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  • Share investing versus share trading

    The tax treatment of your shares depends on whether you hold shares as an investor or carry on a business as a share trader.

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    Tax treatment

    If you hold shares as an investor:

    • your shares are assets and are subject to capital gains tax when you sell them
    • your costs are taken into account at the time you sell your shares
    • if you have a capital loss you can use it to offset capital gains but not to offset income from other sources
    • income is earned from dividends and similar receipts.

    If you are a share trader:

    • your shares are treated like trading stock in a business
    • your gains are treated as ordinary income
    • your losses and costs are treated as deductible expenses in the year they are incurred.

    If you change from an investor to a trader, or vice versa, the treatment of your profits or losses will also change.

    Tax treatment of share investors and share traders

    Cost or receipt

    Share investor

    Share trader

    Profit from the sale of shares

    Subject to capital gains tax

    Assessable as ordinary income

    Loss from the sale of shares

    Used to offset capital gains or carried forward to offset future capital gains

     

    Cannot be used to offset income from other sources

    Deductible against income

    Dividends and similar receipts

    Included in assessable income

    Included in assessable income

    Purchase price of shares

    Taken into account in calculating capital gain or loss when shares are sold

    Deductible in the year incurred

    Transaction costs of buying or selling shares

    Taken into account in calculating capital gain or loss when shares are sold

    Deductible in the year incurred

    Costs (such as interest on borrowed money) incurred in earning dividend income from shares

    Deductible in the year incurred

    Deductible in the year incurred

    How to determine if you are a share trader

    Determining if you are a share trader is the same as determining whether your activities are considered to be carrying on a business for tax purposes.

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

    To determine whether you are a share trader or a business of trading shares, the following factors 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 carries on 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.

    You need to consider not only your intention to make a profit, but also the facts of your situation. This includes how your activities have actually been carried out, or a business plan of how your activities will be carried out.

    A business plan might show, for example:

    • analysis of the current market and each potential investment
    • 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 key characteristic of business activities.

    The higher the volume of your share transactions, the more likely it is that you are carrying on a business.

    A business of share trading would 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

    A share-trading business could reasonably be expected to involve:

    • study of daily and longer-term trends
    • analysis of companies' prospectuses and annual reports
    • seeking advice from experts.

    Your qualifications, expertise, training and skills in this area would also be relevant.

    Failure to keep records of share transactions would make it difficult for you to establish that a business of share trading was being carried on.

    Amount of capital invested

    The amount of capital you invest in shares is not a crucial factor in determining whether you are carrying on a business of share trading.

    It is possible to carry on business activities with a relatively small amount of capital. On the other hand, you could invest a substantial amount of capital and not be considered a share trader.

    Example: share trader

    Molly has a full-time job. After seeing a television program, she decides to start share trading on the side. Molly:

    • sets up an office with a computer in one of the rooms in her house
    • has $100,000 of her own funds available to buy shares and access to a $50,000 borrowing facility through her bank
    • analyses daily developments in equity markets, using financial newspapers and stock market reports, charts and trend lines
    • subscribes to news from online investment analysts.

    Molly's objective is to identify stocks that will increase in value in the short term so she can turn them over quickly at a profit.

    In the last income year Molly conducted 60 share transactions (35 buying and 25 selling). The average buying transaction was $1,000. The average selling transaction was $1,800. All the transactions were conducted through online stockbroking facilities. 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 indicators that she is carrying on a business:

    • Her share trading operation has the intention of making a profit, even though it had a loss.
    • Her activities are regular and repetitive, and are organised in a business-like manner.
    • She has turned over a high volume of shares and injected a large amount of capital into the operation.
    End of example

     

    Example: shareholding as an investor

    George is an accountant. He has:

    • bought 200,000 shares in 20 'blue chip' companies over several years
    • a total portfolio of $1.5 million.

    George bought the shares because of consistently high dividends. He would not consider selling his shares unless their price appreciated markedly. In the last income year, he sold 20,000 shares for a gain of $50,000.

    Although George has made a large gain on the sale of shares, he is not 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

    Changing from investor to trader, or trader to investor

    If you re-classify your activities, the way you treat your shareholdings will be affected.

    We may ask you to provide evidence that:

    • the nature of your activities has changed
    • you have reported your income correctly in the past.

    If we review your tax returns and find that you have incorrectly claimed losses, you may be subject to penalties.

    Changing from investor to trader

    If your activities change from investor to trader, your shares change from a CGT asset to trading stock. When this happens:

    • CGT event K4 occurs. This means you make a capital gain or loss on the shares, which you must report in your tax return. You work out your capital gain or loss based on the market value of your shares at the time of the change.
    • Any unused capital losses from prior years (when you were an investor) remain as capital losses. You can't convert them into revenue losses.

    You should continue to carry forward any unused capital losses until you have a capital gain to offset them against.

    Changing from trader to investor

    If your activities change from trader to investor, your shares are no longer trading stock.

    At the time of the change, you treat your shares as if:

    1. just before they stopped being trading stock, you sold them to someone else (at arm's length and in the ordinary course of business) for their cost
    2. you immediately bought the shares back for the same amount.
    Last modified: 04 Aug 2021QC 66047