Edited version of your private ruling

Authorisation Number: 1012314471519

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Ruling

Subject: Shares

Question and answer:

Were you carrying on a business of share trading?

No

This ruling applies for the following period:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were a stockbroker working for a financial planning/stock broking entity. You held a share portfolio and margin loan with the entity.

You had considerable capital for your share venture.

You transferred employment to another entity upon which your portfolios were transferred to ABC accounts traded through this entity.

ABC went into administration and then into liquidation.

Upon the collapse of ABC you did not trade much in the following year. Prior to the collapse of ABC, you made XX trades.

You made XX trades in 2010 and YY trades in 2011.

As at 30 June 2011, your portfolio was valued at a significant amount.

You have provided statements from a stock brokerage and financial services firm. These statements form part of the facts of this ruling.

The statements show that whilst your shares in some companies were bought and sold in about 3 months, the majority of your shares were held for between 18 and 24 months.

You did not have a written business plan each year. You had complete short term and long tern objectives.

You had a separate area of your home which you dedicated to share trading activities.

Your qualifications in relation to share trading activities include a Bachelor of Business and a graduate diploma from the Securities Institute.

Your profession for the years in question involved giving expert advice regarding share trading activities.

You determined your trading strategy based on your experience in the share trading industry.

You spent over 25 hours per week on share trading activities.

You have made the following statements:

· No shares were ever purchased with an intention to hold long term.

· The portfolio is assessed each day with respect to current and long term market risk factors.

· The only time you have not traded very often are when the BC collapse limited your funds and secondly when the market was not profitable based upon your ongoing reviews.

Basically you are trading or analysing nearly all the time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

There are two possible scenarios as to how the share 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 under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

(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 under section 6-5 of the ITAA 1997.

The question of whether a person was engaged in share trading is essentially based on the facts of their situation. 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 in Shields v. DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 (Shields v. DFC of T (Cth)) the following were stated as factors to be considered:

(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;

and more particularly in respect of share traders:

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

(h) turnover;

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

(j) maintenance of an office;

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

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

In order to appreciate the implications of these factors, it is necessary to briefly look at some of the more relevant cases.

In Case W8 89 ATC XX1; (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 5 months. A small loss made on 4 parcels was claimed as a deduction. The Administrative Appeals Tribunal (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 that he was a speculator in the share market.

The taxpayer was unable to satisfy the AAT that he had established a proper pattern of trading in shares and that the share trading was done in a regular, routine and systematic manner. This was despite arguments that he traded in speculative shares, received regular advice from his accountant, had discussions with his stockbroker and there was a continuity of business, the aim of which was to make a profit.

These cases give a good explanation of the difference between a share trader and a speculator/investor. A share trader was seen as one whose dealings were seen as part of a more extensive business of buying and selling shares. The transactions have the character of a continuing business enterprise. A speculator makes individual forays in particular stock with a view to resale. The difference was determined by following a two-stage test:

(a) Is there a discernible pattern of trading in shares?

(b) If not, is there an evident intention to trade regularly, routinely and systematically?

Characteristics of a business

The question of whether a taxpayer is carrying on a business is a question of fact and degree. There are no rigid rules for determining whether activities amount to carrying on a business, however, the courts have developed indicators that may be applied to a set of circumstances to help determine whether a business is being carried on.

Taxation Ruling TR 97/11 summarises indicators of whether a business is being carried on:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole.

Significant commercial purpose or character and prospect of profit

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

Upon the collapse of ABC you did not trade much in the following year. Prior to the collapse of ABC, you made XX trades. You made XX trades in 2010 and YY trades in 2011.

Although your long tem goal may be to make a profit, your share activities based on the facts given do not have a commercial feel.

Activities of the kind carried on in a similar manner to those of ordinary trade

Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry.

In your case from the information provided, it is not evident that you carried out your activities in a similar manner to others in this industry. For example, it does not appear that your provider re-valued your account each day and sent you a statement listing the total account balance at the close of trade. It would be expected that your analysis of the trades to take would be via a charting software package which you used to analyse the market. Further it would be expected that you would have had a template of indicators which you used to select stocks and/or indices to buy and sell. Thus it cannot be concluded that you carried out your activities in a similar manner to others in this industry.

Organised, systematic and business-like manner

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as having some form of forward planning to take account of contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

It would be reasonable to expect someone in the business of share trading to be involved in the study of daily and longer-term trends and the seeking of advice from experts.

Whilst it is acknowledged that it is your profession to give expert advice regarding share trading activities, you did not have a business plan each year with regard to your own shares.

We have noted that your qualifications in relation to share trading activities include a Bachelor of Business and a graduate diploma from the Securities Institute. It could be argued that these would benefit you in your employment, and not only your share trading activities. Your profession involves giving expert advice regarding share trading activities.

You determined your trading strategy based on your experience in the share trading industry.

You have a home office of specific area for conducting share trading activities and spend about 25 hours a week on share trading activities.

Whilst the above demonstrates several attributes which would be expected in a business, you have not shown that you had a business plan or that you carried out your share trades in a systematic and organised manner by as having some form of forward planning to take account of contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

Repetition and regularity

This indicator requires a taxpayer to demonstrate that the activities are conducted in a manner that displays repetition and regularity. Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions and the number of similar transactions.

In FC of T v. Radnor Pty Ltd, Hill J considered that the taxpayer was not carrying on a business of dealing in shares, primarily because there was no pattern of buying and selling the low volume and low frequency of transactions was emphasised in finding that a business was not being carried on.

Similarly, in Case X86, there was no pattern of buying or selling, and the taxpayer was not considered to be carrying on a business of share trading.

You have indicated that you did not trade much in the income year upon the collapse of ABC. You made XX trades in 2010 and YY trades in 2011. From the information provided, your activities lacked the frequency of transaction required to be a share trader.

This lack of repetition and regularity of trading would indicate that no share trading business was being carried on.

The size and scale of the activity

The activities should be of a sufficient scale to make the activity commercially viable. To satisfy this indicator, the activity should be of a sufficient scale to provide the taxpayer with a reasonable expectation of making a profit from the activity.

We agree that you had considerable capital for your share venture. As at 30 June 2011, your portfolio was valued at a significant amount.

However, from the information provided, there appears to be no application of a discernible system or method that would normally be expected of a share trader. It cannot be seen that there has been an input from detailed analysis of a particular share to determine buying and selling points.

The majority of the share activity is not indicative of a person carrying on a business of share trading.

Summary

After considering the above factors and your specific circumstances, it is considered that you were not carrying on a business as a share trader. Your activities possess several characteristics of a business. Your initial capital amount was a significant amount, you set aside a specific area of your home to conduct your activities, you possess qualifications, knowledge and experience in share activities which are also applied in your employment. Notwithstanding these points, your activities lacked significant repetition or regularity. The majority of your shares were held for between 18 and 24 months. You have not shown that you had a sophisticated share trading technique or a business contingency plan to cope with falling markets. You did not establish a proper pattern of trading in shares and your share trading was not done in a systematic manner. In conclusion you were a share investor for the years of income 2009 to 2011.

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