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Ruling

Subject: Am I in business as a share trader

Question 1:

For the year ended 30 June 2010, were you carrying on a business of share trading?

Answer 1:

No.

Question 2:

For the year ended 30 June 2011, were you carrying on a business of share trading?

Answer 2:

No.

This ruling applies for the following period:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You state that you first commenced buying and selling shares through a broker some years ago and this activity commenced with a small capital outlay.

You have access to additional capital through an equity loan facility.

You currently have a small amount of capital invested in shares and about the same amount in cash.

Your objective is to trade for profit to pay for personal schooling fees and mortgages. Once these are paid, your objective is to be able to trade shares enough to go part time in your current job.

You have no written business plan; however your plan is based on researching companies that show potential for growth and to trade to achieve profitable opportunities according to the following strategies:

Earn profits from buying shares at a lower price and selling the shares at a higher price. You believe these opportunities present themselves in the market in the form of discounted share prices and free attaching options in:

1) share purchase plans;

2) rights issues; and

3) shortfall shares.

Other strategies include taking advantage of

· stock market corrections; and

· averaging down or up.

You believe that your share trading strategy development is now at a level that allows reasonably automatic trading.

You do not purchase shares as long term investments.

You do not purchase shares for the purpose of earning dividends.

You had the following share buy and sell transactions in the following years:

Sometime during the year ended 30 June 2011 you commenced your share buying and selling activity through your family trust.

You have a designated home office, which contains a variety of office furniture, a computer, internet modem, four in one printer, and telephone. Your out of office equipment includes a laptop and an iphone.

You have a certificate IV in Small Business Management and maintain all trading and business transactions on the computerised accounting program MYOB.

You keep monthly summaries of the trades, annual financial reports, all buy and sell contracts and business transaction are recorded and filed.

On average you spend fifteen hours per week on your share buying and selling activity, however this reduces to about six hours per week during lower activity periods.

You work full time in an occupation and spend about thirty eight hours a week on this.

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:

· Share trading questionnaire signed and dated by your tax agent on your behalf on a certain date.

· Profit and loss statement for the period 1 July 2009 to 30 June 2010.

· CommSec account in your name summarising the account transactions for the period 1 July 2009 to 30 June 2010.

· Purchases and payables journal for the period 1 July 2009 to 30 June 2010.

· Purchases (supplier detail) for the period 1 July 2009 to 30 June 2010.

· Sales and Receivables Journal for the period 1 July 2009 to 30 June 2010.

· Sales (item detail) for the period 1 July 2009 to 30 June 2010.

· Untitled excel spreadsheet summarising transactions for the period 1 July 2009 to 30 June 2010.

· CommSec buy and sell contracts for the period 1 July 2010 to 30 June 2011.

· Email from your tax agent of a certain date.

· Profit and loss statement for the period 1 July 2010 to 30 June 2011.

· CommSec account in your name summarising the account transactions for the period 1 July 2010 to 30 June 2011.

· Sales and Receivables Journal for the period 1 July 2010 to 30 June 2011.

· Sales (item detail) for the period 1 July 2010 to 30 June 2011.

· Untitled excel spreadsheet summarising transactions for the period 1 July 2010 to 30 June 2011.

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

Am I in business as a share trader

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. 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 Tribunal's 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. The AAT Member qualified 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.

Applying the criteria to your circumstances

For the year ended 30 June 2010 and 30 June 2011 it has been determined that you were not carrying on a business of share trading.

Year ended 30 June 2010

The factors or indicators that give the overall impression that you were not carrying on a business of trading in shares for the year ended 30 June 2010 are as follows:

· There was a small number of trades for the year, only 15 buys and 15 sells;

· Your buying and selling was predominately in the shares of one company or options in that company. Share traders more often than not will have diversity in the shares that they buy and sell;

· The manner in which you traded shares did not show regularity, a routine and/or a system.

The following table for the calendar months in the year ended 30 June 2010, shows that there was not a discernable pattern of trading, in fact in four months there was no trading at all.

You do not have a written business plan, however in answers provided in your share trading questionnaire you state at question three that your plan is based on researching companies that show potential for growth and to trade to achieve profitable opportunities according to your strategies listed at question eight. You list your strategies at question eight as:

'…earn profits from buying shares at a lower price and selling the shares at a higher price. You believe these opportunities present themselves in the market in the form of discounted share prices and free attaching options in:

1) share purchase plans;

2) rights issues; and

3) shortfall shares.

Other strategies include taking advantage of

· stock market corrections; and

· averaging down or up.'

You also state in your share trading questionnaire that your share trading strategy development is now at a level that allows reasonably automatic trading.

At question nine of the share trading questionnaire you state that you make decisions to buy shares in companies based on market scans through the online share market application 'Iress', based on the buy or sell parameters per the strategy setup.

You state that shares are sold and the number of trades are reduced when the share market takes a downturn.

It is very unclear about whether you adhered to your share strategy given that you predominately bought and sold shares in company 'A' only, this represented (X % of your sales, with the company 'A' options adding another Y% to total sales). Similarly your purchases where predominately in company 'A' shares (about X% and company 'A' options (Z%). Buying and selling shares in one company only is not indicative of a share trader.

As a result, after considering all of the above factors, the overall impression is that for the year ended 30 June 2010, your share buying and selling activity is indicative of a share investor and should be returned on capital account.

Year ended 30 June 2011

The factors or indicators that give the overall impression that you were not carrying on a business of trading in shares for the year ended 30 June 2011 are as follows:

· For the year ended 30 June 2011, quite simply there has not been enough trading to give the overall impression that you were carrying on a business of share trading for this year. Zero buy transactions and two sell transactions is not sufficient trading to categorise your share activity as a business in this year.

· There was clearly no repetition, regularity in your buying and selling of shares. You had two sells in November 2010, with no trading in the first four months of the financial year.

As a result, for the year ended 30 June 2011, your share buying and selling activity is indicative of a share investor and should be returned on capital account.

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