Private ruling: Carrying on a business of share trading
Date of advice: 25 September 2015
Published: September 2015
Ruling period: 1 July 2011 to 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Were you carrying on a business of share trading?

Relevant facts and circumstances: You have a Bachelor degree in and have conducted extensive research of shares over the years. You subscribed to an online tool in the relevant financial years. You conducted daily analysis of share market utilising newspapers, market reports, charts, company prospectus, press releases and financial reports. You monitored share market movements by analysing various charts, which are trading tools widely used by professionals to gauge over sentiment of a stock performance. You bought and sold shares for the relevant financial years in company A. Your intention was to make a profit from buying and selling those shares as opposed to holding them as an investment to receive dividends. Your trading records showed that no shares were held for more than 1 year. In the year ended 30 June 20XX, you conducted share transactions for company A shares. Each purchase of shares was sold within three months. In the year ended 30 June 20YY, you conducted share transactions in company A shares. Each purchase of shares was held by you for less than 3 months and on a number of occasions, less than 1 year. In the year ended 30 June 20ZZ, you conducted share transactions in company A shares. The shares you purchased were held for less than three months. You had an Loan account with a redrawing facility of $XXX,XXX. You pay interest on the loan and the borrowing was purely to buy shares. You kept account statements, and tax invoices for the purchase and sale of shares. You had a dedicated study room/office in your residence where you did your research, and bought and sold shares. You accessed a laptop or computer during share market trading hours. You purchased and sold your shares using an online platform.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: A 'business' for tax purposes is defined in section 995-1 of the Income Tax Assessment Act 1997 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. In FC of T v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, Hill J stated at 359, 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression'. There has been much judicial comment as to what is meant by the phrase 'carrying on a business', however the difficulties associated with the question are probably best summed up by the following comments in Martin v. FC of T (1952) 10 ATD 37 as cited in Case X86 90 ATC 621 at 629: The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and…the determination is eventually based on the large and general impression gained. Whilst the existence of a business or otherwise is a question of fact, a number of factors have emerged from case law which is considered relevant in considering this question. These factors were brought together and relied upon in reaching the decision in Case X86 90 ATC 621 and Shields v. DFC of T (1999) ATC 2037 (which was affirmed on appeal by the Federal court in Commissioner of Taxation v. Shields (1999) ATC 4783. When we determine whether a person is a share trader or a shareholder, we will consider the circumstances of each individual case. This is done by considering the following factors that have been used in court cases: • nature of the activities and profit making intention • the repetition of the activities • organisation in a business-like manner • record keeping • the volume of trading, and • the amount of capital employed. | Detailed Reasoning - Nature of the activities and profit making intention: A share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares. A person who invests in shares as a shareholder (rather than a share trader) does so with the intention of earning income from dividends and receipts, but is not carrying on business activities. The intention to make a profit is not, of its own, sufficient to establish that a business is being carried on. Shares may be held for either investment or trading purposes, and profits on sale are earned in either case. It is necessary for the person to consider not only their intention to make a profit, but also the facts of the case. This includes details of how the activity has actually been carried out and evidence of how the activities have been conducted. It is expected that shares purchased for the purpose of making a profit on sale would be re-sold within a relatively short period of time, whereas shares held as an investment would be held over the medium to long term. You stated that your intention was to make a profit from buying and selling shares and was not holding them as a shareholder to earn income from dividends. The shares you bought and sold during the relevant financial years were speculative shares in company A. You held the shares for a short period of time. Some of the shares you re-sold in a few days and none were held for more than 1 year. This illustrated a profit making intention by buying and selling rather than investing to achieve capital growth. This factor points towards carrying on a business of share trading. | Detailed Reasoning - The repetition: Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions. You bought and sold shares in company A only. In the year ended 30 June 20XX, you conducted share transactions. The shares you purchased were held for less than three months. In the year ended 30 June 20YY, you conducted share transactions. The shares you purchased were held for less than 3 months and on a number of occasions, less than 1 year. In the year ended 30 June 20ZZ, you conducted share transactions. The shares you purchased were held for less than three months. It is considered that your transactions in company A shares displayed a discernible pattern of trading, as you bought and sold in company A shares only and there were similarities in a large amount of transactions in that most of shares were re-sold within 3 months except on a number of occasions. As such, this factor points towards carrying on a business of share trading. | Detailed Reasoning - Organisation in a business-like manner: You have a Bachelor degree and have conducted extensive research of shares over the years. You subscribed to an online tool. You conducted daily analysis of shares utilising newspapers, market reports, charts, company prospectus, press releases and financial reports. You monitored share market movement by analysing various charts, which are widely used trending tools used by professionals to gauge over sentiment of a stock performance. Your objective was to identify the right time to buy or sale shares that would increase in value in the short term to enable you to sell at a profit after holding them for a brief period. You had a dedicated study room/office in your residence where you did your research. You accessed a laptop or computer during share market trading hours. We consider that your trading activities were conducted in a business-like manner. | Detailed Reasoning - Record keeping: You kept account statements, tax invoices for purchase and sale of shares. We consider that the records you kept were sufficient for carrying on a share trading business on a small scale. | Detailed Reasoning - Volume of trading: The higher the volume of your purchases and sales of shares, the more likely it is that you will be carrying on a business. In the year ended 30 June 20XX the average buying transaction involved less than 40,000 shares and the average selling transaction involved less than 35,000 shares. In the year ended 30 June 20YY the average buying transaction involved less than 80,000 shares and the average selling transaction involved less than 90,000 shares. In the year ended 30 June 20ZZ the average buying transaction involved less than 80,000 shares and the average selling transaction involved was less than 120,000 shares. We consider that the volume of share trading was high enough for a business of share trading. | Detailed Reasoning - Amount of capital injected: The amount of capital that you invest in buying shares is not considered to be a crucial factor in determining whether you are carrying on a business of share trading. This is an area in which it is possible to carry out business activities with a relatively small amount of capital. Conversely, you may also invest a substantial amount of capital and not be considered to be a share trader. We consider that you accessed a large amount of the capital for trading shares. However, this is not a crucial factor in determining whether you are carrying on a business of share trading and must be considered together with other factors. | Detailed Reasoning - Conclusion: We have determined that you were carrying on a business of share trading for the relevant financial years. Your activities showed all the factors that would be expected from a person carrying on a business. Your share trading operation demonstrates a profit making intention. Your activities are repetitive and were organised in a business-like manner. The volume of shares turned over was high and you had injected a large amount of capital into the operation.