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Ruling

Subject: Am I in the business of share trading?

Question 1

Did the share trading activities which you carried on in partnership with your spouse, constitute a business?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You and your spouse had a joint bank account from which you purchased shares and deposited the proceeds of the sale of shares.

You and your spouse jointly contributed the capital required to fund the acquisition of the shares.

The partnerships share broker was a financial Institution.

There were a number of separate trades during the financial year.

The partnership kept accurate records of all its trades.

The partnership held the shares that it bought for short periods of time, usually only a few weeks.

The partnership consulted stock market information and closely monitored the prices of its shares.

Your spouse liaised with the broker and carried out the analysis for the partnership as your spouse had more experience than yourself.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

You will be eligible to claim deductions under Section 8-1 of the ITAA 1997 for losses made in relation to your share activities during the 2011-12 income year.

Detailed reasoning

The difference between a share holder (investor) and share trader (business)

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 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.'

This was re-iterated more recently 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.  

Applying the criteria to your circumstances

We have considered the relevant factors, as outlined above, when determining whether you were carrying on a business as a share trader during the 2011-12 income year. The factors or indicators that give the overall impression that you were carrying on a business of share trading for the year ended 30 June 2012 are:

Your partnership trading activities were carried out on a scale and in a manner such that they constituted business activities in accordance with the criteria set out in Taxation Ruling 97/11 (copy enclosed) Therefore, your income from the share trading activities is assessable under Section 6-5 of the ITAA 1997 and the outgoings are generally deductible.

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