Private ruling: Share trading activity
Date of advice: 24 October 2017
Published: March 2018
Ruling period: 1 July 201X to 30 June 201Y | 1 July 201Y to 30 June 201Z
Date scheme commenced: 1 July 201X

Ruling: Q1: Are you carrying on a business of share trading? | A1: Yes

Relevant facts and circumstances: You use a stockbroking firm for all your share transactions. Your statements from your stockbroking firm indicate you had a large number of purchases and sales during the 201Y and 201Z income years. Background details of share trading activities You have no formal qualifications in connection to share trading. You are employed on a full-time basis. You estimate you spend 45 hours per week in full-time employment. You have been following the market for over 20 years. You determine what shares to buy and sell by: ● participating in websites and forums; and ● advice was obtained from an entity which provides you with triggers when to buy and sell You have facilities to access additional capital in relation to your activity such as a margin and bank loan. Strategies you use when buying and selling shares Your share trading strategy has been to buy fallen stock and to purchase upon suggestions from an entity. You intend to sell quickly and turn over but if you get stuck, you can always choose to hang on and hope they will eventually recover. You make decisions on whether to buy, hold or sell shares and on the amount you invest each time in the following manner: ● You take advice from an entity who would ring you with their suggestions; ● You spend two hours per day on a particular website; ● You check many times during the day on your device to view what traders and chartists are saying; ● You search the internet for shares you invest in every day to see if there is any new information pertinent to the industry or company; ● You check a certain website to check for short interest in the shares you invest in as sophisticated or insider traders often use this way of investing (you believe); ● You like to concentrate the areas you invest in so you can maximise the research you do and use the principle of doubling down to lower cost if you time the buy wrongly; ● You have a group of friends who send stock tips to one another on an app; and ● You have a group on a website where interesting articles are posted. You conduct market analysis through extensive internet research including web forums. You read the newspaper which you access via a friend and access through an internet search. You sometimes use stop loss limit and would sell at a 50% level but you do not have these set and sometimes you are unable to sell as the price drops too fast. You state some trading strategies target stop losses so one must be careful. Time watching is the key. This is why you keep your device handy at all times while the market is trading in case you need to sell urgently. You study the developments of the markets and your shares approximately 20 to 30 minutes during the day using your device. Other relevant components as part of your strategy include an increased importance on web forum posters with quality posts. Other details relating to your share trading activity You obtain expert advice and technical material by: ● Talking to an entity on a fortnightly basis, ● Attending share trading meetings and trade shows ● internet The facilities and equipment you use to conduct your share activities include: ● a home computer ● iPad, and ● device You retain records of your share trading activity on an internet stockbroking firm and an entity. Your posts are recorded. You estimate you spend 14 hours per week on your share trading activity.

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997 | Section 8-1 of the Income Tax Assessment Act 1997 | Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: You are carrying on a business of share trading for income tax purposes for the 201Y and 201Z income years. | 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 Income Tax Assessment Act 1997 (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. ‘Business’ is defined in section 995-1 of the ITAA 1997 as: "any profession, trade, employment, vocation or calling, but does not include occupation as an employee." In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689 (Radnor ), 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 (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548: "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 … a determination is eventually based on the large and general impression gained." 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. The Commissioner's view on carrying on a business is set out in Taxation Ruling TR 97/11: Income tax: am I carrying on a business of primary production (TR 97/11) ? Whilst TR 97/11 is about carrying on a business of primary production, the indicators in TR 97/11, which have been developed by the courts of law, are used for all cases relating to the carrying on of a business. The indicators include: ● 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. The question of whether a person is engaged in share trading is essentially based on the facts of the case. This matter has been addressed in a number of court cases. In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 ( Case X86 ), and in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 ( Shields ) 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. In Radnor at 91 ATC 4702, the emphasis upon a pattern of buying and selling and the distinction between trading and investment activity