Show download pdf controls
  • Shareholding as investor or share trading as business?

    The tax treatment of shares depends on whether you're considered to be holding shares as an investor or carrying on a business as a share trader.

    On this page:

    Shareholding as investment

    A shareholder is a person who holds shares for the purpose of earning income from dividends and similar receipts. For a shareholder:

    • the cost of purchase of shares is not an allowable deduction against current year income, but is a capital cost
    • receipts from the sale of shares are not assessable income – but any capital gain on the shares is subject to capital gains tax
    • a net capital loss from the sale of shares can't be offset against income from other sources, but can be offset against another capital gain or carried forward to offset against future capital gains
    • the transaction costs of buying or selling shares is not an allowable deduction against income, but are taken into account in determining the amount of any capital gain
    • dividends and other similar receipts from the shares are included in assessable income
    • costs (such as interest on borrowed money) incurred in earning dividend income are an allowable deduction against current year income.

    Share trading as business

    A share trader is a person who carries out business activities for the purpose of earning income from buying and selling shares. For a share trader:

    • receipts from the sale of shares constitute assessable income
    • purchased shares are regarded as trading stock
    • costs incurred in buying or selling shares – including the cost of the shares – are an allowable deduction in the year in which they are incurred
    • dividends and other similar receipts are included in assessable income.

    How to determine whether you're carrying on a business of share trading

    Whether or not you're carrying on a business of share trading depends on much the same factors as apply to determining whether any other undertaking is considered a business for tax purposes.

    Under the tax law, a 'business' includes 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

    The question of whether a person is a share trader or a shareholder is determined by considering the following factors that have been taken into account in court cases:

    Nature of activity and purpose of profit making

    The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on.

    A share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares.

    Shares may be held for either investment or trading purposes, and profits on sale are earned in either case. 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.

    It is necessary for you to consider not only your intention to make a profit, but also the facts of your situation. This includes details of how the activity has actually been carried out or a business plan of how the activities will be conducted.

    A business plan might show, for example:

    • an analysis of each potential investment
    • analysis of the current market
    • research to show when or where a profit may arise
    • the basis of your decision-making on when to hold or sell shares.

    Repetition, volume and regularity

    Repetition – that is, the frequency of transactions or the number of similar transactions – is a significant characteristic of business activities.

    The higher the volume of your purchases and sales of shares, the more likely it is that you are carrying on a business.

    A business of share trading could also be expected to involve the purchase of shares on a regular basis through a regular or routine method.

    Organisation in a business-like way and keeping records

    Business-like: A share-trading business could reasonably be expected to involve study of daily and longer-term trends, analysis of a company's prospectus and annual reports, and seeking of advice from experts. Your qualifications, expertise, training, or skills in this area are relevant to determining whether your activities constitute a business.

    Keeping records: Failure to keep records of purchases and sales of shares would make it difficult for a taxpayer to establish that a business of share-trading was being carried on.

    Amount of capital invested

    The amount of capital that you invest in buying shares is not considered to be a crucial factor in determining whether you're 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.

    Examples

    Example: Share trader

    Molly is an electrical engineer. After seeing a television program, she decided to become involved in share-trading activities.

    Molly set up an office in one of the rooms in her house. She has a computer and access to the internet.

    Molly has $100,000 of her own funds available to purchase shares and, in addition, she has access to a $50,000 borrowing facility through her bank.

    Molly conducts daily analysis and assessment of developments in equity markets, using financial newspapers, investment magazines, stock market reports, charts and trend lines. Molly's objective is to identify stocks that will increase in value in the short term to enable her to sell at a profit after holding them for a brief period.

    In the last income year, Molly conducted 60 share transactions: 35 buying and 25 selling. The average buying transaction involved 500 shares and the average cost was $1,000. The average selling transaction involved 750 shares and the average selling price was $1,800. All the transactions were conducted through stockbroking facilities on the internet. The average time that Molly held shares before selling them was twelve weeks. Molly's activities resulted in a loss of $5,000 after expenses.

    Molly's activities show all the factors that would be expected from a person carrying on a business. Her share-trading operation demonstrates a profit-making intention even though a loss has resulted. Molly's activities are regular and repetitive, and they are organised in a business-like manner. The volume of shares turned over is high and Molly has injected a large amount of capital into the operation.

    End of example

     

    Example: Shareholder

    George is an accountant. He has bought 200,000 shares in twenty 'blue chip' companies over several years. His total portfolio cost $1.5 million. George bought the shares because of consistently high dividends. He would not consider selling shares unless their price appreciated markedly. In the last income year, he sold 20,000 shares over the year for a gain of $50,000.

    Although George has made a large gain on the sale of shares, he would not be considered to be carrying on a business of share trading. He has purchased his shares for the purpose of earning dividend income rather than making a profit from buying and selling shares.

    End of example
    Last modified: 17 Jul 2017QC 52205