Edited version of your written advice

Authorisation Number: 1051216335288

Date of advice: 20 June 2017

Ruling

Subject: Am I in business – share trading

Question 1

Are you carrying on a business of share trading?

Answer 1

Yes.

Question 2

Are the shares traded held as trading stock?

Answer 2

Yes.

This ruling applies for the following periods

Year ended 30 June 20ZZ

Year ended 30 June 20YY

The scheme commences on

20XX

Relevant facts and circumstances

You began your share trading activities in the 20YY financial year.

You used personal savings to fund your activity.

You initially invested over $300,000 into your activities combined with borrowing extra funds and currently have over $400,000 of borrowed funds available to conduct your activities.

You entered into around 100 buy/sell contracts for the 20YY financial year.

The value of shares purchased in the 20YY financial year was over $700,000 and the value of shares sold in the 20YY financial year was over $700,000.

You entered into XYZ buy/sell contracts for the 20ZZ financial year.

The value of shares purchased in the 20ZZ financial year was over $5,000,000 and the value of shares sold in the 20ZZ financial year was $5,000,000.

The average holding period for the shares purchased and sold where:

You made a loss of over $60,000 in the 20YY financial year.

You made a loss of over $170,000 in the 20ZZ financial year.

You have no business plan in place.

You have previously used stop losses but prefer not to use them due to price rises soon after sale has occurred.

All of your XY trades in the 20YY financial year was in speculative shares (high risk shares).

XX% of your purchases and YY% of your sales for the 20ZZ financial year were in speculative shares.

You did not purchase shares as long term investments.

You did not purchase shares for the purpose of earning dividends.

You have created a network of research aids which includes online

● brokerage facilities,

● subscriptions to newsletters and

● advice through various share trading information sites including broker reports and overseas markets.

You have direct discussions with business colleagues and analysis of a variety of broker reports and overseas markets.

You complete thorough day to day research of market activity locally and overseas, and you conduct extensive research prior to the purchase of any block of shares, this research consists of analysing:

● Overnight movements on stock markets (esp. DJIA)

● Futures markets for international stock exchanges

● Daily volume and value of trades

● Looking for an opportunity on an oversold position to buy into (eg high volume on falling price which stabilises on lower volume).

● Considering exiting a stock if price falling on increasing volume

● Consider liquidity of shares.

● 12 month high/low for the share price

● Generally prefer an entry point well below 12 month high.

● Weekly high/low for the share price

● Intraday high/low for the share price

● Considering entry point for a very short term trade

● Dividends

● Considering buying into historic proven annual share price uptrends and selling pre dividend.

● Charts

● Sector (preference for commodities and finance)

● Currency fluctuations

● Commodity prices

● RBA commentary

● US Fed commentary

● Upcoming news flow (generally mid to small caps)

● Level of shares sold short

● Directors buying

● Liquidity

● Charting (third parties)

You have a home office you use to conduct your share trading activities. The home office includes a desktop computer, filing cabinets and internet access. You also have access to an iPad for when you are away from the home office.

You keep records of your activity via spreadsheets, transaction & analysis tools provided by an online broker and financial statements prepared by your accountant.

You spend on average 25 hours each week on your share trading activities.

You are employed full time working on average 37.5 hours per week.

Assumptions

Nil

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

Income Tax Assessment Act 1997 Section 70-30

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-10

Income Tax Assessment Act 1997 Section 104-220

Income Tax Assessment Act 1997 Section 118-25

Question 1

Reasons for decision

Summary

You are considered to have carried on a share trading business in the 20XX–YY and 20YY-ZZ financial years.

Detailed reasoning

There are two possible scenarios as to how share trading activities may be treated for income tax purposes. These scenarios, and their consequences, are as follows:

1. Business Income

In this scenario you would be a share trader, your shares are trading stock, income from sales are included in your assessable income under section 6-5 of the ITAA 1997, and expenses incurred to acquire the shares are deductible under section 8-1 of the ITAA 1997. Other expenses incurred in the course of carrying on the business would also be deductible under relevant provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

2. Investment income

In this scenario, you would be regarded as a share investor. Your shares are treated as CGT assets, any gains from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10 of the ITAA 1997).

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 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.

Whether or not a person is carrying on a business is a question of fact, not a question of law. 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. 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?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are:

● 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.

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a significant commercial purpose or character

The activity of buying and selling shares is a commercial activity, particularly where shares held in the short term only for resale at a profit and limited dividends are received.

Given the relatively high level of your transactions and the limited holding period of your shares purchased it could be considered that your activities are of commercial purpose or character.

Whether the taxpayer has more than an intention to engage in business

You have more than an intention to engage in business, and engaged in your trading activities for a period of 24 months

Repetition and Regularity

In the case of share trading, repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

You entered into XY buy/sell contracts for the 201A financial year.

You entered into ZY buy/sell contracts for the 201B financial year.

A number of these trades were same day trades with approximately one third of shares being held for less than 7 days. You made approximately x.x trades per week in 201A financial year and approximately x.x trades per week in the 201B financial year.

Your average hold period for the 200A financial year was xx days with the longest held period being xx days and the shortest being done on the same day.

Your average hold period for the 200B financial year was xx days with the longest held period being xx days and the shortest being done on the same day.

The number of trades in conjunction with the limited holding period could be considered to be a commercial level of share trading which could indicate that a business of share trading was carried on.

Scale and Permanency of Share Trading Activities

The scale of your share trading activities could also be considered significant in that your share purchases amounted to over $5,000,000 in the 20ZZ financial year and over $700,000 in the 20YY financial year, while you sold shares to the value of over $5,000,000 in the 20ZZ financial year and over $700,000 the 20YY financial year.

These figures are considered to be beyond mere passive capital investment, and support that a business of share trading was carried on.

Your trading activities were conducted over a 24 month period, indicating that your trading activities exhibit a level of permanency.

Planned, organised and carried out in a business-like manner

Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry.

You have not developed a business plan or trading strategy but do complete extensive research of the markets and company before each purchase transaction.

Your share trading activities were monitored on a daily basis and your selection of stocks provided you with an opportunity to realise a profit but a lack of a trading strategy meant that when the stocks became profitable you did not sell and realise that gain.

You did incorporate a stop loss approach into your trading activities but realised this was not working with the stocks you were purchasing as they would increase after you activated your stop loss.

You have borrowed funds to invest into your trading activities to maximise your potential gains.

You hold your shares for only a short length of time and you also traded in commercial quantities for substantial consideration.

You traded mainly in speculative shares (high risk shares) with a view of making a profit.

In the 20YY financial year you traded solely in speculative shares and during the 20ZZ financial year XX% of your purchases and YY% of your sales were in speculative shares.

In your case from the information provided, it may be considered that you carried out your activities in a similar manner to others in this industry.

Conclusion

Based on the information and documents supplied we consider that you were carrying on a share trading business for the 20YY and the 20ZZ financial years.

Accordingly, 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.

Question 2

Reasons for decision

Summary

The shares purchased by a share trader that are held for the purpose of resale (and not for investment) are accounted for as trading stock.

Detailed reasoning

Shares as trading stock

Trading stock includes anything acquired that is held for the purpose of sale or exchange in the ordinary course of a business (section 70-10 of the ITAA 1997).

As such, shares purchased by a share trader that are held for the purpose of resale (and not for investment) are accounted for as trading stock as outlined in Division 70 of the ITAA 1997.

Conclusion

As you are a share trading business for the 20YY and 20ZZ financial years; the shares purchased by a share trader that are held for the purpose of resale (and not for investment) are accounted for as trading stock.

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