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Ruling

Subject: Share trading

Question:

For the year ended 30 June 2012, were you carrying on a business of shares and currency trading?

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

During the year ended 30 June 2012, you made less than X sales of shares. Half of these sales, in relation to shares you held for 17 days, 15 days, 3 days; and 1 day, were profitable.

All but one of the non profitable share sales were of shares in one company which incurred a large loss. You purchased these shares in late 20YY and later sold them for around one-quarter of the amount you paid for them.

Your other sale was for shares where you sold them for about half of what you paid for them.

For one month during the 2011-12 financial year you performed less than Z currency trading transactions (i.e., less than Z buys and Z sells). In a separate month of the year (some months after the first month of activity) you performed a number of currency trading transactions. During the rest of the year you did not perform any currency transactions. Of these transactions the majority had small gains or losses. Your total loss from currency trading was less than $500.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 24-50

Income Tax Assessment Act 1936 Section 124ZN 

Income Tax Assessment Act 1936 Section 124ZO

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Where shares losses are from investment activity or of a speculative or one-off nature, they are generally accounted for under the CGT provisions in Part 3-1 of the ITAA 1997.

Administrative Appeals Tribunal Case 6297 (1990) 21 ATR 3747; Case X86 90 ATC 621 (AAT Case 6297) lists the indicators of a share trading business, as follows:

· 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 by him;

  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;

· whether the taxpayer is engaged in another full time occupation.

AAT Case 6297 also explains the nature of a 'speculator' in the stock market, as a person whose speculations were in the nature of individual forays in particular stocks with a view to resale. The sale of shares by the 'speculator' were deemed to be on capital account.

In AAT Case 6297, it was decided the taxpayer was not carrying on a business because of the small number of share transactions. Instead, it was decided the taxpayer was a speculator. During the relevant income year, only two lots of shares in two different companies were sold (which were part of six lots of shares bought in six companies in the previous income year, of which four lots were disposed of in that previous income year).

In No. 2 Board of Review Case M16, 80 ATC 98, it was confirmed that not all of the share holdings of a share trader are necessarily trading stock of a business. Here, the taxpayer claimed a deduction in his 1978 return for "losses from share trading'' incurred on the sale of shares all purchased in 1968. Although being treated as a share trader in general, the shares in question were not trading stock but investment assets.

In your case, you did not carry on a business of share trading because your share market activities did not exhibit repetition and regularity in the buying and selling of shares. You only made eight sales transactions. You also did not carry on a business of currency trading because you did not conduct the activity in a businesslike manner.

The profits and losses you made from your currency trading transactions were insignificant. This gives the impression your current trading was an experimental activity, to which you committed a negligible amount of capital and risk. Paragraph 41 of Taxation Ruling TR 97/11, which is about carrying on a business, states experimental or pilot activities do not amount to a business.

The majority of your loss was incurred in a speculative transaction, namely, the original purchase of shares in a company who were drilling a highly speculative well. Speculative losses are accounted for on capital account, i.e., they are capital gains tax losses.

More importantly the company was/is a 'Pooled Development Fund' (PDF).

Section 124ZN and section 124ZO of the Income Tax Assessment Act 1936 provides any capital gain or capital loss from a disposal of shares in a PDF is disregarded and shares in a PDF are not trading stock. As shares in a PDF are not trading stock, they cannot be included in a business loss.

To conclude, even if you did carry on a business of currency trading, this would not necessarily result in you carrying on a business of share trading or your shares being trading stock. Such a distinction is confirmed in No. 2 Board of Review Case M16, 80 ATC 98.

However, your loss on currency trading is a revenue loss because Taxation Ruling TR 2005/15 provides losses on financial contracts for differences and similar cash-settled derivatives are accounted for on revenue account under section 24-50 of the ITAA 1997.

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