Edited version of your written advice

Authorisation Number: 1012737468407

Ruling

Subject: Share trading and share investing

Question

For the financial year ending 30 June 2014 were you considered to be 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 buy and sell shares.

Your business plan is to look for a broad spread of companies.

Some shares are purchased for 100% high dividends, and others are for capital growth.

You have purchased shares in companies in the early stages of them being listed on the exchange when their prices are cheap but with good prospects for increasing of their share prices and eventually dividends.

With the newly emerging companies you generally wait for their share price to double, then sell half of the shares to cover the initial purchase price and retain the remainder for the purpose of letting their share value increase.

You have advised that the purpose and intention of the activity is to make a profit and enlarge your share portfolio.

Your current share portfolio is valued at approximately $X.

You execute approximately on average X purchases and sales per month.

You spend approximately X hours per day, X days per week on your share activities.

For the 2013-14 financial year you have held some parcels of shares for the duration of one month, and others you have purchased to hold onto long-term (more than 12 months).

You do not hold any other type of employment.

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 102-5 ,

Income Tax Assessment Act 1997 Section 102-10, and

Income Tax Assessment Act 1936 Section 44 .

Reasons for decision

Generally, there are two possible ways share trading activities may be treated for income tax purposes.

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 Income Tax Assessment Act 1997 (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.

Share trading and share investing

The distinction between carrying on a business of share trading and a share market investor has been established in the body of law through many court cases.

In AAT Case 4847 (1988) 20 ATR 3182; (1988) 89 ATC 171, a taxpayer purchased twenty parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987. No share was held for more than five months. The Tribunal ruled the shares were purchased as trading stock in the carrying on of a business because the shares were bought and sold repeatedly with a view to making a profit and because all shares were sold within a year of acquisition.

In the Federal Court case of Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689 (Radnor's case), the taxpayer was held not to be carrying on a business of share trading because there was no pattern of buying and selling and a low volume and frequency of transactions. Here, the taxpayer, for the most part, held their shares for extended periods of time of more than twelve months and often for many years.

ATO fact sheet - Carrying on a business of share trading

The ATO fact sheet Carrying on a business of share trading at www.ato.gov.au provides the following examples:

Example 1 - Share trader

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 and stock market reports. 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 2001, 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 stock broking 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 - Share holder

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 2001, 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.

Business indicators

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.

Whether a business is being carried on depends on the large or general impression gained (Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

Whilst some business indicators are evident in the activity, the overall impression is that you are not considered to be carrying on a business of share trading.

Like Radnor's case and in Example 2 in the Carrying on a business of share trading fact sheet, the activity did not display a pattern of buying and selling, and there was a low volume and frequency of transactions. For the most part, shares were held for extended periods of time for the purpose of capital growth and the derivation of dividend income.

As a share investor your shares are treated as CGT assets and are held on capital account. Any gains from the disposal of your shares are included in your assessable income as a capital gain and any losses sustained from the disposals will be a capital loss.

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