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Ruling

Subject: Interest deductibility after cessation of share trading

Questions and Answers:

1. For the period from 20xx to 20xx inclusive, were you carrying on a business of share trading?

Yes.

2. For the income years after you ceased carrying on a business of share trading, can you claim a deduction for the portion of interest expenses incurred in relation to connected borrowings?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You borrowed money from the bank to invest in the share market. The vast majority of shares you bought and sold were in speculative companies. You bought and sold the shares on a regular and repetitive basis.

Your activity resulted in you making a loss and you are now paying back a bank loan which relates to the purchases of shares.

You also have an economic inability to repay (extinguish) the borrowing in full for the following reasons:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

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 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.

The Tax Office website www.ato.gov.au has a webpage titled Carrying on a business of share trading, which includes the following two examples that serve to distinguish between a share trader (carrying on a business) and a shareholder (investing on capital account):

Molly is an electrical engineer. After seeing a television program, Molly decides to become involved in share-trading activities.

Molly sets up an office in one of the rooms in her house. She has a computer and access to the internet.

Molly has $100,000 of her own funds available to purchase shares and, in addition, she has access to a $50,000 borrowing facility through her bank.

Molly conducts daily analysis and assessment of developments in equity markets. The resources she uses include financial newspapers, investment magazines, stock market reports, charts and trend lines. Molly's objective is to identify stocks that will increase in value in the short term to enable her to sell at a profit after holding them for a brief period.

In the year ended 30 June 2012, Molly conducted 60 share transactions: 35 buying and 25 selling. The average buying transaction involved 500 shares and the average cost was $1,000. The average selling transaction involved 750 shares and the average selling price was $1,800. All the transactions were conducted through stockbroking facilities on the internet. The average time that Molly held shares before selling them was twelve weeks. Molly's activities resulted in a loss of $5,000 after expenses.

Molly's activities show all the factors that would be expected from a person carrying on a business. Her share-trading operation demonstrates a profit-making intention even though a loss has resulted. Molly's activities are regular and repetitive, and they are organised in a business-like manner. The volume of shares turned over is high and Molly has injected a large amount of capital into the operation.

Example 2 - Shareholder

George is an accountant. He has bought 200,000 shares in twenty 'blue chip' companies over several years. His total portfolio cost $1.5 million. George bought the shares because of consistently high dividends. He would not consider selling shares unless their price appreciated markedly before selling them. In the year ended 30 June 2012, he sold 20,000 shares over the year for a gain of $50,000

Although George has made a large gain on the sale of shares, he would not be considered to be carrying on a business of share trading. He has purchased his shares for the purpose of gaining dividend income rather than making a profit from buying and selling shares.

In the Administration Appeals Tribunal Case of Damien Patch and Li-anne Grew v. Commissioner of Taxation [2005] AATA 240, the taxpayers undertook twenty-seven buy and thirty-seven sell transactions over a period of three months. Although there was a remarkable lack of sophistication and planning about the trading, the Tribunal concluded, on balance, the taxpayers were carrying on a business. Here, the Tribunal had regard to the amount of capital involved, the repetition and regularity of the activity and the profit making purpose, coupled with the fact the taxpayers had no other real occupation.

Taxation Ruling TR 2004/4 allows deductions for interest expenses incurred following the cessation of relevant income earning activities, where a taxpayer can demonstrate a legal or economic inability to repay the loan is suggestive of the loan not having been kept on foot for purposes other than the former income earning activities.

In your case, we are satisfied you carried on a business from 20xx to 20xx because your activity demonstrated: (i) a profit-making intention, even though an overall loss has resulted; (ii) the regular and repetitive buying and selling of shares; (ii) a relatively high turnover in the volume of shares; and (iv) a relatively large amount of capital injected into the operation.

As for your on-going interest expenses related to your this share trading, we are satisfied your loan has not been kept on foot for purposes other than the former income earning activities. Therefore, unless your circumstances change, we confirm in this ruling the relevant interest expenses may be deducted.

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