Edited version of your private ruling

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Ruling

Subject: Am I in business as a share trader?

Question 1

For the income year ended 30 June 2012, were you carrying on a business of share trading?

Answer

No.

Question 2

For the income year ended 30 June 2012, are the gains or losses you made from your share transactions treated as profits or losses made from a profit making undertaking or scheme, and assessed under sections 6-5 and 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012.

The scheme commenced on

1 July 2011.

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 commenced buying and selling shares through your broker in late 2011.

You followed a strategy known as 'momentum trading' to assist you in deciding when to buy and sell your shares. Momentum trading looks to the volume of a shares trading to identify stocks that will increase in value in the very short term, and would generally be sold within a few days of purchase.

In the income year ended 30 June 2012 you closed out (bought and sold within the same period) less than X trades. Of these trades most were closed out within two weeks of purchase, while some were closed out within one day or less.

Your share transactions have incurred costs that include brokerage, data fees, internet, home office and books.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 70

Reasons for decision

Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on.

Taxation Ruling TR 97/11 income tax: am I carrying on a business of primary production? (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

· Whether the activity has a significant commercial purpose or character,

· Whether the taxpayer has more than 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 repetition and regularity of the activity,

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

· Whether the activity is planned, organised and carried out in a business like manner,

· The size, scale and permanency of the activity,

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

In your case you are carrying on an activity of buying and selling shares.

Whether the activity has a significant commercial purpose or character

The activity of buying and selling shares is a commercial activity, particularly where shares held in the short term only for resale at a profit and no dividends are received. However, given the relatively low level of your transactions it would be considered that your activities lack a significant commercial purpose or character.

Whether the taxpayer has more than an intention to engage in business

You had more than an intention to engage in your activities, and did in fact buy and sell shares on a number of occasions during the income year ended 30 June 2012.

Whether the taxpayer has a purpose of profit as well as a prospect of profit

You had both a profit purpose as well as a prospect of profit.

Whether there is repetition and regularity of the activity

You purchased shares on less than X occasions, and sold shares on less than X occasions during the income period ended 30 June 2012. The majority of your share sales took place in a particular month when you made approximately half of your total sales. Your share transactions during the rest of this period were at a considerably reduced level. Although there is a degree of repetition and regularity in your share transactions, overall this amount of repetition and regularity would not be considered to be at a level that would indicate that a business was being carried on.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

You have a business plan in place and have a realised short term capital gains, while minimising losses buy selling when your stop loss limits were reached. You are also relying on your own market analysis to guide your decisions. However, a share trader would also realise their profits through larger volumes in trading to make a suitable profit over a short term.

Although your transactions are conducted in a way similar to a share trader, your low repetition and low value of share trades do not support that your activities are carried out in a way similar to the ordinary trade of your business.

The size, scale and permanency of the activity

The majority of your trades were completed in late 2011 and early 2012.

For the rest of the income period 30 June 2012 your share trading activity was very low, with your share purchase frequency ranging from nil to less than ten purchase transactions, and nil to less than ten sale transactions.

The values of your share transactions ranged up to approximately $Y, with an average value of around $Z.

The frequency and the size of your share transactions do not exhibit the size and scale that would be expected of a business of share trading.

As the bulk of your trading was completed in a two month block within a 12 month period, it would not be considered that your trading exhibits the permanency that would be expected of a business of share trading.

Accordingly, the size, scale and permanency of your share transactions would not support that you are carrying on a business of share trading.

Whether the activity would be better described as a hobby, recreational or sporting activity

Your trading activities would not be better described as a hobby, recreational, or sporting activity.

Your activities do have some of the characteristics of a business as you have a degree of repetition and regularity, and a profit motive, and a business plan. However, your activities lack commercial purpose and character, and the size, scale and permanency of your share purchases do not support that you are carrying on a business of share trading.

Conclusion

The weighing up all of the relevant factors would then indicate that a business of buying and selling shares is not being carried on.

In considering whether or not your share transactions should be accounted for on capital or revenue account weight has been given to the fact that you have held your shares for very short periods of time, and you have not received any dividend income from the shares that you have purchased. This demonstrates that your relevant purpose in purchasing shares is to gain a profit on the selling price, as opposed to gaining an income stream through dividends.

Your share transactions would be considered to be a profit making undertaking or scheme, and are ordinary income. Your gains would be assessable under section 6-5 of ITAA 1997, while your losses would be deductible under section 8-1 of the ITAA 1997.

Note on calculating your gain or loss when your share transactions are not considered a business

Although you can include a the loss incurred from your share trading during the income year ended 30 June 2012 in your 2012 tax return to be offset against your other assessable income, you cannot claim your expenses as a part of these losses, unless they can be directly attributable to a particular transaction. This means that you can claim brokerage, as that relates specifically to a particular transaction, however you cannot claim deductions for data fees, internet, home office or other expenses.

You also cannot treat your shares as trading stock as per division 70 of the ITAA 1997. Your profit or loss from each transaction needs to be calculated from the historical purchase price and the historical sale price of each share purchased and sold.

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