1012558881755 | Legal database

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This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012558881755

Ruling

Subject: Am I in business? - share trader - trading stock

Question 1

Were you carrying on business of share trading during the 2011-12 income year?

Answer

Yes.

Question 2

Were you carrying on a business of share trading during the 2012-13 income year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You began trading stocks in Month 20XX with a view to making a profit.

You used a loan to trade shares during the 2011-12 and 2012-13 income years.

You developed a trading plan over several months, with the aid of stock tips from various websites and newsletters.

All your trades were done in accordance with the trading plan.

The shares were not held long-term nor were they held to derive dividend income.

Records were kept of purchases and sales in separate spreadsheets.

You satisfy the income requirement in subsection 35-10(2E) of the Income Tax Assessment Act 1997 (ITAA 1997).

You entered into X buy contracts and X sell contracts for the 2012 financial year.

The value of shares purchased in the 2012 year was $X and the value of shares sold was $X.

You entered into X buy contracts and X sell contracts for the 2013 financial year.

The value of shares purchased in the 2013 year was $X and the value of the shares sold was $X.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44.

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 Division 35.

Income Tax Assessment Act 1997 subsection 35-10(2E).

Income Tax Assessment Act 1997 Division 70.

Income Tax Assessment Act 1997 section 70-30.

Income Tax Assessment Act 1997 section 102-5.

Income Tax Assessment Act 1997 section 102-10.

Income Tax Assessment Act 1997 section 104-220.

Reasons for decision

There are two possible scenarios as to how share trading activities may be treated for income tax purposes. These scenarios, and their consequences, are as follows:

1. Business Income

In this scenario you would be a share trader, your shares are trading stock, income from sales are included in your assessable income under section 6-5 of the ITAA 1997, and expenses incurred to acquire the shares are deductible under section 8-1 of the ITAA 1997. Other expenses incurred in the course of carrying on the business would also be deductible under relevant provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

2. Investment income

In this scenario, you would be regarded as a share investor. Your shares are treated as CGT assets, any gains from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10 of the ITAA 1997).

Dividend income is assessable under section 44 of the ITAA 1936 irrespective of which of the above scenarios applies.

Question 1- Carrying on a business of share trading

The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 (Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business.

Having regard to the indicators contained in TR 97/11, you are considered to have carried on a business of share trading in the 2011-12 income year because:

· the buying and selling of shares is an activity with a goal of making a profit, which gives the activity a commercial purpose

· you had repetition and regularity in your share trading activities, entering into X buy contracts and X sell contracts, and a large number of these trades were same day trades with trades occurring over the full income year

· the value of shares traded was commercially significant, with both purchases and sales exceeding $X, and

· you have the necessary resources and maintain adequate records for the activity.

Question 2- Investment Income

In the 2012-13 income year the significant change in the frequency of your trades and the values of the shares traded, indicates that you are no longer carry on a business in share trading.

Therefore, any gains that you incur from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10 of the ITAA 1997).

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