Edited version of private advice

Authorisation Number: 1012682647181

Ruling

Subject: Am I in business

Question

Will you be considered to be carrying on a business of share trading?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You carry on an activity of trading shares.

You have an ABN and are registered for the GST.

Your annual purchases amounted to $x.

Your annual turnover amounted to $x.

You transacted x times during the x income year.

You appointed an adviser to assist with your trades and spoke to them on a daily basis.

You conducted detailed research before each trade.

You had a business plan.

You conducted this activity from a home office.

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 102-5

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 Division 70

Reasons for decision

There are three 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:

1. 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.

2. 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.

3. Income from a profit making undertaking or scheme

Your share trading activities would be considered to be a profit making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. You would sell shares in the very short term, and generally you would not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

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. If a business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each result in a different tax treatment.

Carrying on a business of share trading

Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year to 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 provides a guide to indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. The ruling summarises the following indicators courts have used to determine whether an activity conducts a business:

• is there a significant commercial purpose or character

• is there more than just an intention to engage in business

• whether the taxpayer has a purpose of profit as well as prospect of profit from the activity

• whether there is a repetition or regularity

• whether the activity is planned, organised and carried out in a business-like manner

• size, scale and permanency of the activity

• whether the activity is better describe as a hobby, a form of recreation or a sporting activity.

The overall impression gained from applying the above to your factual scenario is that you will be in the business of trading shares. Specifically we refer to both the scale and regularity of your share trades and the business-like manner in which you have conducted and recorded your share trades. Consequently it accepted that you are carrying on a business of share trading.

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