Edited version of private ruling

Authorisation Number: 1011641067360

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Ruling

Subject: Am I in Business- share trading

1. Are you carrying on a business as a share trader for part of the income year?

Yes.

2. Can you claim a deduction for the losses you have incurred 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 and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· a private ruling application

· a spreadsheet of your buying and selling transactions

· copies of trading statements

· a letter responding to a request for information from the Australian Taxation Office.

You hold a degree after studying economics, capital markets and financial management at an education facility.

You commenced buying and selling in the middle of the income year.

Before commencing the activity you conducted research by undertaking online courses, reading books on the share market, and securities and market economics. You also have previous experience in purchasing shares and with managed funds.

Your intention in undertaking this activity was earn short term gains to increase your income.

Your trading strategy was to identify which shares offered the best potential for price increases and actively traded shares with a view to selling them and taking profits when they increased in value. As part of your strategy you put in place stop loss and profit exit price to minimise any losses and to capture/realise profits.

Your decision whether to buy or sell shares was based on daily research, ongoing analysis and evaluation of the overall market as well as market segments.

You purchased mainly speculative shares in a number of industry sectors.

You use brokerage facilities on a daily basis.

You had one room of your residence dedicated to carrying out this activity which has a broadband and internet connection to your computer. You also have a scanner, fax, printer and copier and used online trading tools in connection with this activity.

You do not hold any shares for long term gains.

You kept records of all purchases and sales of the shares, trading statements and maintained a spreadsheet of the buys and sales.

You spent a substantial amount of time per week buying and selling shares.

You do not undertake any other income earning activity.

You initially invested a small amount of capital and this increased as you purchased more shares.

You have provided a copy of a spreadsheet of your trading transactions the information extracted from the spread sheet shows you traded frequently.

Shares were purchased in large and small volumes.

Some shares were brought and sold on the same day while other shares were brought and sold within a few days.

You sold all your shares and ceased this activity during the income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

There are two possible scenarios as to how the share/option trading activities can be treated for income tax purposes. These scenarios, and their consequences, are as follows:

(1) Business Income - In this scenario, you would be a share trader, the shares would be regarded as trading stock and any income/losses would be included in your assessable income.

(2) Investment/Speculator - In this situation, you would be regarded as a share investor or speculator. The shares would be capital gains tax (CGT) assets, any gains earned from the disposal of the shares would be income as a capital gain and any losses sustained from the disposals will be a capital loss. Any dividends and other similar receipts would be 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, 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.

Whether an activity is carried on as a business is a question of fact. This matter has been addressed in a number of court cases.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), 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 factors to be considered:

· 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 share trader

· 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, 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; AAT Case 4847 (1988) 20 ATR 3182 (Case W8) 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 dealing.

In contrast to that decision, Case X86, 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 he was a speculator in the share market.

Applying the criteria to your circumstances

In your case, you had previous experience in buying and selling shares as a share investor. You had undertaken research by reading books, accessing share trading courses online and drawing on knowledge gained while studying for a degree. You commenced buying and selling shares in part way through the income year. You do not have a business plan; however, you invested in shares with the intention of making short term gains.

You had a substantial amount of capital invested in the activity. Your buying and selling strategy relies on an overall market analysis and research and the monitoring of the market daily. You traded frequently and purchased shares in large and small volumes at varying share prices. You put in place stop loss measures to minimise any losses and profit exit prices to maximise any gains. The holding periods of the shares were short in comparison to the periods noted in Case W8.

You have an area set aside to undertake the buying and selling of shares and use a computer and other facilities to undertake the activity. You utilise the services of a number of brokers. You maintained records of your trading transactions and spent substantial amount of hours per week on this activity. You sold all your shares in the income year and ceased the activity.

After weighing up the above factors, and the circumstances surrounding your buying and selling of shares, the Commissioner considers you were carrying on a business of share trading for part of the income year.

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.

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