Edited version of your written advice

Authorisation Number: 1012778739149

Ruling

Subject: Whether you are in business as a share trader

Question and answer

Are you in the business of a share trader?

No.

This ruling applies for the following pe

Year ended 30 June 2016

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You state you have shares in a number of companies.

You state you are currently managing $xx worth of stock on the Australian stock exchange.

You have a format for investing and you use a proforma sheet, with each entry into stocks you include the evaluation sheet.

You use an internet search facility finance site which provides price movements and historical charts.

You track your leveraged account and UBS and NAB equity position through the site.

You also use your leverage equity site for tracking capital and debt position, in addition to this you also use the mobile stock app to check through the day when you are not at your computer.

The sites provide you with information on index changes, price, profit loss and brokerage, historical charts and links to move company information as required.

You watch the market daily and you read investment material daily.

You e-mail your broker several times a week to finalise deals, obtain information on pricing and purchasing and selling.

You also text your broker where needed to finalise deals etc.

You keep all your buy and sell records and all dividend records.

You tend to do your research at the weekends or out of hours.

You work full-time as a professional.

You spend about 1 hour a day on your share trading activities.

You have a home office from which you carry out your professional work and your share trading.

The records you provided show for the 2014 financial year you made X trades Y buys and Z sells you have no shares on hand before your first buy in January 2014 and held no shares at 30 June 2014. The maximum funds invested at any one time was less than $100,000.

The records you provided show for the first part of the 2015 financial year you made T trades U buys and V sells you have no shares on hand before your first buy in July 2014 and held shares in a number of companies in early 2015. The maximum funds invested at any one time was less than $450,000.

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 35-10.

Income Tax Assessment Act 1997 Section 35-30.

Reasons for decision

'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether a share trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained. The following case law supports the concept of impression gained about the distinction between a share market investor/speculator and someone who is carrying on a business of share trading.

In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) Hill J stated 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.'

And more recently re-iterated in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained.

The factors that are considered relevant in determining whether an activity is carried on as a business have been addressed in a number of court cases.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), and in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 (Shields v DFC of T (Cth)) and Smith the following were stated as factors to be considered:

• the nature of the activities and whether they have the purpose of profit-making;

• the complexity and magnitude of the undertaking;

• an intention to engage in trade regularly, routinely or systematically;

• operating in a business-like manner and the degree of sophistication involved;

• whether any profit or loss is regarded as arising from a discernible pattern of trading;

• the volume of the taxpayer's operation and the amount of capital employed;

and more particularly in respect of share traders:

• repetition and regularity in the buying and selling of shares;

• turnover;

• whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

• maintenance of an office;

• accounting for the share transactions on a gross receipts basis; and

• whether the taxpayer is engaged in another full time occupation.  

Cases that provide examples of the application of these factors by the Administrative Appeals Tribunal (AAT) are:

In Case W8 89 ATC 171; (1988) 20 ATR 3182 a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share trading. 

In contrast to that decision, Case X86, disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market. 

In a decision handed down by the AAT on 5 August 2010, Smith, it was found that Mr Smith was not in the business of share trader during the year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit making because:

•he held his shares for periods longer than a share trader generally would;

•took DRP's and dividends;

•his activities did not demonstrate, to the Tribunal's satisfaction, repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business;

•the applicant did not maintain a separate office;

•the applicant worked fulltime in a very responsible position at Babcock & Brown. The AAT Member qualified this by stating "although I do not put much weight on that, I was concerned that he was unable to indicate what kind of time he spent on buying and selling shares".

•he did not keep any separate accounting but relied on third party systems (BT and the WBC platform).

The AAT concluded:

The evidence points strongly to, and my overall impression is, that Mr Smith was not conducting a business either in 2007, or in 2008, that he was not in business, and not in the business of share trading. I was satisfied that he had more disposable income than previously, and invested it in shares as an investor might. I have preferred the submissions of the Respondent in that regard.

To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

In a more recent case Hartley v FCT (2013) AATA 601 the AAT affirmed a decision of the Commissioner that a taxpayer was a share investor and was not carrying on a business of share trading, and therefore denied deductions that had been claimed on the premise that a business existed for the relevant years.

In the Hartley case the taxpayer was during relevant times a full-time council employee. According to the taxpayer, he had been actively involved in the share market for many years, which occupied about 15 hours of his time per week. He also claimed he had an arrangement with his employer where he could trade during business hours and then make up any time after hours. For the relevant tax years (the income years ended 30 June 2010 and 30 June 2011), the taxpayer lodged tax returns claiming significant deductions on the basis that he was carrying on a business of share trading. After an audit, the Commissioner determined that the taxpayer was a share investor and issued assessments refusing the deductions.

