ATO Interpretative Decision

ATO ID 2001/714

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a share trader entitled to claim a deduction under section 70-35 of the Income Tax Assessment Act 1997 (ITAA 1997) for a loss on sale of a long-term investment?

Decision

No. The loss cannot be claimed under section 70-35 but could be claimed as a capital loss under Part 3-1 of the ITAA 1997.

Facts

The taxpayer has been a share trader for many years.

The taxpayer had purchased units in XYZ Limited Partnership in three instalments as follows:

(i)

some units eight years ago;

(ii)

some other units eights years ago; and

(iii)

some units four years ago.

The taxpayer was a limited partner in this partnership and did not have any day-to-day involvement in the operations of the business.

The taxpayer purchased the units with a view to holding them as a long-term investment. They were not purchased as part of a share trading strategy.

The taxpayer was advised that the investments would not be profitable in the short-term. To find a buyer and make a profit on the sale of the units soon after purchase would not have been possible. The taxpayer did not seek to immediately sell them or determine how to make a profit on them.

In the financial year ended 30 June 2001 the taxpayer received a letter from the business manager of the partnership stating that the business was not viable and that the units were worth considerably less than the purchase price. The taxpayer decided to write off the investment in that year.

Reasons for Decision

In Investments and Merchant Finance Corporation Ltd v. FC of T (1971) 2 ATR 361; 71 ATC 4140; 125 CLR 249 Walsh J, stated at page 373:

'... I do not assert, of course, that shares are always trading stock in the hands of their owner; even where the owner is a dealer in shares, circumstances may show that particular shares are not trading stock....'

This statement means that if a share trader purchases shares then these shares do not automatically become a part of his/her trading stock. Therefore, it would be incorrect to claim an outright deduction for the loss in value of shares held/disposed of using trading stock provisions by the sole virtue that a person was a share trader.

Instead, it must be determined on a case by case basis as to whether each particular parcel of shares is considered to be trading stock and therefore a part of the business operations. As to whether a particular parcel of shares will constitute trading stock will be determined by the circumstances in which they are held.

In the taxpayer's case it is necessary to consider the circumstances under which the units were acquired and held. Depending upon final outcome of that analysis, the loss that the taxpayer made from the units would be recognised as either:

(i)

a loss in value of trading stock under section 70-35 of the ITAA 1997 if the units formed a part of the taxpayer's share trading business; or

(ii)

if the units do not form a part of the taxpayer's share trading business then the loss will be a capital loss and calculated under the capital gains and losses provisions contained in Part 3-1 of the ITAA 1997.

The information provided by the taxpayer clearly shows that:

•

The taxpayer purchased the units with the view to holding them as a long-term investment.

•

The taxpayer did not trade in the units

•

The taxpayer did not have an intention of making a profit in the short-term from the units

•

The units do not form a part of the taxpayer's share-trading strategy.

On the basis of the above factors, the units could not be classed as trading stock. The taxpayer will therefore not be entitled to claim a deduction for the loss incurred under section 70-35 of the ITAA 1997. Instead, the taxpayer will be entitled to claim a deduction for a capital loss calculated under Part 3-1 of the ITAA 1997 in the financial year in which the XYZ Limited Partnership was liquidated.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2000 Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1997
   section 70-35
   Chapter 3, Part 3-1

Case References:
Investment and Merchant Finance Corporation Ltd v. FC of T
   (1971) 2 ATR 361
   71 ATC 4140
   (1971) 125 CLR 249

Keywords
Capital losses
Deductions & expenses
Trading stock
Shares

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2001

ISSN: 1445-2782