Edited version of your written advice

Authorisation Number: 1051313360276

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Date of advice: 11 December 2017

Ruling

Subject: Am I in business of share trading

Question 1

Are you carrying on a business of share trading during the 201C, 201D and 201E years?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 201E

Year ending 30 June 201D

Year ending 30 June 201C

The scheme commences on:

1 July 201B

Relevant facts and circumstances

You have traded since 200A.

In your initial trading activities, you traded shares to the value of $X,000 to $Y,000 per month. You initially moved $P00,000 into an investment account linked with your trading account.

The capital that was invested into your activity was derived from savings, an inheritance and sale of a property.

You left your full time position in 201B to devote full time to your trading activities. You have since devoted more than 35 hours each week to your share activities. You spend time in premarket activities such as reviewing index charts and researching market sensitive company announcements of the previous day. Potential trades are entered into a watch list and alerts are set. Your post market activities consist of reviewing trades 5-8 days after purchase

During the period from 1 July 201B to 30 June 201E, you made a total of Q trades.

You have purchased R shares and sold S over the 201C, 201D and 201E financial years.

During the 201C, 201D and 201E financial years, you purchased shares to the value of $T00,000 and sold shares to the value of $V0,000.

You purchased shares of a speculative nature.

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

You conduct extensive research on the financial information of the companies in which you are purchasing shares. You daily check newspaper publications, ASX reports, journals, magazines and online forums. You research annual company reports.

You use resources from services you subscribe to.

You completed a Bachelor degree and have completed related post graduate certificates.

You operate your share trading activities in a spare room of your home.

You keep records of share purchases and sales in a spreadsheet.

You have a business plan for your share activities. Your business plan specifically states:

● You aim to achieve a X% return on each trade.

● You attempt to trade within short to medium timeframes such as daily, weekly or monthly trades. However, you will hold shares for longer periods if an immediate loss is realised until it rebounds.

● You target shares that are undervalued by at least X-X%.

● You set stop losses at around X% below what you paid for the shares.

● You intended to implement trail stop rules, based on setting X% ‘trailing stops’ below what the current market price was for a share in anticipation of doubling your return on each trade. You aim to hold a diversified range of equities, speculative shares, day trading and blue chip shares.

● You have a trading account and aim to trade a minimum of $X up to $Y to $Z for larger trades.

● You would like to earn an income over $X in the first year and a steady income thereafter. You aim to reinvest profits into other speculative shares.

You entered into B buy and C sell trades for the 201C financial year.

The value of shares purchased in 201C was $D0,000 and the value of shares sold was $0.

You entered into E buy and F sell trades for the 201D financial year

The value of shares purchased in 201D was $G00,000 and the value of shares sold was $H0,000.

You entered into 0 buy and J sell trades for the 201E financial year.

The value of shares purchased in 201E was $0 and the value of shares sold was $K0,000.

The average length of time from when you acquired the shares until you traded the shares varied from ZZ days to YYY days. X (X)) out of the X shares in companies which were purchased and sold during the 201C to 201E financial years were held on average for greater than 100 days. Just over half of the company shares purchased and sold during the 201C to 201E financial years were held for more than 12 months.

You brought shares from X companies during the 201C, 201D and 201E financial years, but never traded any of these shares.

You traded shares from X companies which were purchased prior to the 201C financial year.

For shares you purchased and sold during the 201C to 201E years, you made a profit on shares traded in X company, a neutral result on shares traded in another company and shares in X companies recorded a loss.

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 995-1

Reasons for decision

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).

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. 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 are held in the short term only for resale at a profit and limited dividends are received.

Given the low level of your transactions and the high holding periods of your shares purchased it could be considered that your activities are that of a share investor rather than a share trader.

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

You had more than an intention to engage in business, and engaged in your trading activities for a period of three financial years. You devoted around 35 hours each week to the role of researching and trading shares.

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.

