Private ruling: Capital gains tax
Date of advice: 11 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the shares trading stock of a business under section 70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are any gains made on the sale of the shares assessable as ordinary income under section 6-5 or section 15-15 of the ITAA 1997? | A2: No. | Q3: Are any gains made on the sale of the shares assessable under the capital gains tax (CGT) provisions? | A3: Yes.

Relevant facts and circumstances: The Trusts invest in various shares. The trusts do not remunerate the trustee for the investment management activities they undertake on their behalf. The trustee consults on an informal basis with friends, in regards to the investing activities, particularly regarding information technology. The assets and income stream of the Trust benefit the family. The publications the trustee read generally advocated a buy and hold investment strategy on the basis that: • it was high risk to try and make adequate consistent returns from carrying out trading activities on the stock market; and • the historical returns of investing in shares were significantly greater than bank deposits when taking into account returns from both dividends and capital gains. The trustee has followed these strategies when investing the assets of the Trusts. They invest in a small portfolio of low risk growth companies using a buy and hold investment strategy. Prior to purchasing shares on behalf of the Trusts the trustee usually performs the following: • Research into a company, including reading stockbroking, newspaper and newsletter reports. • Completion of a five year forecast, involving a consideration of what the company will look like five years from now and whether it will produce increased profits over the period, thus providing increased dividend yields and capital growth. • An assessment of the quality of the internal management of the company, and whether the company has historically been managed successfully and with integrity. The decision making process to invest, consists of: • Identifying companies that they determine are achieving increased profits, hence will provide greater dividend income into the future. • A long-term strategy whereby the shares are expected to be held for at least 5 years where they track in line with forecasts. The Trust does not have a business plan. The Trusts have always claimed that gains and losses from the sale of the shares were on capital account and have never claimed nor submitted that they were on revenue account. During the relevant financial year the trustee experimented with a minor trading activity, buying and selling X companies based on a trading strategy. Despite the fact that small gains were made from this experiment, the trustee found that the frequent trading and frequent losses were not conducive to the wishes to have income returns and capital growth to support the income stream over the long term.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-15 | Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Carrying on a business Section 70-10 of the ITAA 1997 provides that trading stock includes anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business. Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree, The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • 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. No one factor is decisive. The indicator must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. Having regards to your circumstances and the factors outlined above, we do not consider that either Trust is carrying on a business. Therefore, the shares will not be considered trading stock. Profits from an isolated transaction Profits arising from an isolated business or commercial transactions will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income. Section 15-15 of the ITAA 1997 states that your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. Note that this section does not apply to a profit that is assessable as ordinary income under section 6-5 of the ITAA 1997 or arises in respect of the sale of property acquired on or after 20 September 1985. In this case, the Trusts employed a buy and hold strategy and had no intention to trade regularly. Almost X% of the gains during the relevant financial year were derive from the disposal of long term investments. We do not consider that the gains made on the sale of the shares will be assessable under section 6-5 or section 15-15 of the ITAA 1997. Capital gains tax Under subsection 104-10(1) of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. An entity disposes of a CGT asset if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Under subsection 104-10(3) of the ITAA 1997, the time of an event is when the entity enters into the contract for the disposal. CGT event A1 occurred when you disposed of each parcel of shares. Therefore, any gains made on the sale of the shares will be assessable under the CGT provisions.