Edited version of private ruling

Authorisation Number: 1011535308361

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Ruling

Subject: Am I Carrying On A Business?

Questions and answers

1. Are you carrying on a business of share trading?

Yes.

2. Can you claim a deduction for the losses you have incurred from your Contract For Differences (CFD) trading activities?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are employed as a full time salary earner and your occupation is of benefit to your share trading activities.

You trade CFDs after hours.

You have funded your share trading activities with your own funds. The first transaction was made in the last financial year. You made a loss and filed net capital losses in your income tax return.

You established a home office which is clearly identifiable as a place of business. The home office area is not readily suitable or adaptable for use for private or domestic purposes in association with the home in general as it is set up as a professional business office. The home office is used exclusively for your share trading activities. You purchased a designated personal computer with dual monitor for trading uses. You purchased office supplies and equipment including printer with facsimile capability, a telephone and filing cabinets.

You conducted weekday trading for between three to four hours per day and five hours on Saturday and Sunday analysing the market including charting, stock market report, broker research papers and financial news report on television to assist you in your trading activities.

You have a business plan. Your objectives were to identify the market trend and take on a trading position to enable you to make a profit by holding the stock for a very short period of time.

You traded on a regular basis making in excess of 1500 transactions, split equally between buying and selling trades. All transactions were conducted online through a CFD provider.

You have provided trading statements to support your application. These statements show repetitive trading transactions of varying amounts.

Your trade activities have resulted in a loss made up of the trade loss, net interest and commissions and fees.

You have provided correspondence from your online CFD provider which provides general advice and direction towards Australian Taxation Office Taxation Ruling 2005/15 (TR2005/15).

You will use fixed rate method to compute running expenses of your home office.

Have you not established a business banking account as there are minimal banking transactions at present. You have been transferring funds you're your personal bank accounts. You intend establishing a business banking account to segregate private and business funds in near future as banking transactions increase.

As your trading activities are more successful, you intend operating full time in the business of trading from your home office.

You intend registering for an Australian Business Number when you have progressed to full time share trading.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Question 1

In order to determine if you are carrying on a business, the term 'Business' is defined as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The business indicators were applied in Shields v. Deputy Commissioner of Taxation [1999] AATA 4; 99 ATC 2037; (1999) 41 ATR 1042 Block J said:

· 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, and more particularly in respect of the activity

· repetition and regularity in the buying and selling of stock

· 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, and

· whether the taxpayer is engaged in another full time occupation.

Two cases provide examples of the application of these factors by the Administrative Appeals Tribunal (AAT).

In Case W8 89 ATC 171; (1988) 20 ATR 3182 a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share trading.

In contrast to that decision, Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market.

In your case, you have a fair amount of capital invested in the activity. You do have a business plan and you traded in CFDs for short term gains with the intention of making a profit.

Your buying and selling strategy relies on research and advice provided by brokers detailed in research papers, you analyse the stock market report and utilise information contained in the financial reports on television. You conduct daily market research and chart performance. The trading activities outlined in the trading statements show you traded repetitively with a regular turnover. The holding periods of the CFDs were usually short.

You have established a home office as an area set aside to undertake your trading activities which has a computer resource allowing you access to brokers websites and trading online. You consider the home office area is readily identifiable as a place of business and not readily suitable or adaptable for use for private or domestic purposes in association with the home. The home office is used exclusively for your share trading activities. You maintained records of your activities. You are employed full time and dedicate a substantial amount of time every day to this activity.

After weighing up the above factors, and the circumstances surrounding your buying and selling of CFDs, the Commissioner considers you were carrying on a business for the purpose of profit making during the period you were engaged in this activity.

Question 2

Income

As you are considered to be carrying on a business, the income from the activity is assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The losses related to the activity are allowable as deductions under section 8-1 of the ITAA 1997. You will need to complete the Supplementary section of the 2009-10 TaxPack at section 15 and 16 and read the recommended publications to enable you to complete your return accurately.

Home Office Deductions

Taxation Ruling 93/30 (TR 95/30) provides guidance on the distinction between an area used specifically for conducting a business and an area of the home that could also be utilised as a study.

Paragraph 2 advises that as a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. The exception to this rule is where part of the home is used for income producing activities and has the character of a "place of business". In this case some of the expenses incurred, such as rent, interest, repairs, house and contents insurances, rates and property taxes may be partly deductible.

In determining whether an area of the home has been set aside and has the character of a place of business we consider:

· the area is clearly identifiable as a place of business

· the areas is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally

· the area is used exclusively or almost exclusively for carrying on a business, or

· the area is used regularly for visits of clients or customers.

Deductible expenses can be divided into two broad categories:

· Expenses relating to ownership or use of a home which are not affected by the taxpayer's income earning activities, for example occupancy expenses. These include rent, mortgage interest, municipal and water rates and house insurance premiums.

· Expenses relating to the use of facilities within the home, such as running expenses. These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office.

If an area of the home has the character of a place of business, some of the expenses from both categories may be claimed as a deduction. In most cases, the apportionment of expenses should be made on the floor area. The amounts allowable as deductions are the additional expenses incurred as a result of your share trading activities.

In your situation, we consider that your home office was established to enable you to undertake your share trading activities. We consider the area set aside for these activities meets the definition of a 'place of business'. The room is used solely for your share trading activity and whilst you do not have clients or customers that regularly visit, this is not in the nature of your business.

As you do perform income producing activities at home, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for the running costs of your home office to the extent the costs incurred relate to your share trading activities. You will need to complete the Supplementary section of the 2009-10 TaxPack and read the recommended publications to enable you to complete your return accurately.

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