Private ruling: Share trading and share investing
Published: August 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: For the year ending 30 June 2014 will you be considered to be carrying on a business of share trading and also share investing? | A1: 

Relevant facts and circumstances: You are employed permanent full-time. You have brokerage accounts. You have used your accounts to purchase Australian shares and another to purchase US shares. You considered yourself to be a share investor however you also intend to commence a trading system in the 2013-14 financial year. Your source of research for the share-trading / investment activities consist of two paid newsletter subscription and free information available from the web. As a share-trader you are planning to participate in trading weekly-expiry options which means that on average you will be doing two transactions a week (one buy, one sell). You are also planning to do monthly-expiry options depending on the research you receive. You will allocate sufficient capital to your trading account and your average transactions for the weekly expiry options will be less than this amount. You will spend on average four hours a week to do your research reviewing information from your subscriptions and from the web. Most of your trading will be done online via a mobile, a laptop or a desktop computer with Internet access.

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 995-1 | Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 Division 35 | Income Tax Assessment Act 1997 Division 70

Reasons for decision: Summary: There are three possible scenarios as to how gains and losses from share trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows: 1. Business income In this scenario your share trading activities would be considered to constitute the carrying on of a business. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), while your expenses would be deductible under section 8-1. 2. Investment income In this situation your share trading activities would be regarded as investing. Your shares would be considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares would be income as a capital gain. Any losses sustained on the disposal of your shares would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10. 3. Income from a profit making undertaking or scheme Your share trading activities would be considered to be a profit making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. You would sell shares in the very short term, and generally you would not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction. 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 business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each result in a different tax treatment. | Detailed Reasoning - Carrying on a business of share trading: Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year to 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 provides a guide to indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. The following is your application to these indicators; · the buying and selling of shares is an activity with a goal of making a profit, which gives the activity a commercial purpose · you will have repetition and regularity in your share trading activities, intending to enter into more than x buy/sell transactions for the year · you will allocate sufficient capital for your trading account and your weekly transactions will be approximately $x · while you are engaged in full time employment you will devote appropriate time to your share trading The overall impression gained is that you will be in the business of trading shares however you also show that you are a share investor. Therefore you can have separate portfolios for investment purposes and for share trading and each will be treated differently. To operate as a share trader and also as an investor you should ensure the two activities are kept separated and you keep sufficient records to identify how you treat each activity. Your income from your share trading business is assessable as ordinary income under section 6-5 of the ITAA 1997, while your deductions are allowable under section 8-1. Your investment activity would be income as a capital gain and any losses sustained from the disposals will be a capital loss. Also any dividends and other similar receipts would be included in your assessable income.