Edited version of private ruling

Authorisation Number: 1011500711290

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Ruling

Subject: Share trader or investor

Are you carrying on a business as a share trader?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You spend a minimum of five hours per day trading shares.

You work from home.

You have provided your trading history as supporting documentation of your activities.

You have capital $A to $B invested in shares at any one time. You have a margin loan.

You subscribe to a trading platform.

You use stop losses in your trading activities. If the market drops 10% you sell the shares then buy them back at the reduced price.

You had XX buy contracts and YY sell contracts in a three month period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Share trading versus share investing

There are two possible ways share trading activities may be treated for income tax purposes.

(1) Business Income- in this situation you are a share trader, the shares are regarded as trading stock and any income is included in your assessable income.

(2) Investment- in this situation, you are regarded as a share investor. Shares are treated as capital gains tax (CGT) assets and any gains from the disposal of the shares are assessable as a capital gain, any losses from disposals are treated as a capital loss. Dividends and similar receipts are also included in your assessable income.

'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

In FC of T v. Radnor 91 ATC 4689; (1991) 22 ATR 344 (Radnors Case), Hill J stated 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.'

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 and more recently in Shields v. Deputy Commissioner of Taxation [1999] AATA 4; 99 ATC 2037; (1999) 41 ATR 1042, the following were stated as indicators to be considered:

(a)    the nature of the activities and whether they have the purpose of profit-making

(b)    the complexity and magnitude of the undertaking

(c)    an intention to engage in trade regularly, routinely or systematically

(d)    operating in a business-like manner and the degree of sophistication involved

(e)    whether any profit or loss is regarded as arising from a discernible pattern of trading

(f)     the volume of the taxpayer's operation and the amount of capital employed by him

and more particularly in respect of share traders:

(g)    repetition and regularity in the buying and selling of shares

(h)    turnover

(i)    whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

(j)    maintenance of an office

(k)    accounting for the share transactions on a gross receipts basis

(l)     whether the taxpayer is engaged in another full time occupation.

When considering whether a person is carrying on a business, all of the above indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. The weighting given to each indicator may vary from case to case.

Application to your circumstances

In your case, you have a reasonable amount of capital invested in the activity. You trade in shares for short term gains with the intention of making a profit. Your buying and selling strategy relies on a daily monitoring of the market. You spend a minimum of five hours per day trading shares. You maintain records of your share transactions. You show repetition and regularity in buying and selling shares and a high volume and frequency of transactions, in the three months that you have pursued this activity.

After weighing up the above factors, and the circumstances surrounding your buying and selling of shares, it is considered that you are carrying on a business of share trading. Therefore, the income from the activity is assessable under section 6-5 of the ITAA 1997. The losses related to the activity are allowable as deductions under section 8-1 of the ITAA 1997.

You should note carrying on a business of share trading is a question of fact. Therefore, you should evaluate your level of activity on a regular basis to see whether you are carrying on a business of share trading.

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