Edited version of your private ruling

Authorisation Number: 1011951149848

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Ruling

Subject: Am I a partner in a business of share trading

Question: For the year ended 30 June 2009 and 30 June 2010, were you a partner in a business of share trading?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2009.

Year ended 30 June 2010.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

You are employed in the accounting field and your spouse is also employed.

You and your spouse have a portfolio loan for a substantial amount that gives you access to funds for investing in share trading and houses.

For the year ended 30 June 20XX, you had a significant amount of share buy and sell transactions.

For the year ended 30 June 20XX, you had an even greater number of share buy and sell transactions.

You have a room set up with a computer and access to the internet.

You have a filing facility for Contract notes and research paperwork and share trading books.

You have purchased several books on share trading to improve your skills on share trading.

You have an iphone for access to the share market when you are away from computer access.

You spend several hours every day reading the Financial Review, SMH and internet research on stocks through the Australian Stock Exchange and Commsec portals.

You also read the Business Review weekly.

You analyse market trends on stock and base your buy and sell share transactions on the information that you read. You look for trends in stock and market areas.

You trade weekly with the aim of increasing you and your spouse's combined income.

You have included a copy of the following documents which are to be read with and form part of the scheme for the purpose of this private binding ruling:

· Copies of your income tax return for the year ended 30 June 2009 and 30 June 2010;

· A summary of the share trading for the year ended 30 June 2009 in company groupings, titled 'Confirmation Contract Notes Summary';

· Commsec Contract Notes Summary - pages 1 to 29, for the account name of you and your spouse detailing share trading activity for the period June 2008 until to sometime in August 2011;

· Summary of all buy trades for the year ended 30 June 2009;

· Summary of all sell trades for the year ended 30 June 2009;

· Summary of all buy trades for the year ended 30 June 2010;

· Summary of all sell trades for the year ended 30 June 2010.

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,

Income Tax Assessment Act 1997 Section 35-10 and

Income Tax Assessment Act 1997 Section 35-30.

Reasons for decision

Summary

For the year ended 30 June 2009 and 30 June 2010, you were a partner in a business of share trading.

Detailed reasoning

For tax purposes, a partnership is an association of people who carry on a business as partners or receive income jointly. Taxation Ruling TR 94/8 Income tax; whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8) provides the ATO view on whether a business is carried on in partnership.

The following factors are used in deciding whether persons are carrying on business as partners in a given year of income:

Intention

· The mutual assent and intention of the parties

Conduct

· Joint ownership of business assets;

· Registration of business name;

· Joint business account and the power to operate it;

· Extent to which parties are involved in the conduct of the business;

· Extent of capital contributions;

· Entitlements to a share of net profits;

· Business records; and

· Trading in joint names and public recognition of the partnership.

The weight to be given to these factors varies with the individual circumstances. The above list of factors is not exhaustive and no single factor is decisive, although the entitlement to a share of net profits is essential.

In your case, after considering the above factors a partnership exists because:

· You have the intention to act as partners, (evidenced mainly by the share trading account being held in joint names of you and your spouse and by the facts provided in your application for a private binding ruling dated 12 August 2011);

· you and your spouse are both actively involved in the operation of the share trading business, (you spend several hours per day on this activity);

· you and your spouse have taken out a portfolio loan of a substantial amount to invest in share trading and houses.

· you and your spouse both have a 50% entitlement to a share of the net profits or losses;

· you and your spouse both made capital contributions to setting up the share trading business; and

· the share trading account is held in joint names.

Share trading

There are two possible scenarios as to how share 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 will 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'.

Whether a share trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained. The following case law supports the concept of impression gained about the distinction between a share market investor/speculator and someone who is carrying on a business of share trading.

In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) 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.'

And more recently re-iterated in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470:

"The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained."

