Private ruling: am I in business as a share trader
Published: November 2011
Ruling period: Year ended 30 June 2011.
Date scheme commenced: 1 July 2010.

Ruling: Q1:  | A1:  | Q2:  | A2: 

Relevant facts and circumstances: You commenced your share trading activity sometime during the year ended 30 June 2011. You initially invested a significant amount in your share activity. In a period of a number of months you conducted about X buy and sell trades for a substantial turnover amount through your broker. You make decisions on when to buy, based on announcements made by the company itself, the overseas market, (trading overnight) and the current market. You also utilise the experience that you have gained from investing in a managed fund. You make decisions on when to sell, based on a movement of 10% each way, (profit or loss). You work full time for a company. You spend between a number of hours per week on your share trading activity. You conduct your share activities on your laptop. You meet the non-commercial losses - income requirement because the total of the following amounts is less than $250,000; § taxable income (ignoring any business losses), § total reportable fringe benefits amounts, § reportable super contributions, and § total net investment loss - including financial investment losses and rental property losses. The following documents are to be read with and form part of the scheme for the purposes of the private binding ruling: § Answers to the share trading questionnaire signed and dated by you; § transaction summary for the year ended 30 June 2011, (in date order); and § transaction summary for the year ended 30 June 2011, (in company share groupings).

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 35-10, | Income Tax Assessment Act 1997 Section 35-30 and | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: For the year ended 30 June 2011, you were carrying on a business of share trading. | Detailed Reasoning - Detailed reasoning: 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. Three cases provide examples of the application of these factors by the Administrative Appeals Tribunal (AAT). 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 1987 year. 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 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 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. | Detailed Reasoning - Conclusion - Applying the criteria to your circumstances: The factors or indicators that give the overall impression that you were carrying on a business of trading in shares for the year ended 30 June 2011 were: There was high number of trades and a high turnover; § you traded shares in a regular, routine and systematic manner; § there was a discernable pattern of trading; § you did not hold shares for long periods of time, the shares were turned over regularly. § you operated in a business like manner, (despite not identifying a business plan, you have provided an overview of your share trading strategy and outlined how you made decisions to buy and sell, this included a stop loss strategy and a target of when to take profits); § you followed your share trading strategy, your trading was not left to chance. § you injected large amounts of capital into your share trading. For the year ended 30 June 2011, the total cost of your acquisitions was substantial as were your disposals; and § you spend a number of hours on your share trading activity. The overall impression gained is that you were in the business of trading in shares for the year ended 30 June 2011. | Detailed Reasoning - Question 2: As you are in the business of trading in shares, any gains will be assessable income under section 6-5 of the ITAA 1997 and any losses will be deductible under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: am I in business as a share trader: Question 1: For the year ended 30 June 2011, were you carrying on a business of share trading? | Question 2: For the year ended 30 June 2011, will the losses from your business of share trading be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?