Private ruling: Share trading
Date of advice: 9 February 2023
Published: 27 March 2023
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Was the Applicant carrying on a business of share trading in the 20XX income year? | A1: No. | Q2: If the answer to Question 1 is no a. Is the Applicant required to include the purchase price of the 20XX Shares in the taxpayer's assessable income in the 20XX income year under section 70-110; b. Are the Applicants i. profits from disposing of the 20XX Shares assessable under section 6-5 and ii. losses from disposing of the 20XX Shares deductible under section 8-1? | A2: Yes. | Q3: In determining the profit or loss from the sale of the 20XX Shares, is the cost of these shares their purchase price? | A3: Yes.

Relevant facts and circumstances: The taxpayer has been undertaking share trading activities. The Commissioner issued a private ruling confirming that the taxpayer was carrying on a share trading business in the 20XX and 20XX income years. The taxpayer is a store manager. The taxpayer did not receive any share trading advice, eg did not consult a professional stockbroker or an expert share trading adviser in the 20XX year and did his own research and analysis. For all share purchases, the taxpayer's focus was to make a short term trading profit from the sale of shares. The taxpayer funded his share trading activities through a margin loan with a limit as well as loans from a private company that operated stores. After significant losses in the 20XX income year, the taxpayer began taking steps to wind down his share trading business and significantly reduced the number of transactions. The taxpayer continues to own certain shares at 30 June 20XX which were purchased as part of earlier trading. The taxpayer purchased parcels of shares with the intention of making a profit from the sale of those shares. In 20XX the taxpayer purchased and sold additional shares with the intention of making profits that would offset the losses he had incurred. None of the shares purchased in the 20XX income year have been held for more than 12 months.

Relevant legislative provisions: Income tax Assessment Act 1997 section 6-5 | Income tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Your share trading activities are not considered to constitute the carrying on of a business. | Detailed Reasoning - Detailed reasoning: Where share trading is carried on as a business, the gains will be accounted for under section 6-5 of the ITAA 1997 and the losses deductible under section 8-1. | Detailed Reasoning - Carrying on a business: 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 Income tax: am I carrying on a business of primary production? (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on: • 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 following is your application to these indicators: | Detailed Reasoning - Whether the activity has a significant commercial purpose or character: The activity of buying and selling shares is a commercial activity, particularly where shares are held in the short term for resale at a profit and no dividends are received. In your case, the activity declined significantly since 20XX but still had a commercial purpose or character and you invested in additional shares with the intention of making a profit. | Detailed Reasoning - Whether the taxpayer has more than an intention to engage in business: You did in fact buy and sell shares on a number of occasions during the income year ended 30 June 20XX all within a 4 month period. You advised that you were winding down your business and the pattern of share trading changed from regular trading to more sporadic trades. | Detailed Reasoning - Whether the taxpayer has a purpose of profit as well as a prospect of profit: You had both a profit purpose as well as a prospect of profit. | Detailed Reasoning - Whether there is repetition and regularity of the activity: As noted above you purchased shares on a number of occasions, and sold shares on a number occasions during the income period ended 30 June 20XX. However, these all took place in a relatively short period being 4 months. For the rest of the income period ended 30 June 20XX there was no other share trading activity. There is a degree of repetition and regularity in your share transactions, but not at a level that would indicate that a business was being carried on. | Detailed Reasoning - Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business: You had a full time occupation running stores, you did not have a business plan, and relied on your own market analysis to guide your decisions and you have realised some short-term gains and losses. In the 20XX year your transactions were not conducted in a way similar to a share trader, and your activities were not carried out in a way similar to carrying on a business as a share trader. | Detailed Reasoning - The size, scale and permanency of the activity: As noted above you purchased shares on a number of occasions, and sold shares on a number of occasions during the income period ended 30 June 20XX, which all took place in a relatively short-period over 4 months. For the rest of the income year ended 30 June 20XX there was no other share trading activity. The frequency and the size of your share transactions reduced significantly from the 20XX and 20XX income years in size and scale and does not exhibit the size and scale that would be expected of a business of share trading. You have advised that you were winding down the business and trying to recoup losses and had purchased some shares with the intention of making a profit from the sale of those shares to offset losses which you incurred in 20XX. Accordingly, the size and scale and permanency of your share transactions would not support that you were carrying on a business of share trading. | Detailed Reasoning - Whether the activity would be better described as a hobby, recreational or sporting activity: Your activities did have some of the characteristics of a business as you had some degree of repetition and regularity, along with a profit motive. However, your activities lack size, scale and permanency and are more aligned with isolated transactions than carrying on the business of share trading. | Detailed Reasoning - Conclusion: Whilst no single factor is necessarily determinative (see Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187 at 202 per Hill J), In weighing up these factors and the speculative