Edited version of your written advice

Authorisation Number: 1013088474921

Date of advice: 9 September 2016

Ruling

Subject: Am I a share speculator

Question 1

Are the gains and losses from the sale of shares on capital account and therefore not assessed as ordinary income or subject to the trading stock provisions?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20ZZ

Year ended 30 June 20XY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In the 20YY income year you purchased less than ten share parcels and sold most of them in the same year.

In the 20ZZ income year you sold the remaining share parcel/s that were purchased in the 20YY income year. You did no other trading in this year.

In the 20XY income year your share buying and selling increased slightly from that in the 20YY income year.

Prior to this your only experience with owning shares was one parcel of shares bought for you when you were under the age of 18 and you later sold this parcel as an adult.

You trade through an on line broking account.

You work full time and you place your orders on your own personal phone during your lunch break and on your O H & S breaks. You do your research outside of work hours.

The majority of the shares that you buy are held for shorter periods of time, ranging from days to a few months, particularly shorter timeframes if the price goes up, although your strategy if a share price falls and continues to fall is too keep holding it in the hope that it will recover. If the price does not recover you will either continue to hold or eventually cut your losses. You do not have a pre-determined stop loss price or percentage in place.

Your share trading strategy is to attempt to buy shares when you think they are cheap and sell them when they go up in price. You do not always act on your research; that is you don't trade.

Your trading technique is unsophisticated and has not varied significantly from when you first started trading in the 20YY income year.

You conduct research via an internet web site that has free membership. On this site, investors write blogs so you can follow threads of information about various stocks. Sometimes you act on this information and sometimes you don't. The information assists you in determining your gut feel on what to buy and sell. Your main strategy is when a share price for a stock becomes volatile and falls or crashes you then look to buy in the hope that the price is under-priced and will recover.

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 15-15

Income Tax Assessment Act 1997 section 25-40

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Question 1

Summary

We have determined that you carried out your share trading as an investor / speculator, accordingly any gains and losses that you make from the sale of your shares will be on capital account and not assessed as ordinary income. The trading stock provisions will not apply.

Detailed reasoning

For income tax purposes, there are two possible scenarios as to how share activities can be treated. These scenarios are:

1. Business income this is where a person is a share trader and the shares would be regarded as trading stock and income/losses are included as assessable income/allowable deductions.

2. Investment/speculator this is where a person is not in business and any shares are regarded as capital assets. Any gains earned from the disposal of the shares would be assessable income as a capital gain and any losses sustained from the disposals will be a capital loss. Any dividends and other similar receipts would be included as assessable income.

Shares may be held for either investment/speculating or trading purposes, and profits on sale are earned in either case.

A loss from an isolated transaction is generally deductible when the taxpayer intended, or expected, to derive a profit which would have been assessable income and the transaction was entered into in the course of carrying on a business or it was carried out in a commercial or business-like manner. 

The Commissioner considers that the following matters (listed at paragraph 13 of Taxation Ruling TR 92/3) may be relevant in determining whether an isolated transaction amounts to a business operation or commercial transaction:

a) the nature of the entity undertaking the operation or transaction;

b) the nature and scale of other activities undertaken by the taxpayer;

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d) the nature, scale and complexity of the operation or transaction;

e) the manner in which the operation or transaction was entered into or carried out;

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

h) the timing of the transaction or the various steps in the transaction.

In your case:

• You are an individual;

• You did not employ sophisticated trading techniques to evidence any commercial intent;

• In contrast with most cases involving isolated transactions in the relevant sense, you did not develop anything and there was no complex or substantial involvement required by you, you merely bought and sold shares;

• You did not employ any contingency plan to cope with failing markets;

• You conducted a relatively low number of trades in each income year; and

• The amount of capital invested in the activity at any one time was not large.

In AC Williams v. Federal Commissioner of Taxation 72 ATC 4157;(1972) 128 CLR 645; (1972) 3 ATR 236, Stephens J. stated a speculator is a person whose purchases were in the nature of individual forays in particular stocks with a view to resale. This view is in contrast with the definition of a share trader as their dealing should be seen as part of a more extensive business of buying and selling shares. However, gains and losses made by both share investors and share speculators are treated as capital gains and capital losses respectively.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), a deduction was disallowed for losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains tax provisions. 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. 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. It was held that the applicant was a speculator in the share market.

In Case 35/94, 94 ATC 318 (1994) 28 ATR 1246 (Case 35/94) the taxpayer was a real estate investment adviser. From 1982 to 1987 he was employed on a salary and wage basis by C Corp and later became an independent consultant. In his income tax return for the year ended 30 June 1990, he claimed a deduction under section 51 or 52 for a loss totalling $1,170,346 on the sale of shares. The major part of the loss was in relation to shares purchased in C Corp which had been acquired between May 1985 and March 1987. This company was subsequently de-listed in October 1989 following a request by the directors. Other share transactions involved eight listed companies, where generally the taxpayer sold the shares within a few months of acquisition, although some were held for 12 months or more. The taxpayer's submissions that he had been carrying on a share trading business were rejected. Also rejected was the alternative argument that the transactions were commercial transactions entered into with a profit-making intention.

We acknowledge that your intention with respect to the shares was to sell the shares for a profit in order to make a short term gain. It is evident that you bought and sold some shares on a regular basis which demonstrates you had a profit making intention with respect of those shares.

However, you did not have a sophisticated method for deciding when to buy and sell shares. You did not have a strategy based on technical analysis or structured trading techniques to maximise profits, nor did you have a contingency plan to limit your trading losses if the share price kept falling. You merely stated that you hoped that you could take advantage of what you perceived as a low point in the stock market at the time of purchase to make subsequent profits on sales.

For these reasons, we do not consider that your share transactions were carried out in a commercial manner. The facts and the nature in which the activity was carried out indicate that your activities would be regarded more as a share speculator.

For the reasons explained above, you are not entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses you made in relation to this activity, nor are your gains considered ordinary income and assessable under section 6-5 of the ITAA 1997. As an investor/speculator, any gains made will be assessable as capital gains and any losses made will be regarded as capital losses under Part 3-1 of the ITAA 1997. Any dividends and other similar receipts would be included as assessable income.

The trading stock provisions do not apply to shares that are assessed on capital account nor do they apply to a share trading activity considered to be profit or losses from isolated transactions. Your shares would only be trading stock if we considered your share trading to be the carrying on of a business.

Note

This private ruling is binding on the facts provided. The main reason this share trading activity is characterised as investment / speculating; and assessable on capital account is because of the low amount of trades entered into and that you did not employ sophisticated trading techniques to your buying and selling of shares. Should your trading technique become more sophisticated to a level that is considered to be at a business like or commercial level and the amount of physical trading increases significantly, your share activity may take on the character of profit and losses incurred from isolated transactions and be assessable on revenue account. At the end of each income year you should review your share trading. Should your circumstances vary significantly from the financial information and facts that you provided with this private ruling application; and you require further binding advice, you could apply for a new private ruling based on the different facts if you are unsure of how the ATO view would apply to your circumstances.

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