Private ruling: Expenses - investment
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim the losses from selling your shares to offset your income from salary and wages? | A1: No.

Relevant facts and circumstances: You purchased a portfolio of shares with funds from your salary income. You intended when purchasing the shares to hold them for long term investment purposes. You liquidated the entire portfolio for personal reasons during the 2012-13 financial year. You incurred a loss from the sale of the shares. No income was derived from these shares in the period of ownership.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: For income tax purposes, there are two possible scenarios as to how share activities can be treated. These scenarios are: 1. Business income - this is where a person is a share trader and the shares would be regarded as trading stock and income/losses are included as assessable income/allowable deductions. 2. Investment/speculator - this is where a person is not in business and any shares are regarded as capital assets. Any gains earned from the disposal of the shares would be assessable income as a capital gain and any losses sustained from the disposals will be a capital loss. Unless you are in the business of share trading, a net loss from the sale of shares cannot be offset against income from other sources (such as salary), but may be used to offset capital gains or carried forward to offset against future capital gains. The question of whether a taxpayer is engaged in share trading is essentially based on the facts of the situation. This matter has been addressed in a number of court cases. In Case X86 90 ATC 621; (1990) 21 ATR 3747, and more recently in Shields v. Deputy Federal Commissioner of Taxation 99 ATC 2037; (1999) 41 ATR 1042 the following were stated as factors to be considered: (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 or loss is regarded as arising from a discernible pattern of trading; (f) the volume of the taxpayer's operation and the amount of capital employed by him; and more particularly in respect of share traders: (g) repetition and regularity in the buying and selling of shares; (h) turnover; (i) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records; (j) maintenance of an office; (k) accounting for the share transactions on a gross receipts basis; (l) whether the taxpayer is engaged in another full time occupation. Also, to be carrying on a business, a taxpayer must be involved in the activities that make up that business. This would be evidenced by an element of control over, and/or an ongoing participation in, the business. The involvement should be direct or immediate, rather than passive. The general impression gained from the facts provided is that you were not carrying on a business of share trading in the 2012-13 financial year. Therefore, your loss from the sale of shares can not be offset against your salary income, but may be used to offset capital gains or carried forward to offset against future capital gains.