was summed up by Hill J as follows: Counsel for the Commissioner submitted that the evidence of transactions in particular stocks suggested a pattern of buying and selling. At the invitation of the bench a schedule was prepared of each stock the subject of sales. What that schedule revealed was, accepting that at the time of appointment of John D.G. Robinson & Associates the respondent would have held shares in some at least of the companies, that thereafter further shares were bought from time to time. Ultimately, after the passing of a number of years, some or all of the total holdings were sold. There were isolated instances of sales and purchases in close proximity. An example, not atypical of such a case is the following history of acquisition and sales in Comalco Ltd, the opening holding is unknown: Bought Sold 1977 674 - 1979 411 - 1980 1000 - 1983 1037 2000 1985 519 - The sale in question, referred to as having been one made by the manager, hardly seems to be an act of trading. The stock itself was not speculative, nor can one see a pattern of buying and selling as suggested. Ultimately, the question whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression. In my view the present case falls on that side of the line where the activity of the taxpayer can be seen, not as involving the carrying on of a business of dealing in shares, but rather of investing in shares… That is, the taxpayer was held not to be carrying on a business of share trading because there was no pattern of buying and selling and a low volume and frequency of transactions. In AAT Case 4847; AAT Case W8 (1988) 20 ATR 3182; 89 ATC 171 (Case W8) , a trainee accountant purchased twenty parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share dealing. In Shields v. Deputy Commissioner of Taxation (Cth) ; Case [1999] AATA 4 (1999) 41 ATR 1042; (1999) 99 ATC 2037, during the period from 6 February 1996 to 4 March 1996, the taxpayer bought shares in Australian banks which were about to pay franked dividends for cum dividend prices and sold shares in the same banks at their ex dividend prices. Applying the factors listed in Case X86, even though the activity was for a short time only, the Tribunal decided the taxpayer was carrying on a business because of the volume of transactions and because the transactions were so carefully and systematically organised and handled. Based on the factors of your situation, we have considered a number of these indicators below. | Detailed Reasoning - Repetition and Regularity: This is considered an important indicator when determining whether or not a business is being carried on. Of particular importance in the case of determining if a business of share trading is being carried on is the level of repetition of share sale activities. In your case you have carried out had a large number of purchases sell contracts for the 201Y 201Z income years. Whilst the number of trades indicates a degree of repetition and regularity, further analysis of the nature of trades, including the length of time stocks are held, the types of stocks held and other strategies will determine the nature of your activity. A review of your stock broking statements for the year ended 30 June 201Y indicate that your trading patterns are highly concentrated on a number of stocks of buy and sell transactions. For the year ended 30 June 201Z your trades were concentrated on certain companies From the information you have provided, your transaction statements commencing on 1 July 201X indicate that there are some stocks where you have bought and sold them over a short period of time. However the majority of stocks you have bought and sold shares in have been over a longer timeframe. From the information provided it can be concluded that whilst the majority of your share trading activities were accumulating shares in only a few stocks, there were frequent sell transactions and the period held was no longer than 14 months. Your frequent trading activities and nature of the stocks traded are distinctly different to that of a share investor for the following reasons: ● The time you hold your stock is not long term, with a number of stocks only held for a few days or months; ● The stocks you hold are speculative in nature and the share price volatile; ● The majority of the stocks you hold do not pay dividends and compared with the size of capital employed, it is clear you do not look for growth through receiving dividends; and ● Your portfolio of stocks is highly concentrated with 60% of the value being represented by two stocks, which would not represent a diversified portfolio of a share investor. Based on the information available, this factor clearly indicates your share activities are carried out on a regular and repetitive basis indicating that you are carrying on a business as a share trader. | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose. Paragraph 29 of TR 97/11 states in part: … A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative: see Thomas. … In your case, you work around 45 hours per week in your full-time job. You spend approximately 14 hours per week buying and selling shares. You do not have qualifications or previous experience in finance. However, your lack of qualifications and experience in finance does not preclude you from carrying on activities of a significant commercial purpose or character. The size and scale of your share trading operations indicate that your activities are more than a mere hobby as can be demonstrated by the following: ● You have significant capital allocated