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Edited version of your written advice
Authorisation Number: 1013025497200
Date of advice: 27 May 2016
Ruling
Subject: Share Trading - Am I in Business?
Question
Were you carrying on a business of share trading during the income year ended 30 June 2015?
Answer
Yes
This ruling applies for the following periods:
1 July 2014 to 30 June 2015.
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The taxpayer commenced buying and selling shares in 200X.
During the ten months up until the end of April 201X the taxpayer made a number of share transactions.
The taxpayer had close to 100 transactions, with a total value of purchases and sales of close to $X million each. The average value of individual purchases and sales was close to $XX0,000.
Shares were generally held for less than a week.
The taxpayer funded their purchases with a percentage of their own money and a percentage of borrowed funds.
The taxpayer traded mainly in iron ore mining stocks, as these tend to follow the iron ore prices. The taxpayer also traded in a handful of other listed companies not related to iron ore.
The taxpayer's trading strategy was to take advantage of short term movements in iron ore prices.
The taxpayer bought when the iron ore market had dropped for three days and sold when it had risen for two.
The taxpayer had a stop-loss position of selling all stocks after 2-3 weeks.
The taxpayer earned no dividend income
The taxpayer had an undergraduate degree, a post graduate qualification and a post graduate degree.
The taxpayer used an online trading account and kept records of their trades.
The taxpayer stated they spent approximately 30 hours a week on share trading and 37 hours a week on other income producing activity.
The taxpayer has reported prior year income from share trading as capital gains, but as they were all short term trades no CGT discounts were applied.
The taxpayer expects to make a loss for the current year.
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 70-10
Reasons for decision
Carrying on a business as a share trader
There are two 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 ITAA 1997, while your expenses would be deductible under section 8-1 of the ITAA 1997.
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.
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.
Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all the relevant indicators within the context of your own situation. No one indicator determines whether or not a business is being carried on.
Taxation Ruling TR 97/11 income Tax: am I carrying on a business of primary production (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:
• Whether the activity has a significant commercial purpose or character,
• Whether the taxpayer has more than an intention to engage in business,
• Whether a taxpayer has a purpose of profit as well as a prospect of profit from the activity,
• Whether there is repetition and regularity of the activity,
• Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,
• Whether the activity is planned, organised and carried out in a business-like manner,
• The size, scale and permanency of the activity,
• Whether the activity is better described as a hobby, a form of recreation or a sporting activity.
In your case;
• The buying and selling of shares is an activity with a goal of making a profit, which gives the activity a commercial purpose. Your share transactions were also conducted at a commercial level, with your settlement considerations often exceeding $100,000 per trade. It would be then considered that your share trading activities have both a commercial purpose and character.
• You have more than an intention to engage in business, and you engaged in your share trading activities for a period of more than 12 months.
• You had a profit purpose as well as the prospect of profit and did in fact make profitable trades.
• You have repetition and regularity in your share trading in that you have conducted100 trades over a ten month period.
• Your share trading activities were monitored on a daily basis. You employed a share trading strategy that would be considered suitable for a share trader. You had stop loss limits in place, and realised short term gains by selling your shares after iron ore prices had increased in price for two days running. You hold your shares for only a short length of time. You also traded in commercial quantities for substantial consideration. Conducting your share trading activities in this way is carrying out of your activities in the usual way of a person who is carrying on a business as a share trader.
• The volume of your trading would indicate that you are trading at a commercial level. The value of your transactions was also commercially significant. Although you have only submitted ten months' worth of transactions for review up until April, your trading for the year has not ceased. This would indicate that your share trading activities display the size, scale and permanency that would be expected of a person carrying on a business of share trading.
• Your trading activities would not be better described as a hobby, form of recreation or a sporting activity.
The weighing up of all the relevant indicators within the context of your own situation would indicate that you were carrying on a business of share trading for the relevant period. Consequently, your income is assessable as ordinary income under section 6-5 of the ITAA 1997, while your losses are deductable under section 8-1 of the ITAA 1997.
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