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Ruling

Subject: Am I in business as a share trader?

Question 1

For the income year ended 30 June 20XX, were you carrying on a business of share trading?

Answer

No.

Question 2

For the income year ended 30 June 20YY, were you carrying on a business of share trading?

Answer

No.

Question 3

For the income year ended 30 June 20ZZ, were you carrying on a business of share trading?

Answer

No.

Question 4

For the income year ended 30 June 20XX, 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

No.

Question 5

For the income year ended 30 June 20YY, 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 ITAA 1997?

Answer

Yes.

Question 6

For the income year ended 30 June 20ZZ, 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 ITAA 1997?

Answer

Yes.

Question 7

For the income year end 30 June 20XX, are the gains or losses you made from your share transactions treated as capital gains and capital losses, and assessed under the capital gains tax (CGT) provisions of the ITAA 1997?

Answer

Yes.

Question 8

Can you claim your prior year losses from your share transactions that your have deferred in your 20XX and 20YY tax returns as deductions against your assessable income in your 20ZZ tax return?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010.

Year ended 30 June 2011.

Year ended 30 June 2012.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You commenced buying and selling shares on during the income year ended 30 June 200W.

During the income year ended 30 June 200V you made X share purchase transactions and X share sale transactions. The average holding period for your sold shares was in excess of 12 months. You declared your loss from your share transactions in your 200V tax return as a non primary production business loss. You deferred your loss as you did not meet the $20,000 income requirement under non commercial loss rules.

During the income year ended 30 June 20XX you made Y share purchase transactions and three share sale transactions. The average holding period for your sold shares was in excess of 10 months. You declared your loss from your share transactions in your 20XX tax return as a non primary production business loss. You deferred your loss as you did not meet the $20,000 income requirement under non commercial loss rules.

During the income year ended 30 June 20YY you made certain share purchase transactions and six share sale transactions. The average holding period for your sold shares was less than two weeks. You declared your loss from your share transactions in your 20YY tax return as a non primary production business loss. You deferred your loss as you did not meet the $20,000 income requirement under non commercial loss rules.

During the income year ended 30 June 20ZZ you made a certain amount of share purchase transactions and certain amount of share sale transactions. The average holding period for your sold shares was less than two weeks.

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 35

Income Tax Assessment Act 1997 division 70

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 102-15

Income Tax Assessment Act 1997 section 104-1

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

There are three possible scenarios as to how gains and losses from share trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows:

Business income

In this scenario your share trading activities would be considered to constitute the carrying on of a business. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997, while your expenses would be deductible under section 8-1 of the ITAA 1997.

Investment income

In this situation your share trading activities would be regarded as investing. Your shares would be considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares would be income as a capital gain. Any losses sustained on the disposal of your shares would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10 of the ITAA 1997.

Income from a profit making under taking or scheme

Your share trading activities would be considered to be a profit making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. Shares are sold in the very short term, and generally do not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1 of the ITAA 1997. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share trading activities amount to the carrying on of a business. If a business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each results in a different tax treatment.

Carrying on a business of share trading

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.

Investment income

Generally a capital asset is property that is used to produce income. Disposals of capital assets are subject to CGT provisions contained in the ITAA 1997 which includes a net capital gain as part of your assessable income.

A CGT asset is any kind of property. This specifically includes shares. If you dispose of shares that are capital assets (as opposed to revenue assets) you will need to apply the CGT provisions of the ITAA 1997 to any capital gain or capital loss that you make as a result of that disposal.

A share would be considered to be a capital asset if it was not purchased in the ordinary course of a share trading business, or was not purchased as part of a profit making undertaking or scheme.

A profit making undertaking or scheme

Taxation ruling 92/3 Income tax: whether profits on isolated transactions are income provides guidance on whether the profits and losses from transactions that have a profit making purpose are considered to be assessable under section 6-5 of the ITAA 1997.

In regards to share transactions, a transaction would be considered to be a profit making undertaking rather than a capital investment if the sole intention in purchasing a share is to sell it in the short term and realise a gain in share price. Short term would be considered a period from the same day to two weeks.

Non Commercial Loss Rules

Non commercial loss (NCL) rules only apply to a net loss generated from a business activity. If you were not carrying on a business of share trading you do not need to consider NCL rules.

