Private ruling: Am I in business? – share trading
Date of advice: 29 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2017.
Date scheme commenced: 1 July 2016.

Ruling: Q1: Were you carrying on a business of share trading during the 2016 - 17 financial year? | A1: Yes.

Relevant facts and circumstances: You have been interested in the share market for a number of years and have completed dummy trades in the years leading up to the commencement of live trading. You began your share trading activities 20AA. You do not have any formal qualifications, expertise or training in market analysis or share trading. You used personal savings to fund your activities. Over the first two weeks of trading you invested approximately $500,000 on your trading activities. In the 20AA financial year you made a number pf buy and a number sell transactions. During this time you purchased AAA, BBB, CCC, DDD and EEE and at the end of the 20AA financial year you held a large holding of BBB and a large holding of CCC. You used a Bank trading account as your online broker, and then shifted to another trading account to trade shares during the 20AA and 20BB financial years. You only use your Bank trading account for alerts and other useful information but do not use them to trade. You entered into more than 100 buy contracts and more than 100 sell contracts during the 20BB financial year. You mainly traded in BBB, FFF, CCC and DDD during the 20BB financial year. The value of shares purchased in the 20BB financial year was approximately $10,000,000 and the values of shares sold were approximately $10,000,000. You did not purchase any shares as long term investments or to earn dividends. However you have received an amount of dividend proceeds through holding FFF and DDD shares. 93% of shares were held for less than 50 days with 84 trades completed within 10 days, with nearly half of these being same day trades. The Average Holding Period (AHP) for the shares purchased and sold during the 20BB financial year was 13.40 days. You made a loss from your share trading activities during the 20BB financial year. Your business plan consists of: ● buying shares with a high turnover and a tight spread, so large orders can get filled ● making small percentage gains by holding larger parcels of shares for very short periods of time ● not holding any shares for more than 12 months ● leaving a buffer of cash for extreme conditions to ensure you have funds available so you do not miss out on good value shares that have dropped for no apparent reason, and ● re-assess your position using any new information that may have come to light that has caused the share to drop and make the decision to hold longer or sell. You do not use stop losses as you believe they get triggered unnecessarily. You have a home office you use to conduct your share trading activities. The home office includes two 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 Your research includes reading the financial newspapers daily, searching online forums, and having a finance web site set as your home page with international and domestic share market information. This gives you quick access to relevant market indices so you can keep track of events overseas and overnight that may influence your shares. You study world news and events such as the Country X economy which you believe to have the greatest impact on iron ore price and consequently mining shares. You also study the Country Y economy which is thought to be the next major development/investment opportunity. You make decisions on whether to buy, hold or sell based on historical movements. Different movements apply to different companies, if history dictates that a share price constantly moves 10% every few days then you don’t sell until this marker is met (or close to being met). You do not invest more than 10% of your capital in speculative shares. You aim to make a profit at least more than the income generated if the capital were invested in the best cash savings rate account You spend on average 40 hours each week on your share trading activities. You are employed on a part time basis.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 44 | 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: You are considered to have carried on a share trading business. | Detailed Reasoning - Detailed reasoning: 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 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 (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, not a question of law. 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. Whether or not a person is carrying on a business is a question of fact, not a question of law. 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. There is no one factor that is decisive of whether a particular activity constitutes a business Based on the factors of your situation, we have considered the following indicators: Whether the activity has a significant commercial purpose or character The activity of buying and selling shares is a commercial activity, particularly where shares held in the short term only for resale at a profit and limited dividends are received. Given the moderate level of your transactions, the limited holding period of your shares and the small amount of dividends received compared to the amount invested it could be considered that your activities are of commercial purpose or character. Whether the taxpayer has more than an intention to engage in business You have more than an intention to engage in business. You have been engaged in your trading activities for just over 12 months to the end of the 20BB financial year conducting a large number of trades worth over $20,000,000. You have indicated that this activity has continued into next financial year. Repetition and Regularity 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 have carried out more than 100 buy contracts and more than 100 sell contracts in the 20BB financial year, a number of these trades being same day trades with approximately one third of shares being held for less than 10 days and 93% of shares being held for less than 50 days. You made approximately 4.7 trades per week in the financial year. Your average hold period for all shares traded for the 20BB financial year was 13.4 days with the longest held share being DDD at 149 days for one parcel of shares and the shortest being shares traded on the same day. While you held DDD shares for the longest period of time, averaging just over 65 days, shares held in all other seven companies purchased during the 20BB financial year were held for an average of 15 days or less. The number of trades in conjunction with the limited holding period could be considered to be a commercial level of share trading which could indicate that a business of share trading was carried on. Scale and Permanency of Share Trading Activities The scale of your share trading activities could also be considered significant in that your share purchases amounted to approximately $10,000,000 while you sold shares to the value of approximately $10,000,000 in the 20BB financial year. These figures may be considered to be beyond mere passive capital investment, and may support that a business of share trading was carried on. Planned, organised and carried out in a business-like manner 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. You have not developed a detailed business plan or trading strategy and you do not incorporate a stop loss approach to your trades as you believe they get triggered unnecessarily when the market may rebound. You have not borrowed any additional funds at this point in time to increase your trading activity and maximise your potential gains. However, you do have a redraw account on your mortgage if you need addition funds. You complete widespread research of the local and international markets and economy before each purchase transaction and you monitor your share trading activity daily. You hold your shares for only a short length of time and you trade in commercial quantities for substantial consideration with 77% of trades being 5 figures amounts and 21% of trades being 6 figure amounts with the largest amount traded being just over $400,000. In the 20BB financial year approximately 46% of trades were conducted using FFF shares , while approximately another 46% of trades were divided between BBB, CCC, DDD and VVV all of which cost below $7 per share. | Detailed Reasoning - Conclusion: Based on the information and documents supplied we consider that you were carrying on a share trading business for the 20BB financial year. Accordingly, your income is assessable as ordinary income under section 6 - 5 of the ITAA 1997, while your losses are deductable under section 8 - 1 of the ITAA 1997.