nature of the share trading undertaken, the decline in volume and scale in 20XX with long periods of activity, not having a business plan and your reliance on your own market analysis to guide your decisions, that you were gradually winding down a business of share trading. This is not consistent with constantly monitoring the share price and not conducting a business as a share trader would. | Detailed Reasoning - Trading with a profit-making purpose; and/or a profit-making undertaking.: Subsection 6-5(1) of the ITAA 1997 states that: Your assessable income includes income according to ordinary concepts, which is called ordinary income. Profit or gain arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business. The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer) , that: The authorities establish that a profit or gain so made [in an isolated transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income provides the ATO view on whether profits on isolated transactions are income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA 1936), now section 6-5 of the ITAA 1997. The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers. Paragraph 16 of TR 92/3 states that: If a taxpayer who is not carrying on a business makes a profit, that profit is income if: (a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and (b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. ...speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets. Further, TR 92/3 states at paragraph 12 and 13 that: 12. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. 13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following: a. the nature of the entity undertaking the operation or transaction; b. the nature and scale of other activities undertaken by the taxpayer; c. the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; d. the nature, scale and complexity of the operation or transaction; e. the manner in which the operation or transaction was entered into or carried out; f. the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; g. if the transaction involves the acquisition and disposal of property, the nature of that property; and h. the timing of the transaction or the various steps in the transaction. When a transaction involves the sale of property (shares) as in the present case, for a profit or gain on the sale of the property to be characterised as ordinary income, it is usually necessary for a taxpayer to have a profit-making intention at the time the shares were acquired. As outlined above, you were not carrying on a business in relation to your share transaction activities. However, your activities were inherently commercial in nature and had a profit making-intention. In considering whether or not your share transactions should be accounted for on capital or revenue account weight has been given to the fact that you held your shares for very short periods of time, and you have not received any dividend income from the shares. This demonstrates that your relevant purpose in purchasing shares is to gain a profit on the sale, as opposed to gaining an income stream through dividends. You stated that you bought shares with the intention of making a profit from the sale of those shares to offset the losses you incurred in 20XX. You entered into transactions in the 20XX year, all within a 4 month period. You advised that you were winding down your business and trying to recoup losses and the pattern of share trading changed from regular trading to more isolated trades. In weighing up these factors including the speculative nature of the share trading undertaken, they align with being isolated commercial transactions with a profit-making purpose. As such your share transactions would be considered to be a profit-making undertaking or scheme and ordinary income. Your gains are therefore assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Conclusion: Your trading activities are short-term and directed at making an isolated profit to offset losses. However, the intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Your share trading in the 20XX year lacks the repetition and regularity of a business. The volume and value of share trading has reduced significantly since 20XX and 20XX. There are insufficient indicators to maintain a business for the 20XX income year. You did not have a business plan and relied on your own market analysis to guide your decisions. You advised that you were gradually winding down a business of share trading. The long periods of inactivity were not consistent with conducting a business in 20XX. However, you did have a profit-making purpose and the share trading was a commercial transaction. Therefore any profit in the 20XX year is assessable on revenue account under section 6-5 of the ITAA 1997 and any losses in the 20XX year were deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2(a), (b)(i) and (b)(ii): Where an item of trading stock ceases to be held by a taxpayer as trading stock (but continues to be owned by the taxpayer) the taxpayer is deemed to have disposed of it (at arm's length and in the ordinary course of business) at cost and have acquired it for the same amount. (section 70-110 of the ITAA 1997). Accordingly you are required to include the purchase price of the 20XX shares in your assessable income in the 20XX income year under section 70-110 of the ITAA 1997. Profits from disposing of share in 20XX are assessable under section 6-5 of the ITAA 1997 not as carrying on a business but as isolated transactions and any losses from disposing of shares in 20XX are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 3: In determining the profit or loss from the sale of shares purchased before 1 July 20XX in 20XX their cost of will be their purchase price. Where an item of trading stock ceases to be held by the taxpayer as trading stock (but continues to be owned by the taxpayer) the taxpayer is deemed to have disposed of it (at arm's length and in the ordinary course of business) at original cost and to have reacquired it for the same amount (section 70-110 of the ITAA 1997). As the shares are a legacy of your ceased 20XX and 20XX share trading business and were trading stock at 1 July 20XX as you are no longer carrying on a business in 20XX you are deemed to have sold those shares for their purchase price and reacquired them at the purchase price. Accordingly on sale of those shares in 20XX your cost base is their purchase price.