In your case, during the 201C financial year, you only purchased shares and did not sell any shares. In the 201D financial year, around XX% of your share transactions involved the purchasing of shares. You only entered F sell transactions in 201D. During the 201E financial year, you engaged in J sell transactions and didn’t purchase any shares.

You purchased and sold shares relating to X companies over the 201C to 201E financial years. You only purchased and sold shares in X out of X companies during these three financial years. In X out of the X companies in which you had purchased and sold shares, you sold shares purchased prior to the 201C financial year. X (X) out of the X companies in which you purchased shares were not traded at all during the 201C to 201E financial years. X (X) out of the X companies in which you sold shares only (no purchases) were purchased prior to the 201C financial year.

X (X) out of the X (X%) shares in companies which were purchased and sold during the 201C to 201E financial years were held for on average greater than 100 days. Just over half of the company shares purchased and sold during the 201C to 201E financial years were held for more than 12 months. The longest average day in which the shares were held before trading included 702 days for the L shares and the shortest average day in which the shares were held were 13 days for the M shares.

The irregularity and lack of repetition in the number of shares traded over the 3 financial years, in conjunction with the long holding periods is not characteristic of a share trading business.

Scale and Permanency of Share Trading Activities

Your share purchases amounted to $D0,000 in the 201C financial year; G00,000 in the 201D financial year; and $0 in the 201E financial year. You sold shares to the value of $0 in the 201C financial year; $H0,000 on the 201D financial year; and $K0,000 in the 201E financial year. The shares sold in 201D represented X% of the units of available shares held. The shares sold in 201E represented around X% of the available units held.

You have held speculative shares for lengthy periods of time in the anticipation that they will increase in value and you will realise a profit. Unfortunately, you recorded a loss in around X% of the shares held in companies in which you purchased and sold shares during the 201C to 201E financial years. X (X) of the X companies in which you traded shares, delivered a profit and X delivered a neutral result.

Your activities demonstrate limited scale and permanency evident by the limited amount of trading in the shares you have held and the long periods of time in which you have held these shares.

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

You have relied on savings and an inheritance as the source of your investment funds and transferred $P00,000 to a high interest account linked to your trading account.

You have devoted in excess of 35 hours per week to your activities after leaving your full time employment.

You have business plan and complete extensive research on the share markets and companies before a transaction. There is evidence that you have not followed your business plan based on the low returns and profits you have derived from your activities and the small amounts of daily, weekly or monthly trades.

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

Your share trading activities were monitored on a daily basis, but your selection of shares didn’t provide you with an opportunity to realise a profit and you sold a significant amount of your shares without realising a gain. Only X out of the X companies in which you purchased and sold shares over the 201C to 201E financial years returned a profit, X achieved a neutral outcome and the other X resulted in losses.

You did incorporate a stop loss approach into your trading plan, but realised this was not practical given the low value of shares you were purchasing. You held onto many of your shares for long periods of time in the expectation that the market value of the shares would recover.

In your case, some of your activities demonstrate a business- like approach to share trading including the establishment of an investment account linked to your trading account, the full time role you devoted to your share trading activities and the development of a business plan. However, there is not the repetition and regularity in the buying and selling of shares, required to be a share trader. There was an absence of selling shares in the 201C financial year and an absence of buying any shares in the 201E financial year. In the 201D financial year, when you purchased and sold shares, you only sold around X% of the available share units. Overall, there was no demonstrated systematic trading pattern, nor were your operations carried out in a business like or sophisticated manner to be considered a business of share trading.

Conclusion

Based on the information and documents supplied we consider that you were not carrying on a share trading business for the 201C, 201D and 201E financial years.

Accordingly, receipts from the sale of shares are subject to the CGT provisions. Any gains from the disposal of shares are included in your assessable income as a capital gain and any losses from the selling of shares will be a capital loss. A net capital loss from the sale of shares cannot be offset against the income from other sources, however it can be offset against another capital gain or carried forward to offset against future capital gains.

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