Private ruling: share trading
Published: March 2014
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Were you carrying on a business of share trading during the income year ended 30 June 2011? | A1: Yes.

Relevant facts and circumstances: You used your online trading account to buy and sell shares. You entered into a significant number of buy and sell contracts. You held the majority of your shares for short periods, including making a large number of same day trades. You had adequate capital available to purchase shares. The value of shares purchased and sold was substantial. You conducted daily analysis and assessment of developments in equity markets. Your objective was to generate an income stream by researching and identifying stocks that would increase in value in the short term enabling you to sell them at a profit after holding them for a brief period. Your research included fundamental and technical analysis, studying share price charts, moving averages and price bars using resources including online subscriptions and financial news services, investment magazines, stock market reports, charting and trend lines. You carried out your share trading activity from your fully equipped home office. You maintained hand-written and electronic records of your share trading activity, accounting for your share transactions on a gross receipts basis. You spent considerable time on your share trading activities each week. You did not derive any dividend income from your share trading activities. You were not engaged in any other employment.

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 ITAA 1997 ( 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 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 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. 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, 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, and (f) whether the taxpayer is engaged in another full-time occupation. Having regard to these factors you are considered to have carried on a business of share trading during the year ended 30 June 2011 because: • you purchased and sold shares with a view to making short term profits, illustrating a profit making intention rather than an intention of deriving dividend income and invested adequate capital into the activity • you operated to a plan and carried out your own research and analysis of the stock market using multiple resource • the magnitude of your transactions is reasonably substantial, • your online trading account shows regular trading, entering into a significant number of buy and sell contracts, holding the majority of your shares for short periods including making a large number of same day trades • you operated in a business-like manner spending considerable time on your share trading activities, maintaining a fully equipped office, keeping records for the activity, and accounting for your share transactions on a gross receipts basis • you were not engaged in any other occupation, and • the nature of the activity was something more than a mere academic pursuit or hobby. As you were carrying on a share trading business the income from your share sales is included in your assessable income, and you are entitled to claim deductions for the expenses incurred to acquire the shares and other expenses incurred in the course of carrying on the business.