to your trading activities; ● You have taken large loans and margin loan facilities with a bank; and ● You obtain professional advice from an entity. Given the above, the facts would suggest that this factor indicates you are carrying on a business of share trading. | Detailed Reasoning - Scale and Permanency of Share Trading Activities: The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. Similarly, the larger the amount of capital employed in the activity, the more likely the taxpayer will be regarded as carrying on a business. However, neither is a determinative factor and it must be considered together with the other factors. Moreover, the size and scale of the activity is not a determinative test and a person can carry on a business in a small way. Your statements indicate you have been trading for a period of at least 2 years. You have obtained large loans to fund your trading activities. Similarly as concluded in the indicator “the activity has a significant commercial purpose or character” discussed above, it is clearly concluded that this indicator is satisfied. | Detailed Reasoning - Whether the taxpayer has more than an intention to engage in business: An intention to carry on a business is an important indicator but not a determinative factor. As well as an intention, there must also be activities which indicate that the person concerned is carrying on a business. In general, most businesses have some form of forward planning to take account of contingencies and market fluctuations, as well as setting profit targets, budgets, periodic financial reviews, record keeping systems, an appropriate office and so forth. It would be reasonable to expect a share trading business to involve study of daily and longer-term trends, analysis of a company’s prospectus and annual reports and the seeking of advice from experts. This means having or operating in accordance with a particular plan, with the main goal of maximising profits. You have full-time employment and continued your employment while buying and selling shares. However, being engaged in full-time employment is not the most significant factor and does not preclude your from carrying on a business. | Detailed Reasoning - Planned, organised and carried out in a business-like manner: Activities are more likely to be carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as having some form of forward planning to take account of contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discounting unprofitable activities and keep appropriate business records. It would be reasonable to expect someone in the business of share trading would have a business plan or a clear and consistent trading plan which outlines what strategies you would use to maximise gains and minimise losses and also deal with worst case scenarios such as a market crash. You state share trading activities are monitored on a daily basis. You study the markets and your shares for approximately 20 to 30 minutes during the day. You estimate you spend 14 hours per week on your share buy and sell activities. Your philosophy for investing in shares is to buy fallen stock. You receive advice from an entity which is a research tool for you in respect to trading strategies which provides you with triggers to buy and sell shares. You also monitor certain websites to determine what shares to buy or sell. You discuss timing for purchasing and selling with an entity and you have advised that you have some general rules on when to limit losses and you do not utilise stop loss orders as you consider that some trading strategies target stop losses. Your strategy is to closely monitor stock prices throughout the trading day and sell when you feel appropriate. From the above it is clear that whilst you have general strategies that you implement in your trading activities, your methods are not what would be expected of a share trader. Whilst this is an important indicator in determining whether your activities are akin to a share trader, it is not determinative. | Detailed Reasoning - Conclusion: From the above analysis it can be seen that the your activities have the requisite amount of repetition and regularity, the scale and permanency of the share trading activities and the significant commercial purpose and character of similar share trading businesses. Whilst you do not have the documentation and business plans that would normally be expected of someone in business, you have an intention to make a profit and you have a general trading strategy to do this. When you compare the nature of your share transactions and types of shares you buy and sell your activities can be distinguished to that of a share investor for the following reasons: ● You do not hold shares for the long term. You hold them short term and on occasions hold them for up to 14 months; ● You do not acquire blue chip investments type stocks. The majority of your trades are in speculative mining stocks and other stock considered more risky; ● You do not acquire stocks for the dividend earning potential. Whilst you have acquired some stocks that pay dividends you do not hold them long enough to obtain a significant return from them. ● Your shares are not diversified, rather you have large proportions of your capital attributed to one or two stock. On a balance of all the above indicators, it is considered that your share activity is considered to be akin to carrying on the business of a share trader for the 201Y and 201Z income years for income tax purposes.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.