Edited version of your private ruling

Authorisation Number: 1012340116285

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Ruling

Subject: Am I in business as a share trader?

Question 1

Are you carrying on a business as a share trader?

Answer

No.

This ruling applies for the following period

Income year ended 30 June 2010

Income year ended 30 June 2011

Income year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

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 on at some time during the income year ended 30 June 20XX.

During the income years ended 30 June 2010, 30 June 2011, and 30 June 2012, you made a number of share transactions

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 do not carry out any forward planning or budgeting in relation to your share transactions. You do not have a trading strategy in place. However, you do study market developments and monitor your shares daily. You also look at a company's performance and annual reports when deciding which shares to invest in.

You have access to market information and publications via the internet, newspapers, and television.

You do not invest more than $X in any one company, and you do not accept a loss of more than $Y to $Z. You are not using stop loss limits to mitigate your losses.

You use an on-line share broker to complete your share transactions.

You keep accurate records of all of your share transactions, and retain share trading statements, bank statements, computerised profit and loss statements and transaction reports.

You spend at numerous hours per week on your share transactions, and also work at a full time occupation. However, the hours of your full time occupation are variable, and this often leaves you with surplus time to spend on your share transactions.

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:

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 (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.

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.

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 relatively low level of sale transactions that you are completing indicates that your share transactions lack 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 a profit purpose as well as a prospect of profit.

Whether there is repetition and regularity of the activity

This is considered an important indicator when determining whether or not a business is being carried on. Of particular importance in the case of determining if a business of share trading is being carried on is the level of repetition of share sales activity.

For the income year ended 30 June 20XX year you conducted less than Y share purchase transactions, and no share sale transactions. Although there is a level of repetition in your purchase activities, your lack of sales do not indicate that a business of share trading was being carried on during this period.

For the income year ended 30 June 20XX you conducted less than Z share purchase transactions, and less than Y share sale transactions. A level of less than X share sales for a 12 month period equates to less than two sale transactions a month, which would be considered to be a low level of transactions. This level of sale transactions does not indicate that a business of share trading was being carried on during this period.

For the income year ended 30 June 20YY you conducted less than X share purchase transactions, and less than X share sales transactions. A level of X share sales transactions over a 12 month period equates to less than two transactions a month, which is again a low level of transactions. This level of sale transactions does not indicate that a business of share trading was being carried on during this period.

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

Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be:

· a share trading strategy in place,

· mitigation of risk through short holding periods and strict adherence to taking gains at a certain level and cutting losses at a certain level,

· a high turnover of shares,

· substantial levels of repetition and regularity of share sales,

· high value of share transactions to take advantage of small movements in price.

Although you have purchased a significant quantity of shares in total during the relevant years you have not sold shares in similar quantities. Consequently, the portfolio of shares held by you has increased from year to year, while your sales have not increased in the same proportions.

You do not appear to be holding shares until a particular price point is reached, turning over shares in high volumes, or purchasing large parcels of shares.

Your average holding periods for shares sold is over V days during the income year ended 30 June 20XX, and over W days during the income year ended 30 June 20YY. You had no sales during the income year ended 30 June 20ZZ. These lengthy holding periods indicate that you are not realising short term capital gains, or using stop loss limits to limit your losses.

It is not considered that you are conducting your share transactions in the same manner as would be expected of a share trader.

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

You are keeping very good records of your share transactions, however you are not undertaking any planning or budgeting activities, and do not have an overall strategy that is guiding your share transactions.

The size, scale and permanency of the activity

Share trading that is being conducted on a small scale is more likely to be considered investing, however a share trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

Your share transactions are on average between $Y and $Z in value. This would be considered to be a reasonable transaction value. As you have been buying and selling shares for a period in excess of two years your activities do exhibit permanency.

However, the frequency of your sales transactions falls short of what would be expected when carrying on a business of share 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 share transactions would not be better described as a hobby, recreational, or sporting activity.

Conclusion

Your activities do have some of the characteristics of a business as your activities have a commercial character, a profit motive, and you are keeping good records of your activities. However, your transaction level lacks the repetition and regularity that would be expected of a share trader. The size and scale of your activities also fall short of indicating you are carrying on a business of share trading, and your activities are also not being conducted in a way that would be expected of a share trader. Although you are keeping very good records of your activities, your activities lack the planning and organisation that would be expected in a business of share trading.

The weighing up all of the relevant factors indicates that a business of share trading was not being carried on for the relevant years.

Your share transactions are more in keeping with a share investor who is building their share portfolio, and has realised some of their share holdings in the process.

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

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