If you reclassify your activities, we may ask you to provide evidence that demonstrates there has been a change in the nature of your activities or that you have declared your income incorrectly in the past.
If we review your tax returns and it is found that losses have been incorrectly claimed, penalties may apply.
Example
Jack is a manager. He is also a share holder who has reported consistently high dividend income in recent years as his portfolio has grown in size. In 2008, he claimed a loss for his share trading activities of $75,500 at question 15 (Net income or loss from business) on his tax return.
A review of Jack’s returns found that in the previous year he made a large gain on the sale of shares of around $176,000 that was reported at the capital gains tax question. After applying the capital gains tax discount, his net capital gain was reduced to $63,600. In 2005 and 2006 he did not report any gains or losses.
This behaviour is indicative of an investor who purchased shares with the intention of earning income from dividends.
Jack needs to demonstrate that his current year activities involve carrying on a business as a share trader rather than as an investor, especially in light of his reporting history. If he determines that he is a share trader, Jack may have to review whether he was a share trader in prior years or determine when his position changed.
If you have reclassified your activities, there may be capital gains tax (CGT) or other implications.
Reclassifying from investor to trader
If your activities change from investor to trader, your investment changes from a CGT asset to 'trading stock'. This can trigger CGT event K4.
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