The factors that are considered relevant in determining whether an activity is carried on as a business have 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 DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 (Shields v DFC of T (Cth)) and Smith 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 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; and

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

Three 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, 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 a recent decision handed down by the AAT on 5 August 2010, Smith, it was found that Mr Smith was not in the business of share trader during the year ended 30 June 2007 or 30 June 2008 when the following factors were taken into account:

· 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/loss is regarded as arising from a discernible pattern of trading; the volume of the taxpayer's operations and the amount of capital employed by him;

· repetition and regularity in the buying and selling of shares;

· turn-over;

· whether the taxpayer was operating to a plan, setting budgets and targets, keeping records;

· the maintenance of an office;

· accounting for the share transactions on a gross receipts basis;

· whether the taxpayer was engaged in another full-time profession.

The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit making because:

· he held his shares for periods longer than a share trader generally would;

· took DRP's and dividends;

· his activities did not demonstrate to the Tribunals satisfaction repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business;

· the applicant did not maintain a separate office;

· the applicant worked fulltime in a very responsible position at Babcock & Brown. He qualifying this by stating "although I do not put much weight on that, I was concerned that he was unable to indicate what kind of time he spent on buying and selling shares".

· he did not keep any separate accounting but relied on third party systems (BT and the WBC platform).

The tribunal concluded that "The evidence points strongly to, and my overall impression is, that Mr Smith was not conducting a business either in 2007, or in 2008, that he was not in business, and not in the business of share trading. I was satisfied that he had more disposable income than previously, and invested it in shares as an investor might. I have preferred the submissions of the Respondent in that regard".

To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

Conclusion - Applying the criteria to your circumstances

The factors or indicators that give the overall impression that you are carrying on a business of share trading for the year ended 30 June 2009 and 30 June 2010 are:

· you had a profit making intention;

· you did not hold shares for long periods of time and traded shares in a regular, routine and systematic manner;

· you operated in a business like manner, that is you followed your business plan and used a degree of sophistication, your trading was not left to chance;

· there was a discernable pattern of trading, you trade every week;

· you injected a significant amount of capital into your trading activity, (you and your spouse took out a portfolio loan for a substantial amount so that you had funds available for your share trading activity;

· there was high number of trades and a high turnover;

· you maintained a separate home office and had a dedicated computer for carrying out your share trading activities; and

· you spend several hours every day on your share trading activities researching stocks and analysing the market, you then base your buys and sells on this information.

The overall impression gained is that you were in the business of share trading for the year ended 30 June 2009 and 2010.

As you are in the business of share trading any gains will be assessable income under section 6-5 of the ITAA 1997 and any losses will be deductible under section 8-1 of the ITAA 1997.

Note 1: Non commercial loss rules

You will need to consider the non-commercial loss rules and how they apply to partners in a business partnership. The following facts sheets:

· Non-commercial losses: overview;

· Non-commercial losses: the assessable income test; and

· Non-commercial losses: partnerships

have been included for your reference and are located on the ATO website, www.ato.gov.au.

Specifically, you will need to pay attention to the income requirement and the assessable income test, a brief summary follows:

Non-commercial losses: partnerships

If you have a net loss from a business activity you carry on as an individual, either as a sole trader or as a partner in a partnership, the non-commercial loss rules will apply. These rules determine whether you can use your business loss to offset income from other sources.

Partners and the income requirement

For the 2009-10 and later income years, you first need to meet the non-commercial losses income requirement.

You meet the income requirement if as an individual your income for non-commercial loss purposes is less than $250,000.

Income for non-commercial loss purposes is the sum of your:

· Taxable income (ignoring any business losses);

· total reportable fringe benefits;

· reportable superannuation contributions; and

· total net investment losses - including financial investment losses and rental property losses.

If you meet the income requirement, you need to satisfy one of four tests, to work out if you can offset your loss from a partnership against your other income.

The four tests are;

· Assessable income test;

· Real property test;

· Other assets test; or

· Profits test.

Partners and the assessable income test

If you are a member of a partnership and all the other partners are individuals, the assessable income of the whole partnership must be at least $20,000 before the individual members can deduct losses.

Note 2: Australian Business Number (ABN)

Enclosed is a fact sheet providing information about ABN's and whether or not entities are entitled to an ABN number.

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