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Edited version of private ruling
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Ruling
Subject: Share trading
Question:
For the year ended 30 June 2010, were you carrying on a business of share trading?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 2010
Relevant facts and circumstances
During the relevant income year, you performed a number of share market transactions.
Your purchases totalled $X and your sales totalled $Y. The longest period you held a share for was X days and your average holding period was around Y days.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature.
Where losses are of a capital nature, they are generally accounted for under the capital gains tax provisions in Part 3-1 of the ITAA 1997.
The distinction between a share market investor and carrying on a business of share trading has been established in the body of law through many court cases. In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, the following were stated as indicators of carrying on a business:
- the nature of the activities and whether they have the purpose of profit-making;
- the complexity and magnitude of the undertaking;
- an intention to engage in trade regularly, routinely or systematically;
- operating in a business-like manner and the degree of sophistication involved;
- whether any profit or loss is regarded as arising from a discernible pattern of trading;
- the volume of the taxpayer's operation and the amount of capital employed by him;
and more particularly in respect of share traders:
- repetition and regularity in the buying and selling of shares;
- turnover;
- whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;
- maintenance of an office;
- accounting for the share transactions on a gross receipts basis;
- whether the taxpayer is engaged in another full time occupation.
In AAT Case 4847 (1988) 20 ATR 3182; (1988) 89 ATC 171, a taxpayer purchased twenty parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987. No share was held for more than five months. The Tribunal ruled the shares were purchased as trading stock in the carrying on of a business because the shares were bought and sold repeatedly with a view to making a profit and because all shares were sold within a year of acquisition.
In the Federal Court case of Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689, the taxpayer was held not to be carrying on a business of share trading because there was no pattern of buying and selling and a low volume and frequency of transactions. Here, the taxpayer, for the most part, held their shares for extended periods of time of more than twelve months and often for many years.
In your case, you were carrying on a business of share trading. Your activity fulfilled the primary criteria of a business, namely, repetition and regularity in the buying and selling of shares and sales turnover. It follows your share trading profits and losses are revenue in nature and you may offset your share trading losses against your ordinary income.
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