Edited version of your written advice

Authorisation Number: 1013139578021

Date of advice: 16 December 2016

Ruling

Subject: Am I in business- share trading

Question 1

Did you carry on a business of share trading in the 20XX income year?

Answer

Yes

This ruling applies for the following periods:

Income year ending 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

In approximately 201X, you began buying shares.

You buy and sell shares online. You pay subscription fees in relation to these activities.

You held less than $50,000 in your online share account prior to increasing your share trading activity.

During 201X you became more active in your buying and selling activities.

You have access to a high volume account which provides access to news and information about the stock market.

You analyse this information and make decisions about which shares to buy and sell based on the predicted movements in the market.

The majority of your shares are bought and sold either on the same day, or over a period of a few days. Some shares are held for a period of up to two weeks.

You completed around 400 buy and sell transactions throughout the income year, with a majority occurring within a XX month period.

Your share purchases and sale amounts were both in excess of 1 million dollars including brokerage.

You have access to a loan facility through your share trading account which allows you to spend up to a certain limit based on your account balance.

You slowed your trading activity because you had run out of equity.

You spent approximately XX hours a day on your buying and selling activities.

You conducted your buying and selling activities from your home office before attending your usual place of work using electronic devices.

You did not undertake any formal training or education in relation to share trading.

You read articles and books related to share trading strategy.

You do not have a written business plan for your share trading activities.

Relevant legislative provisions

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 102-15

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

There are three 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 Income Tax Assessment Act 1997 (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 of the ITAA 1997.

3. Income from a profit making under taking or scheme

Your share trading activities would be considered to be a profit making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. Shares are sold in the very short term, and generally you do not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1 of the ITAA 1997. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

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. If a business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each results in a different tax treatment.

Carrying on a business of share trading

Whether or not a person is carrying on a business is a question of fact and degree determined on a year by year basis. No one indicator determines whether or not a business is being carried on.

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.

The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation.

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 the 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.

Investment income

Generally a capital asset is property that is used to produce income. Disposals of capital assets are subject to CGT provisions contained in the ITAA 1997 which includes a net capital gain as part of your assessable income.

A CGT asset is any kind of property. This specifically includes shares. If you dispose of shares that are capital assets (as opposed to revenue assets) you will need to apply the CGT provisions of the ITAA 1997 to any capital gain or capital loss that you make as a result of that disposal.

A share would be considered to be a capital asset if it was not purchased in the ordinary course of a share trading business, or was not purchased as part of a profit making undertaking or scheme.

A profit making undertaking or scheme

Taxation ruling 92/3 Income tax: whether profits on isolated transactions are income provides guidance on whether the profits and losses from transactions that have a profit making purpose are considered to be assessable under section 6-5 of the ITAA 1997.

In regards to share transactions, a transaction would be considered to be a profit making undertaking rather than a capital investment if the sole intention in purchasing a share is to sell it in the short term and realise a gain in share price. Short term would be considered a period from the same day to two weeks.

Application to your circumstances

Carrying on a business of share trading

Having regard to the indicators contained in TR 97/11, we consider that you have carried on a business of share trading in the 201X income year because:

● the buying and selling of shares is an activity with a goal of making a profit, which gives the activity a commercial purpose.

● The majority of your shares have not been held for significant periods and you have not derived dividend income.

● you had repetition and regularity in your share trading activities, entering into approximately 250 buy contracts and 250 sell contracts throughout the income year.

● you applied a strategy in deciding which shares to buy or sell, based on market information as to which shares were likely to fluctuate in value over the short term.

● you conduct relevant research, such as in relation to share trading strategy.

● the value of shares you traded was commercially significant.

● a large proportion of your shares were bought and sold on the same day, or over a period of a few days during the period that your activity was most intense.

Accordingly, your shares would be regarded as trading stock relating to your business and any gains or losses would be included in your assessable income.

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