Private ruling: Am I in business? - share trader - trading stock
Published: December 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Were you carrying on a business of share trading during the 2011-12 financial year? | A1: No.

Relevant facts and circumstances: You and your relative acquired shares through two trades with the belief the shares would increase in value in the short term. The value of the shares purchased was $X. You entered the market after conducting significant research which indicated there would be a short term significant gain. The shares were realised in the 2011-12 financial year. On realisation you and your relative jointly lost $X.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5. | Income Tax Assessment Act 1997 section 102-5. | Income Tax Assessment Act 1997 section 102-10. | Income Tax Assessment Act 1997 section 995-1.

Reasons for decision: Summary: There are two possible scenarios as to how share trading activities may 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, your shares are trading stock, income from sales are included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), and expenses incurred to acquire the shares are 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. 2. Investment income In this scenario, you would be regarded as a share investor. Your shares are treated as CGT assets, any gains from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10 of the ITAA 1997). Business is defined in section 995-1 of the ITAA 1997 to be any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 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 a taxpayer's 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. Taxation Ruling TR 97/11 incorporates the general factors that are considered important in determining the question of whether a business activity is being carried on: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity · whether there is regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or sporting activity. After considering the above factors and your specific circumstances, it is considered that you are not carrying on a business as a share trader during the 2011-12 income year. Your share trading activities lacked significant repetition or regularity. Although you carry out some market research, it is considered that the activities do not amount to that of a business. The fact that you bought the shares with a purpose of making a profit does not mean that a business is being carried out. As you are not in the business of share trading: · the cost of purchase of shares is not an allowable deduction, but is a capital cost · receipts from the sale of shares are not assessable income, however any net profit is subject to capital gains tax (section 102-5 of the ITAA 1997) · a net loss from the sale of shares can not be offset against income from other sources, but may be carried forward to offset against future capital gains · costs incurred in buying or selling shares are not an allowable deduction in the year in which they are incurred, but are taken into account in determining the amount of any capital gain/loss · dividends and other similar receipts are included in assessable income, and · interest on borrowed money incurred in earning dividend income are an allowable deduction at the time they are incurred.