Edited version of your private ruling

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Ruling

Subject: Am I in business as a share trader?

Question:

For the income year ended 30 June 2012 were you carrying on a business as a share trader?

Answer:

No.

This ruling applies for the following period:

Income year ended 20 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 the activity of buying and selling shares during the income year 30 June 2012.

During the income year ended 30 June 2012 you made a number of share transactions, a summary of which follows:

You use your own funds to buy your share holdings. You do not have a loan facility, and you do not have access to any additional capital.

You trade in ASX300 stocks, as they offer you daily trading volume to make short-term trading feasible.

You have a share trading strategy in place based on popular share trading literature.

You usually invest around less than $X in each of your share trades.

You have access to market information and publications, and use charting tools to analyse your share transactions.

You have utilised stop losses on occasion, but they are not always part of your share transacting.

You use an on-line broker.

You keep accurate records of all of your share transactions, and use spreadsheets to work our break even points and to monitor performance of past trades.

You spend less than ten hours per week on your share transactions, and also work at a full time occupation.

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 102-5

Income Tax Assessment Act 1997, section 102-10

Reasons for decision

There are two 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:

1. 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 Income Tax Assessment Act 1997, while your expenses would be deductible under section 8-1 of the ITAA 1997.

2. Investment
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.

To determine which of these treatments applies to your situation it is necessary to make a determination on whether or not your share trading activities amount to the carrying on of a business.

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.

It is then necessary to apply the criteria as outlined in TR 97/11 to your circumstances to determine if your activities amount to a business being carried on.

Whether the activity has a significant commercial purpose or character

The activity of buying and selling shares does have a commercial character as your transactions are conducted with the world at large. However, the low value of your transactions as well as your low level of repetition and regularity do not support that your activities have a commercial purpose.

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 complete share purchases and sales.

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 or profit, and your share purchases and sales did in fact generate a small profit before your costs were applied.

Whether there is repetition and regularity of the activity

For your share transactions you conducted less than Y buying transactions, and less than Y selling transactions over a 12 month period.

Although this level of activity does show some repetition and regularity it is falls short of what would be expected in the usual course of trade for a business of share trading. The repetition and regularity of your activities is not indicative of a business 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

It would be expected that carrying on a business of share trading would show some or all of the following attributes:

· Generally trades would be conducted using an on-line trading facility.

· Most brokers would have access to finance facilities to access capital quickly when required.

· A share trader would be trading on at least a daily basis.

· A share trader minimises the risks involved in their activity by holding shares in the short term, short term gains are realised, and losses are not tolerated past a certain level. A short term holding period would be approximately two weeks or less.

· A share trader would generally look to shares other than the ASX300 in their trading activities, as the stability of these shares make it difficult to realise a profit in the short term.

In your case you are not using a finance facility in your share trading, and your trading regularity is far short of what would be expected for a share trader. The shares that you have sold during the income year ended 30 June 2012 were held for an average of 48 days, and you preferred to trade in ASX300 shares.

Therefore, it is not considered that your share transactions are being conducted in a way similar to that of a share trader.

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

Your activities appear to be planned and organised in a business like manner in that you have set times that you spend on your activity, and you have a strategy in place that governs your share buying and selling.

The size, scale and permanency of the activity

Your share transactions are generally less than $X in value. This would be considered to be a low trade value. The frequency of your transactions falls short of what would be expected when carrying on a business of share and commodities trading. The size and scale of your activities do not indicate that a business is being carried on.

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 commercial purpose, a profit motive, and are keeping good records of your activities. However, your low level of transactions lack repetition and regularity, as well as the size and scale that would be expected when carrying on a business of share trading. Your activities are also not being conducted in a way that would be expected of a share trader.

The weighing up all of the relevant factors indicate that a business of share trading is not being carried on.

Your share purchases and sales would be considered to be investment activities. Any profits or losses from your share investments would be subject to capital gains tax provisions contained in the ITAA 1997.

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