Private ruling: Am I in business - CFD trading - share trading
Date of advice: 7 December 2020
Published: January 2021
Ruling period: Year ended 30 June 20XX.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Were you carrying on a business of Contract for Difference (CFD) trading? | A1: Yes. You meet the relevant factors contained in Taxation Ruling TR 97/11for your CFD trading activities. Further information about carrying on a business can be found by searching 'QC 31733' on ato.gov.au | Q2: Were you carrying on a business of share trading? | A2: No

Relevant facts and circumstances: Many years ago you began buying and selling on the Australian Stock Exchange (ASX) in shares and CFD's. You have a degree. You have invested approximately $XXX,000 in your CFD and share trading activities since it began. You have access to an approved margin lending loan, savings from your personal income, a credit card and access to an approved personal loan to fund your trading activity. You used online brokers for your trading activities both in Australia and internationally. Both online brokers recognise your trading as Professional Status providing you with additional extras a regular trader may not receive. You trade CFD's on the ASX during the day, and internationally in the evening and overnight whenever it is possible. You conduct research on the financial information of the companies you trade in. 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, webinars, investment magazines, stock market reports, charting and trend lines. You have a home office you use to conduct your trading activities. The home office includes laptops, a phone, a printer, internet connection, an office desk and chair and filing cabinets for your records. You keep all relevant paperwork and records of all transaction provided from your online broker including contact notes, end of year statements and dividend receipts. You employ the following strategy/ies: CFD trading plan: How to make money from spread? • In order to beat CFD provider or broker at their own game are: - Focus on 1 or 2 market index to trade; - Pick a tight spread of 4 point trade; - Be disciplined - discipline is vital to success; - Never add to losing position; - Remove emotion out of trading; - Use chart to identify trend, support and resistance in ranging; - Identify the daily range of top and bottom; - Timing is everything - avoid open trade at wrong time; - Set target for profit - be realistic on profit target; - Close trade with small lost rather than bigger lost later on; - Don't hold overnight - financial cost of holding and market is unpredictable; - 100% continuously monitors your account and be ready for react and act when necessary; and - Do not take too much risk on one trade. To minimise your risk, you employ the following techniques: • Always use the stop loss for every trade; • After a loss you take a break and revise the trend before making another trade; and • Stop trading for the day if lost 5-10% of the capital or 3 wrong trades were made. • Do not do the following: Do not - - Trade when tired; - Fall in love one side of up or down trend which in turn keep open bad trade to bet against the market trend - Overtrade - Over leverage - to maximise potential profits in the least amount of time equal lost if market turn south. - Trading too often - too many trades leave to commission eat into profit and capitals and margins. - Greed - set excess desire to make money as depend on one big trade - Make trade decision on emotion. - Fail to learn from losses - Be stubborn and hold losses which it only compounds more losses. You plan to continue to do the following: • Use the profit to invest in a new technology (computer or ipad) as trading tools and the ease of trading with faster respond time; • attend workshops and webinars, which provides trading platform's research and trading tools (charts, training, etc), news updates and research trading advices from all media release where possible; and • used all daily research from trends, news, company results, earnings and others related information and analytical announcement from all media platform and trading advice where it is possible. You spend approximately XX hours per week on this activity plus any training workshops and personal development required. You spend XX hours per week in full time employment. Most of the CFD transactions for the 20XX income year were in between the range of $X,000 to $XX,000. You completed approximately XX,XXX CFD transactions in the 20XX financial year. Your plan stated the following: 'Normal share trading - the profit can only achieve by buying low and selling high price. In another word, one-way trading is buy up. Shares require a high capital while the fee or commission is excess. Day to day movement is not more than 3%. The day trader who is frequent buy or sell don't see much profit. It is recommended for long term holding more than 12 months and it is good for superannuation.' You trade shares out of two accounts: • Account 1; and • Account 2 For the 20XX financial year you made 1 transaction in Account 1, this included 1 buy orders. For the 20XX financial year you made 23 transactions in Account 2, this included 11 buy orders and 12 sell orders. For the 20XX financial year you made a total of 24 transactions - 12 buy and 12 sell transaction with a monetary value of $XXX,XXX. Your shareholdings at 1 July 20XX for account 1 include the following: • Share 1 XXXXX units; • Share 2 XXXX units; • Share 3 XXXX units; • Share 4 XXXX units; and • Share 5 XXXX units. Your shareholdings at 1 July 20XX for account 2 include the following: • Share 6 XXXX units; and • Share7 XXXXX units For the 20XX financial year you made 5 transactions in Account 1, this included 2 buy orders and 3 sell orders. For the 20XX financial year you made 4 transactions in Account 2, this included 1 buy order and 3 sell orders. For the 20XX financial year you made a total of 9 transactions - 3 buy and 6 sell transaction with a monetary value of $XX,XXX. The Average buy transaction value for the 20XX financial year is $XX,XXX. The Average sell transaction value for the 20XX financial year is $XX,XXX. From the information above all share trading was conducted on the ASX during the 20XX financial year. Your shareholdings at the end of the financial year for account 1 include the following: • Share 1 XXXXX units; • Share 2 XXXX units; • Share 4 XXXX units; and • Share 8 XXXXX units Your shareholdings at the end of the financial year for account 2 include the following: • Share 6 XXXX units For the 20XX income year you made a trading loss. For the 20XX income year you made a trading loss. For the 20XX financial year you made a loss of $XX,XXX trading shares. For the 20XX financial year you made a loss of $XX,XXX trading CFD's.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section44 | 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 Further issues for you to consider | None | Anti-avoidance rules | None | Reason for decision | 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 theITAA 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 (ITAA 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). | To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share trading activities amount to the carrying on of a business. | 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. | Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on. | 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. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are: | • Whether the activity has a significant commercial purpose or character, | • Whether the taxpayer has more than 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 repetition and regularity of the activity, | • Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business, | • Whether the activity is planned, organised and carried out in a business-like manner, | • The size, scale and permanency of the activity, | • Whether the activity is better described as a hobby, a form of recreation or a sporting activity. | Based on the factors of your situation, we have considered the following indicators: | 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 completing during the 20XX financial year indicates that your share trading activity lacks a commercial purpose. | 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. | 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 for the 20XX financial year you have carried out 3 buy transaction and 6 sell transaction. This is less than 1 share trading transaction per month. | 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. | 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. | The scale of your share trading activities would be considered small, given you have approximately $XXX,000 invested into trading activities you have only share traded a combined amount of $XX,XXX for the 20XX financial year on buy and sell transactions. | Although this equates to a reasonable sized average buy transaction of $XX,XXX and average sell transaction of $X,XXX, the limited number of share trading transactions completed for the 20XX 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. | 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 you have a low turnover of shares, limited share trading strategy or share trading business plan in place, you have low repetition and regularity of share sales and you have a low value of share transactions. | From this information it indicates that you are not carrying out your activities in a similar manner to others in this industry. | Whether the activity is planned, organise 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 have access to an already approved margin lending loan from XXXXXX to maximise your potential profits/Gains. | You conduct research on the financial information of the companies you trade in. | You have a home office you use to conduct your trading activities. | You keep all relevant paperwork and records of all transaction provided from your online broker including contact notes, end of year statements and dividend receipts. | However, your share strategy does not display the sophistication that may be expected of a share trading business and you stated that ' It is (share trading) recommended for long term holding more than 12 months and it is good for superannuation .' | You have not set profit targets or budgets for your share trading activities. | 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. | Whether the activity would be better described as a hobby, recreational or sporting activity | Your share transactions would not be better described as a hobby, recreational, or sporting activity. They are considered investment income. | Conclusion | In weighing up of the relevant factors it is considered that you are not carrying on a business of share trading. | Your share losses are capital losses and must be carried forward to be offset against capital gains made in future income years. | Other relevant comments | Shares as trading stock | Trading stock includes anything acquired that is held for the purpose of sale or exchange in the ordinary course of a business (section 70-10 of the ITAA 1997). | As such, shares purchased by a share trader that are held for the purpose of resale (and not for investment) are accounted for as trading stock as outlined in Division 70 of the ITAA 1997. | Non-commercial loss rules | If losses were incurred in the business (of CFD trading), Division 35 - non-commercial loss rules will apply. See Non-commercial losses on ato.gov.au. | You must satisfy the income requirement to be eligible to offset your losses in the current year. If you do not satisfy the income requirement you must defer the loss or you can apply for the Commissioner's discretion in limited circumstances. | If you meet the income requirement, check if you pass any of the four tests. If you do, you can offset the loss in the year in question. | The four tests are the: | • assessable income test | • profits test | • real property test | • other assets test

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 theITAA 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 (ITAA 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). To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share trading activities amount to the carrying on of a business. 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. Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on. 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. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are: • Whether the activity has a significant commercial purpose or character, • Whether the taxpayer has more than 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 repetition and regularity of the activity, • Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business, • Whether the activity is planned, organised and carried out in a business-like manner, • The size, scale and permanency of the activity, • Whether the activity is better described as a hobby, a form of recreation or a sporting activity. 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 completing during the 20XX 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. | 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 for the 20XX financial year you have carried out 3 buy transaction and 6 sell transaction. This is less than 1 share trading transaction per month. 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. The scale of your share trading activities would be considered small, given you have approximately $XXX,000 invested into trading activities you have only share traded a combined amount of $XX,XXX for the 20XX financial year on buy and sell transactions. Although this equates to a reasonable sized average buy transaction of $XX,XXX and average sell transaction of $X,XXX, the limited number of share trading transactions completed for the 20XX 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 you have a low turnover of shares, limited share trading strategy or share trading business plan in place, you have low repetition and regularity of share sales and you have a low value of share transactions. 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, organise 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 have access to an already approved margin lending loan from XXXXXX to maximise your potential profits/Gains. You conduct research on the financial information of the companies you trade in. You have a home office you use to conduct your trading activities. You keep all relevant paperwork and records of all transaction provided from your online broker including contact notes, end of year statements and dividend receipts. However, your share strategy does not display the sophistication that may be expected of a share trading business and you stated that ' It is (share trading) recommended for long term holding more than 12 months and it is good for superannuation .' You have not set profit targets or budgets for your share trading activities. 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: Your share transactions would not be better described as a hobby, recreational, or sporting activity. They are considered investment income. | Detailed Reasoning - Conclusion: In weighing up of the relevant factors it is considered that you are not carrying on a business of share trading. Your share losses are capital losses and must be carried forward to be offset against capital gains made in future income years. | Detailed Reasoning - Shares as trading stock: Trading stock includes anything acquired that is held for the purpose of sale or exchange in the ordinary course of a business (section 70-10 of the ITAA 1997). As such, shares purchased by a share trader that are held for the purpose of resale (and not for investment) are accounted for as trading stock as outlined in Division 70 of the ITAA 1997. | Detailed Reasoning - Non-commercial loss rules: If losses were incurred in the business (of CFD trading), Division 35 - non-commercial loss rules will apply. See Non-commercial losses on ato.gov.au. You must satisfy the income requirement to be eligible to offset your losses in the current year. If you do not satisfy the income requirement you must defer the loss or you can apply for the Commissioner's discretion in limited circumstances. If you meet the income requirement, check if you pass any of the four tests. If you do, you can offset the loss in the year in question. The four tests are the: • assessable income test • profits test • real property test • other assets test