Edited version of your written advice

Authorisation Number: 1012942582896

Date of advice: 9 February 2016

Ruling

Subject: Whether shares were trading stock

Question:

Were the shares received from the sale of the mining tenement held as trading stock?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts

The entity operates a prospecting and exploration business in the resources sector.

The entity sold the rights to a mining tenement to company X.

The entity received company X shares as part of the proceeds of the sale.

The entity's intention at the time of receiving the shares from the sale of the tenement was to retain these shares for short term gains as it was thought that the share value would improve due to the sale of the tenement. Otherwise these shares were to be sold off to fund further exploration.

A number of years later the entity sold the shares and made a loss on the sale.

The entity has also acquired other shares through purchase. These were acquired for investment purposes and have been sold at various times to fund exploration. These shares and their sale have been treated on capital account by the entity.

The entity did not seek advice in relation to the buying and selling of shares.

The entity maintained a spreadsheet of the shares held.

The entity used a broker to buy and sell shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-25

Reasons for decision

Summary

The nature of the entity's business activity is prospecting and exploration in the resources sector. The shares from the sale of the mining tenement were not trading stock as the entity is not considered to be a trader in shares. Accordingly, the shares were CGT assets and subject to the CGT provisions at the time the CGT event occurred. Any capital losses from the sale of the shares can normally be claimed against other capital gains derived during the year or can be carried forward to future years, tax returns and progressively claimed against any capital gains made in those years. This process can be repeated until the loss carried forward has been reduced to nil.

Detailed reasoning

Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) defines capital gains tax (CGT) assets. It states a CGT asset is any kind of property or a legal or equitable right that is not property.

Examples of CGT assets listed in section 108-5 of the ITAA 1997 are land and buildings; shares in a company and units in a unit trust; options; debts owed to you; a right to enforce a contractual obligation; and foreign currency.

Section 118-25 of the ITAA 1997 discusses CGT general exemptions. It states a capital gain or capital loss you make from a CGT asset is disregarded if, at the time of the CGT event, the asset is your trading stock.

Section 70-10 of the ITAA 1997 discusses the meaning of trading stock. It defines trading stock as including anything produced, manufactured or acquired that is held for the purpose of manufacture, sale or exchange in the ordinary course of business.

The above definition is not exhaustive and relies on the ordinary meaning of trading stock, or its alternative expression 'stock-in-trade'. The ordinary meaning denotes 'goods held by a trader in such goods for sale or exchange in the ordinary course of his trade' (Federal Commissioner of Taxation v. Sutton Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277; (1985) 85 ATC 4398; (1985) 16 ATR 567).

An important element of the definition requires a particular relation to exist between the thing and the business carried on by the entity - the thing must be 'held for purposes of manufacture, sale or exchange in the ordinary course of a business' (Professor R. W. Parsons in Income Taxation in Australia , Electronic edition, 2001, University of Sydney Library, Sydney). This has been affirmed by High Court authorities including John v. Federal Commissioner of Taxation (1989) 166 CLR 417; (1989) 89 ATC 4101; (1989) 20 ATR 1 (John's case) where the Court stated:

[the definition of trading stock] presupposes that the person by whom [the goods] are produced, manufactured, acquired or purchased is or will be engaged in trade in those goods. ... Thus the relevant issue is not the nature of the business carried on but rather whether the person is a trader in the goods which are claimed to be trading stock. [emphasis added]

In this case, the entity acquired shares from the sale of a mining tenement. As per John's case, the relevant issue is whether the entity was a trader in the shares.

The difference between a share holder (investor) and share trader (business)

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

In AAT Case 6297 (1990) 21 ATR 3747; (1990) 90 ATC 621 (AAT Case 6297), the following criteria were established particularly in respect of share traders:

(a) repetition and regularity in the buying and selling of shares;

(b) turnover;

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

(d) maintenance of an office;

(e) accounting for the share transactions on a gross receipts basis;

(f) whether the taxpayer is engaged in another full-time profession.

In Case W8 89 ATC 171; (1988) 20 ATR 3182 (Case W8) 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.

Another example is the case of Shields v. Deputy Commissioner of Taxation (Cth); Case [1999] AATA 4 (1999) 41 ATR 1042; (1999) 99 ATC 2037 (Shield's Case). Here, during the period from 6 February 1996 to 4 March 1996, the taxpayer bought shares in Australian banks which were about to pay franked dividends for cum dividend prices and sold shares in the same banks at their ex dividend prices. Applying the factors listed in AAT Case 6297, even though the activity was for a short time only, the AAT decided the taxpayer was carrying on a business because of the degree of repetition during that period, the substantial turnover and because the transactions were so carefully and systematically organised and handled.

In contrast to the cases above is 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. Here, 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.

Similarly in AAT Case 6297, a deduction was disallowed for losses on the sale of shares. 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, a business plan, market research in shares invested, a contingency plan in a falling market and a significant 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 he was a speculator in the share market.

Applying the criteria to the entity's circumstances

In this case, the entity's business activity is prospecting and exploration. In the private ruling request the entity is seeking to treat the shares received from the sale of the mining tenement to company X as trading stock. As noted above, for the shares to be considered trading stock, the entity is required to be a trader of these shares.

The entity has invested a substantial amount of capital in the activity, undertaken research, utilised the services of a broker and maintained records of its share transactions. These activities alone are not sufficient to indicate the company is a trader in shares. While the entity's intention was to hold the company X shares in question for short term gains, the fact is the entity held these shares for a number of years before disposing of them which does not indicate that the entity was a trader of these shares.

Also, the share transactions shown in the spreadsheet do not indicate that the entity is a share trader with respect to its other shares. There is no pattern of buying and selling for a profit as in Case W8 and Shield's Case or any indication that there was a plan, technique or method being utilised to make a profit from the trading of shares. It appears that primarily shares were sold when exploration funds were needed rather than as part of an overall plan of making a profit from trading.

Having regard to all of the above, the Commissioner considers the company X shares in question were not trading stock as defined under section 70-10 of the ITAA 1997 as the entity is not a trader in shares.

Accordingly, the shares were CGT assets and subject to the CGT provisions at the time the CGT event (being the sale of the shares) occurred.

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