 ), listed the following indicators of carrying on a business: (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 or loss is regarded as arising from a discernible pattern of trading (f) the volume of the taxpayer's operation 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 (f) whether the taxpayer is engaged in another full-time occupation. Of these indicators, paragraph 16 of TR 97/11 says when considering whether a person is carrying on a business, all of the indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. In most cases, the greatest weighting is given to the repetition and regularity of the activities followed by organisation in a business-likemanner as a supportive indicator. In AAT Case 6297 , one factor contributing to the decision the taxpayer was not carrying on a business was the small number of share transactions. During the relevant income year, only two lots of shares in two different companies were sold (which were part of six lots of shares bought in six companies in the previous income year, of which four lots were disposed of in that previous income year). Here, the term 'share trader' was used to describe a person who dealt in shares such that his transactions had the character of a continuing business enterprise, whereas a 'speculator' in the stock market was a person whose speculations were in the nature of individual forays in particular stocks with a view to resale. The sale of shares by the 'speculator' were deemed to be on capital account. In Case W8 89 ATC 171; (1988) 20 ATR 3182 a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the financial year ended 30 June 1987. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share trading. In contrast to that decision, Case X86 , disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market. In the Federal Court case of Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689, it was decided the taxpayer did not carry on a business because there was no pattern of buying and selling of shares. Again, in AAT Case 9183, 27 ATR 1168; Case 1/94 , 94 ATC 101, whilst accepting the taxpayer's evidence that shares in one company were purchased for resale and the dominant motive was profit making by sale, the primary factor contributing to the decision the taxpayer was not carrying on a business was there was no evidence of any regular, routine, or systematic trading in shares. The purchase of any of the shares appeared to have been made on a very spasmodic basis. The existence of a period of dormancy, where trading activity ceases, often raises an issue as to whether a business is truly still in existence, though greatly reduced in scale or has actually ceased altogether. In a decision handed down by the AAT on 5 August 2010, Smith v FC of T 2010 ATC 10-146, it was found that Mr Smith was not in the business of share trader during the financial 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, and 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. To summarize, 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. In a more recent case Hartley v FCT (2013) AATA 601 ( Hartley case ) the AAT affirmed a decision of the Commissioner that a taxpayer was a share investor and was not carrying on a business of share trading, and therefore denied deductions that had been claimed on the premise that a business existed for the relevant years. In the Hartley case the taxpayer was during relevant times a full-time council employee. According to the taxpayer, he had been actively involved in the share market for many years, which occupied about 15 hours of his time per week. He also claimed he had an arrangement with his employer where he could trade during business hours and then make up any time after hours. For the relevant tax years (the financial years ended 30 June 2010 and 30 June 2011), the taxpayer lodged tax returns claiming significant deductions on the basis that he was carrying on a business of share trading. After an audit, the Commissioner determined that the taxpayer was a share investor and issued assessments refusing the deductions. The AAT considered each of the relevant factors established in case law (in particular, the factors listed in AAT Case 6,297 (1990) 21 ATR 3747) in determining whether or not the taxpayer was engaged in a business of share trading. Although noting the 'matter was finely balanced', the AAT was of the view that the factors pointing against the existence of a share trading business were more significant than those pointing in favour of the existence of a share trading business. The factors in favour of the Commissioner's position identified by the AAT included the following: • the buying and selling of shares was not regular or routine; • there appeared to have been very little in the way of a plan, although a written plan was produced belatedly; the AAT added that very little appeared to have been done in terms of setting budgets and targets, and that the trading and the background research was simple and unsophisticated; and • the taxpayer was engaged in another full-time profession as a council employee. In particular, the AAT expressed the view that 'the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an ongoing-business'. Based on the factors of your situation, we have considered the following indicators: | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. The low level of share trading transactions that you have completed during the majority of the financial year indicates that your share trading activity lacks a commercial purpose. | Detailed Reasoning - Whether the taxpayer has more than an intention to engage in business: You had an intention to engage in your activities and have completed share purchases and sales. A small number of the purchased shares you were holding and had not sold yet at the end of the financial year. | Detailed Reasoning - Whether there is repetition and regularity of the activity: 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 you were running a services business as a sole trader. You spent an approximate number of hours per week on share activities. You conducted the share activity mainly during a very small part of the year. After that the activity was sporadic and there was no activity at all during some months, and no sale of shares for a large period of time. The reduction in your trading activity was not due to factors beyond your control, rather you made a personal choice to reduce your trading. There was no discernible pattern to your trading. This is not considered to be a high level of share transactions and is not in keeping with the sales that would be expected of a person who was in business as a share trader. | Detailed Reasoning - The size, scale, and permanency of the activity: Share trading that is being conducted on a small scale is more likely to be considered investing, however a share trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake. You had an average of $X invested in trading activities, but you bought shares worth $X and sold shares worth $X for the relevant income year on buy and sell transactions. You had about X buy and sell transactions for the year. Although this equates to a reasonable sized average buy transaction, the limited number of share trading transactions completed for the financial year has limited the size and scale of the share trading activity. The figures provided indicate that you are trading in shares as a capital investment and not as a share trading business. | Detailed Reasoning - 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: Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry. Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be: • 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, • a share trading strategy in place, • substantial levels of repetition and regularity of share sales, • high value of share transactions to take advantage of small movements in price. In your case your value of trades was mainly between $X to $X per trade. You had a low turnover of shares during most of the relevant income year, limited share trading strategy, no share trading business plan in place, and you had low repetition and regularity of share activity. From this information it indicates that you are not carrying out your activities in a similar manner to others in this industry. | Detailed Reasoning - Whether the activity is planned, organised, and carried out in a businesslike manner: Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as having some form of forward planning to take account of contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records. You conducted research on the financial information of the companies you trade in, and consulted with fellow share traders. You had a home office you used to conduct your trading activities. You kept end of year statements. You subscribed to publications regarding share trading. However, your share strategy did not display the sophistication that may be expected of a share trading business and you stated that your plan was based on the share price dropping from the Covid pandemic. You do not have a plan to take into account market fluctuations and did not have a stop loss limit for your share trading activities. You did not have a business plan, and your share activity was not organised. Overall, it is not considered that your share activities are carried out in a manner that supports that a business of share trading is being carried on. | Detailed Reasoning - Whether the activity would be better described as a hobby, recreational or sporting activity: You started your share activity during the market volatility period in the early months of the Covid pandemic and tried to buy Penny stocks and/or small share price stocks rather than blue chips. This indicates that the share transactions were speculative. The majority of the losses were from speculative transactions and speculative losses are accounted for on capital account. Your share transactions would not be better described as a hobby, recreation, or a sporting activity. They are considered investment income. | Detailed Reasoning - Conclusion: In weighing up the relevant factors it is considered that you were not carrying on a business in share trading in the relevant income year. You were an investor rather than a trader. The shares you held at the end of the relevant income year were not trading stock for the purposes of Division 70 of the ITAA 1997 . As the losses are capital in nature they cannot be claimed as a deduction under section 8-1 of the ITAA 1997. They are capital losses and can be offset against capital gains made that year.