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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012552778611

Ruling

Subject: Share Trading/Investing

Question

For the year ending 30 June 20XX are you carrying on a business of share trading?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You are an Australian resident.

You are an IT consultant.

You have undertaken infrequent share trading activities to date during the 20XX financial year, with only two other share sales having occurred.

You purchase shares a few times a year, and sell these within a couple of months of the purchase.

You acquire shares with a longer term view of investment rather than shorter term view of trading.

You intend to exit the share market permanently and purchase real estate.

You have not held more than a few stocks at any one time during the period.

Relevant legislative provisions

Taxation Administration Act 1953 Section 14ZW

Taxation Administration Act 1953 Section 14ZX

Income Tax Assessment Act 1999 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 102-15

Reasons for decision

There are two possible ways your gains and losses from the purchase and sale of shares can be treated for income tax purposes. Briefly, these and their consequences are as follows:

Business Income

If you are carrying on a business of share trading, your profits and losses from the purchase and sale of shares would be treated as business income. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Any gains made 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

If you are not carrying on a business of share trading, you are treated as an investor and any gains or losses are dealt with under the capital gains tax provisions of the tax law. In simple terms, this means any assessable gains are included in your assessable income under the provisions of section 102-5 of the ITAA 1997. Any net capital loss made in an income year can be carried forward to later income years.

To determine which taxation treatment applies to your situation it is necessary to consider whether or not you are in the business of share trading.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? identifies various factors as being relevant in determining if a business is being carried on. These include:

Although relating to primary production, the principles espoused in Taxation Ruling TR 97/11 can be equally applied to determine whether or not a person who is buying and selling shares is in the business of share trading.

The factors identified in TR 97/11 must be considered and weighed up against the individual circumstances of each case and no one factor determines whether or not a business is being carried on.

Whether the activity has a significant commercial purpose or character

Buying and selling shares does have a commercial character. However, we do not consider there was any significant commercial purpose associated with your share transactions in the 20XX financial year to date. This is particularly the case given the relatively low level of transactions completed. Furthermore, you have stated you considered yourself to be an investor, you had no business plan, no specific financial targets, and no formal budget.

Whether the taxpayer has more than an intention to engage in business

You considered yourself to be an investor. This, combined with the fact that you had no business plan, financial targets or budget, and sought no professional advice regarding your activities suggest that you had no intention to engage in a business like operation.

Whether the taxpayer has a purpose of profit as well as a prospect of profit

Your intention was to acquire shares to hold them for the long term. Whilst this might indicate an intention to make a profit over time, it is insufficient in its own right to consider you were in the business of share trading.

Whether there is repetition and regularity of the activity

This is 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.

You purchase shares a few times a year and sell these within a couple of months of purchase.

This level of activity is insufficient to show that you were engaged in the business of share trading for the financial year.

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

Although you kept records of your share transactions as would be expected of anyone operating a business, you had no strategy, budget or financial targets, all of which would be expected of someone operating a business of share trading.

The size, scale and permanency of the activity

The frequency of your transactions falls short of what would be expected of an individual carrying on a business of share trading.

Conclusion

Your share transactions are the activities of an investor, rather than someone who is in the business of share trading. Accordingly, any gains or losses from your share investments will be subject to the capital gains tax provisions.

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