Edited version of private ruling

Authorisation Number: 1011626736006

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Ruling

Subject: Share acquisition and disposal

Question 1

Is income derived from share trading activities, business income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are the expenses incurred in deriving income from share trading activities an allowable deduction under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

The taxpayer is a fulltime permanent employee.

The taxpayer accessed savings in order to purchase some shares with the intention of making a profit in the long term.

The initial share purchases increased in value to a point where the taxpayer realised the profit.

During the relevant year, the taxpayer made around several share trades (purchases and sales) and a net profit.

The taxpayer intends to make a profit from her share trading, however does not consider that she is carrying on a business. The taxpayer considers her activities to be a hobby or entertainment. She has no intention of doing share trading on a full-time basis.

The taxpayer conducted no preliminary research prior to purchasing her first parcel of shares, nor did she purchase any equipment. The taxpayer's first parcel of shares were financial institution shares due to a long association with that institution.

The taxpayer has no prior experience or qualifications in relation to share trading or the stock market.

The taxpayer does not keep any records on company or sector performances or finances.

The taxpayer keeps records for tax purposes.

The taxpayer has a subscription to a stock market analysis firm which is her main source of information on recommended share purchases. The taxpayer also watches business programs and reads information on the internet.

The taxpayer spends a few hours a week on her share trading activities.

The taxpayer averages fewer than ten trades per week on an ad hoc basis. In one week she might make a slightly higher number of trades but then have no trades for the next few weeks.

The taxpayer does not have a separate home office.

The taxpayer was required to set up a trading account in order to conduct her trading activities.

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 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Issue 1

Questions 1 & 2

Income

Under section 6-5 of the ITAA 1997 your assessable income includes income according to ordinary concepts.

Deduction

Under subsection 8-1(1) of the ITAA 1997, a deduction is allowable for any loss or outgoing to the extent that:

a) it is incurred in gaining or producing your assessable income; or

b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

However, under subsection 8-1(2) of ITAA 1997 the deduction is denied if the loss or outgoing is of capital or capital in nature, or private or domestic in nature.

Capital

Sections 102-5 and 102-20 of the ITAA 1997 relate to capital gains.

Section 102-5 of the ITAA 1997 states that a person's assessable income includes any net capital gain for the income year.

Section 102-20 of the ITAA 1997 states that a person can make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens. The gain or loss is made at the time of the event.

Shares are included as CGT assets in section 100-25 of the ITAA 97.

Income/Deduction v Capital

The question at issue pivots on whether, during the relevant year, the taxpayer was carrying on a business of share trading.

If a business of share trading was carried on, the income would be included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 and any losses would be deductible under section 8-1 of the ITAA 1997.

If a business of share trading was not carried on, the taxpayer would be a share investor/speculator, in which case any gains made or losses incurred would be of a capital nature. Net capital gains would be included in the taxpayer's assessable income under section 102-5 of the ITAA 1997 and any net capital losses would be carried forward to future years under section 102-10 of the ITAA 1997 and applied to future capital gains under sections 102-5 and 102-15 of the ITAA 1997.

Carrying on a Business

Business is defined in section 995-1 of the ITAA 1997 as:

any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Whether the taxpayer's share trading activities amounts to carrying on a business is depended on the facts provided: FC of T v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689.

The tests of whether the taxpayer is carrying on a share trading business are based on the taxpayer's subjective purposes and the objective evidence provided. It is made by regarding the nature of the taxpayer's activities and the purposes for engaging in them. A determination is made on the general impression gained from various indicators of carrying on a business and the taxpayer's individual circumstances: Martin v. FC of T (1952) 10 ATD 37.

Whilst the existence of a business or otherwise is a question of fact, a number of factors have emerged from case law which are considered relevant in considering this question. These factors were brought together and relied upon in reaching the decision: Administrative Appeals Tribunal Case X86 90 ATC 621, and subsequently applied in Shields v. DFC of T (1999) ATC 2037 at 2043:

The relevant indicators are:

(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/her;

and more particularly in respect of share traders:

(a) repetition and regularity in the buying and selling of shares;

(b) turnover;

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

(d) maintenance of an office;

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

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

We consider that the taxpayer's share trading activities did have some characteristics of a business. For example:

(a) a reasonable amount of capital was invested;

(b) shares were mainly held for short term gains and not for the purposes of receiving dividend income; and

(c) there was repetition of activity although on a small scale.

However, we consider the overall impression, when considering the taxpayer's intentions together with the circumstances and all of the business indicators is that the activity was not conducted in a business like manner. The activity was conducted in a similar fashion to that of an investor or speculator in that:

(a) the taxpayer predominantly relied on professional advice to make decisions about the investments;

(b) limited time was spent on the activity (that is, 4-5 hours per week);

(c) the method of operation is simple;

(d) the taxpayer does not have a trading plan;

(e) the taxpayer does not have a contingency plan in place to absorb market downturns;

(f) the taxpayer has no experience or training in share trading or the stock market;

(g) the taxpayer has a full time occupation unrelated to the stock market industry;

(h) the taxpayer keeps records for tax purposes only; and

(i) the extent of the taxpayer's activities is such that she does not maintain a home office.

In addition, the taxpayer did not conduct any research or analysis of the companies' activities or performance in making her decisions to invest funds. The taxpayer has not demonstrated any intention to undertake the necessary analysis and research. This is illustrated by the taxpayer's reliance on professional advice from an analysis firm and opinions from media business reports to make decisions on investments. Further, the taxpayer has no intention to conduct share trading activities on a full-time basis, on the contrary the taxpayer considers the activity to be a hobby or entertainment.

Conclusion

Accordingly, we do not consider the taxpayer is carrying on a business of share trading, therefore the gains or losses made from the taxpayer's share transactions are of a capital nature and will be subject to the capital gains tax provisions.

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