Edited version of your private ruling

Authorisation Number: 1012514584166

Ruling

Subject: Business - Am I in business

Question 1

Is the entity carrying on a business of share trading?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on

1 July 2008

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.

For a number of years, the entity has been actively trading in shares on the Australian Stock Exchange ("ASX") with a view to profiting by investing in shares assessed to be capable of substantial price appreciation.

The managing director ("MD") undertakes a number of activities with respect to this trading which includes the following:

· The MD spends at least 5 hours daily (on weekdays) conducting substantial research and analysis and monitoring the ASX, market trends and announcements. The extensive research and analysis includes, but is not limited to:

o Monitoring the prices of certain resources then identifying shares in companies that produce these resources that may benefit from an increase in the price of the underlying resource:

o Identifying shares that are developing a certain new groundbreaking product that may be potential takeover targets;

o Perusing annual financial reports;

o Examining market price data for a particular such as its 52-week high/low;

o Examining market trends;

o Reading past performance and projected performance;

o Contacting the management of target companies;

o Attending annual general meetings;

o Conducting a risk for return analysis, and

o Assessing daily trades and conducting statistical analysis via:

§ Monitoring volumes (i.e. to differentiate between liquid and illiquid stocks)

§ Assessing price of entry based on desired purchase quantity

§ Comparison of the above factors with similar companies

§ Charting movement in price throughout the trading day

· The entity has purchase subscription to the financial publications; a list of publications was provided, which the MD reads to identify opportunities and/or confirm personal assessments made

· Trading based on different strategies. Examples of these are:

o Using his own valuation methodologies, the MD seeks to target any shares that they believe are undervalued at their current market price. Once identified, the entity will take up a position in the target company.

o Monitoring the buying and selling volume of a particular share - for example, they may identify a company which he believes is undervalued with weak selling volume and wishes to take up a position in. As such, they may purchase a large chunk of shares in order to soak up this weak selling volume. Consequently, anyone that wishes to purchase this share in the near future theoretically would have to pay a high price.

· The MD closely monitors and adapts strategies based on the performance and status of past and current trades and created a customised "share-tracker" database in Microsoft Access which allows them to ascertain the current position of the entity's trades. This database is quite detailed and enables the MD to track separate parcels of shares in the same company and identifies their purchase date and price. It also tracks brokerage costs and GST associated with each parcel. The entity continues to use this database to track its share trading activity.

In addition, the entity has employed substantial capital to fund its share trading activities which is comprised of its own funds, secured business loan agreements and a further overdraft facility which is drawn on as required.

Since 200X, the entity has purchased shares to the value of approximately $Y million. The entity has also provided information in relation to its share sale and purchase trading activities from year end 200Z to year end 20XX. Throughout those years, number of shares purchased and sold was in the millions which amounted to millions dollars of total cost and total proceeds. Due to its numerous trades in any given income year, the entity conducts these trades through its trading accounts held with brokers.

The entity has also provided the following documents to indicate the extensiveness and complexity of its share trading activities:

· research conducted of different companies in relation to the current share price, 52 week low prices and 52 week high prices

· sales and production forecast on continental coal which might affect the share prices

· analysis report on different companies which looks at profit and estimated share value

· strategy report which explains the broad strategy the entity adopts in its share trading activities

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 995-1

Income Tax Assessment Act 1997 Section 100-55

Income Tax Assessment Act 1997 Subsection 100-25(2)

ATO view documents

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?

Reasons for decision

Summary

The entity is considered to be carrying on a business of share trading.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a taxpayer's assessable income includes income according to ordinary concepts, referred to as ordinary income. Ordinary income includes revenue derived from the carrying on of a business. Profits from the sale of capital assets are generally not ordinary income.

Similarly, section 8-1 of the 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 income and losses are of a capital nature, they are generally accounted for under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. However, this definition does not provide any guidance for determining whether the nature, extent and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law.

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Whilst TR 97/11 is about carrying on a business of primary production, the indicators in TR 97/11, which have been developed by the courts of law, are used for all cases to determine whether activities constitute the carrying of a business. Paragraph 13 identified these indicators:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just 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 and 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 on in a businesslike manger such that it is directed at making a profit

· 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.

TR 97/11 further states that when considering whether a person is carrying on a business, all of the above indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavor or character. The weighting given to each indicator may vary from case to case.

In carrying on a business of share trading, the greatest weighting is given to the repetition and regularity of the activities and organization in a business like manner. For example, in the court case Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 91 ATC 4689; (1991) 22 ATR 344; a trader was held not to be carrying on a business of share trading, primarily because there was no pattern of buying and selling and a low volume and frequency of transactions.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 at 629, the 'business indicators' were consolidated and applied to reach a decision on the facts. The business indicators were subsequently applied in Shields v. Deputy Commissioner of Taxation [1999] AATA 4; 99 ATC 2037; (1999) 41 ATR 1042. At 2043, Block J reinforced the following:

'The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and…the determination is eventually base on the large or general impression gained.'

At 2043 and 2044, Block J further stated that the following factors are to be considered in determining whether a business of share trading was being carried on:

a) the nature of the activities and whether they have the purpose of profit-making;

b) the complexity and magnitude of the undertaking;

c) and intention to engage in trade regularly, routinely or systematically;

d) operating in a business-like manner and the degree of sophistication involved;

e) whether any profit or loss is regarded as arising from a discernible pattern of trading;

f) the volume of the taxpayer's operation and the amount of capital employed by him;

and more particularly in respect of share traders;

a) repetition and regularity in the buying and selling of shares;

b) turnover;

c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

d) maintenance of an office;

e) accounting for the share transactions on a gross receipts basis;

f) whether the taxpayer is engaged in another full time occupation.

As per the information provided, the entity has been trading in shares for a number of years with a view to profit by investing in shares that are expected to be capable of substantial price appreciation. In order to manage its share trading activities, the MD spends at least 5 hours daily to undertake systematic and extensive research and analysis in relation to the share market such as monitoring market trends and announcements, monitoring fluctuation of share prices, examining past and projected performance, reading financial reports and conducting risk of return analysis. The daily involvement of the MD's time and effort and the magnitude of the share trading activities undertaken by the MD suggest that the entity has a clear purpose of profit-making and is intend to trade regularly in a business manner.

The entity also uses sophisticated database in Microsoft Access to monitor its current position in its share trading activities. The database allows the MD to closely monitor and adapts investment strategies based on share performance. In addition, the entity has also employed substantial capital, secured business loan agreements and organised an overdraft facility in order to fund its share trading activities. The use of a sophisticated database to track details and the use of business loan and overdraft market shows that the entity operates its share trading activities in a sophisticated and business-like manner where a huge amount of capital is invested.

As provided by the reports on share sales and purchases from year end 200Z to year end 20XX, the entity has purchased and sold an enormous amount of shares which involved high amount of cost and proceeds. The information provided also states that due to the entity's numerous trades in any given income year, it conducts these trades through its trading accounts held with brokers. Therefore, the amount of money and volume of shares involved also shows the entity's regularity and repetition in buying and selling of shares.

In conclusion, after taking into account the circumstances in which the entity undertakes its share trading activities and comparing it to the business indicators as discussed in TR 97/11 and case law, it is considered that the entity is carrying on a business of share trading.

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