Applying the indicators to your situation

Income year ended 30 June 200V

In the income year ended 30 June 200V you made two share purchase transactions, and sold two parcels of shares that you held in your share portfolio for an average period in excess of 12 months. Your share transactions during this income period lack the any of the characteristics that would indicate that a business of share trading was being carried on.

You shares were held for an extended period of time before sale and you made no other sales in this period.

In weighing up of the relevant indicators it is concluded that you were not carrying on a business of share trading during the income year ended 30 June 200V, and that your share trading should be accounted for under the CGT provisions of the ITAA 1997.

You cannot deduct from your assessable income a net capital loss for any income year. Any capital loss that you have made should be carried forward to be offset against a future capital gain.

Income year ended 30 June 20XX

In the income year ended 30 June 20XX you made three share purchase transactions, and sold three parcels of shares that you had held in your portfolio for an average holding period in excess of 10 months.

Your share transactions during this period lack commercial character. Your share transactions do not have the required level of repetition and regularity that would indicate that a business of share trading is being carried on, and your pattern of transactions are not being carried out in a manner that is similar to how a share trader would be conducting their activities. All six of your share transactions were conducted in a two month period during 200V, which indicates that your activity lacks the size, scale and permanency that would be expected of a share trading business.

In the weighing up of relevant indicators it is concluded that you were not carrying on a business of share trading during the income year ended 30 June 20XX, and that your share trading should be accounted for under the CGT provisions of the ITAA 1997. Any capital loss that you have made should be carried forward to be offset against a future capital gain.

Income year ended 30 June 20YY

In the income year ended 30 June 20YY you made nine share purchase transactions, and sold six parcels of shares. Your average holding period for these shares was less than two weeks. The average consideration for your share transactions was approximately $Z.

This level of transaction activity would not be considered to be carrying on a business of trading in shares. Again, the level of activity lacks commercial character, and your repetition and regularity of transactions is well below what would be expected of a share trader. All of your share transactions were conducted within a two month period during 20YY, which indicates that your activities lack permanency. The value of your transactions is generally low at around $X on average, which indicates that your activities are also on a small scale.

In the weighing up of all the relevant indicators it is concluded that you were not carrying on a business of share trading during the income year ended 30 June 20YY. However, as you have turned over your shares in short time frames your share transactions are more in keeping with a profit making undertaking or scheme.

As a profit making undertaking or scheme any gains from your share transactions would be assessable as ordinary income, and would be assessable on revenue account rather than on capital account. Any gains would be included in your tax return as other income. Any losses would be deductions, and would be included in your tax return as other deductions. You must include a revenue gain or loss in your tax return in the year that it is incurred.

You cannot claim your expenses as 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.

As you are not carrying on a business you 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.

As you are not carrying on a business of share trading, you do not need to consider the application of the NCL rules to your situation.

Income year ended 30 June 20ZZ

In the income year ended 30 June 20YY you made nine share purchase transactions, and sold nine parcels of shares. Your average holding period for these shares was less than two weeks. Your average purchase consideration for your share transactions during this period was approximately $Z

The pattern of your share transactions for the year ended 30 June 20ZZ is very similar to your pattern of share transactions for the income year ended 30 June 20YY. Therefore, for the reasons outlined above, it is concluded that you were not carrying on a business of share trading during the income year ended 30 June 20ZZ, and your share transactions are considered to be the carrying out of a profit making undertaking or scheme.

As for the income year ended 30 June 20YY, you cannot treat your shares as trading stock, and any gain or loss must be calculated using the historical prices of your shares. You cannot claim general expenses as deductions if they do not relate specifically to a share transaction. However, you can offset the loss that you have incurred through your share transactions in the income year ended 30 June 20ZZ in your 20ZZ tax return against other assessable income earned in that income period.

As you are not carrying on a business of share trading, you do not need to consider the application of the NCL rules to your situation.

Other shares held by you on capital account

From the share transaction list that you have submitted to us it is apparent that you are selling some of your share holdings in the short term, while other stocks are being held for longer periods. Shares that you are holding for longer periods, generally for a period long enough for dividends to be received, are considered to be on capital account. The gains or losses from these holdings would be assessable under CGT provisions.

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