The AAT considered each of the relevant factors established in case law (in particular, the factors listed in AAT Case 6,297 (1990) 21 ATR 3747) in determining whether or not the taxpayer was engaged in a business of share trading. Although noting the "matter was finely balanced", the AAT was of the view that the factors pointing against the existence of a share trading business were more significant than those pointing in favour of the existence of a share trading business.

The AAT made the following points in relation to the "general factors":

• Nature of the activities and profit-making purpose - The AAT was satisfied that the nature of the taxpayer's activities was "something more than a mere academic pursuit or a hobby". It was also satisfied that there was an intention to make a profit. It said this factor supported the view that the taxpayer was conducting a share trading business.

• Complexity and magnitude of the undertaking - The AAT was not convinced that restricting one's activities to mainly "blue chip" companies makes the activity less complex; however, it found that the factor of complexity went against the taxpayer. The AAT noted the taxpayer had utilised the services of CommSec and a number of other brokers and advisory institutions to assist in his research and decision-making. However, it did find that the magnitude of the transactions was "reasonably substantial" and therefore, in this respect, it held that the factor of magnitude was in favour of the taxpayer. The AAT noted that the taxpayer turned over in excess of $900,000 in the 2010 year and almost $400,000 in 2011. It also noted that some 40 transactions took place in 2010 and 25 transactions in 2011.

• Intention to engage in trade regularly, routinely or systematically - The AAT found there was a lack of regular or routine trading during the relevant years, which it said pointed to the taxpayer being involved in a series of individual transactions on a speculative basis rather than as a share trader. It noted that the taxpayer did not purchase any shares at all in seven of the 12 months in the 2010 year and that no share sales took place in five of those months. Further, it noted that in the 2011 year, only eight purchases appear to have been made in a three-month period. The AAT noted that there was, in a sense, a system in which the taxpayer purchased and sold shares, which was partly explained by a "business plan" (although "belatedly" prepared); however, it said that "while this was a plan of sorts it was neither particularly sophisticated nor intricate, and for the most part appeared to be as much in the head of the [taxpayer] as it was writing".

• Operating in a business-like manner and the degree of sophistication involved - While noting that there were some elements suggesting business-like activities (eg a dedicated office at home), the AAT was of the view that the operation was "very simple, lacked any real sophistication and overall was not consistent with the operation of a business".

• Profits/losses arise from a discernible pattern of trading - The AAT did not accept that the business plan incorporated a pattern of trading. Although questioning the relevancy of this factor, the AAT said this factor pointed against the taxpayer having conducted a share trading business.

• The volume of the taxpayer's operations and the amount of capital employed by him - The AAT was satisfied, noting the volume of the operations and the amount of capital employed by the taxpayer, that in relation to this factor there was a share trading activity.

In relation to "specific" share trading factors, the AAT said that factors in favour of the taxpayer included the following:

• turnover in gross terms was quite large, particularly having regard to the taxpayer's salary (being below $200,000 a year);

• the taxpayer maintained an office specifically for the purpose of conducting his share purchase and sale activities; and

• records of transactions were kept for the purposes of doing accounting and tax calculations (although not necessarily on the gross receipts basis).

However, the AAT was of the view that, overall, the specific share trading factors in favour of the Commissioner's position pointed against the conduct of a share trading business. The factors in favour of the Commissioner's position identified by the AAT included the following:

• the buying and selling of shares was not regular or routine;

• there appeared to have been very little in the way of a plan, although a written plan was produced belatedly; the AAT added that very little appeared to have been done in terms of setting budgets and targets, and that the trading and the background research was simple and unsophisticated; and

• the taxpayer was engaged in another full-time profession as a council employee. In particular, the AAT expressed the view that "the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an on-going business".

In your case you hold a full-time job as a professional.

You spend approximately 1 hour per day on share activities.

You do not have a business plan but rather a strategy used to buy and sell shares.

You use the Q finance site to obtain information relating to price movements and historical charts. You use a leverage equity site to track capital and debt information.

You also use a mobile app to check pricing when you are away from your computer.

You have a home office set up from which you do work relating to your profession and also your share activities.

You have only made a small number of trades in this financial year and the 2014 financial year.

Your share buying and selling activity is not indicative of you being in the business of share trading during the 2014 financial year and the first part of the 2015 financial year.

You are a investor rather than a trader.

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