Edited version of private advice

Authorisation Number: 1051572947188

Date of advice: 28 August 2019

Ruling

Subject: Are you in business of share or option trading

Question

Are you carrying on a business of share or option trading?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

You are employed on a full time basis. You have no formal qualifications in buying and selling shares. You are self-taught and you learn from finance textbooks and ASX options trading guides.

You opened an option trading account with a capital investment of $x,xxx sourced from your savings. You did not seek expert advice or assistance prior to setting up your activity.

For a limited period, you purchased speculative shares, options derivatives on ASX stocks of publicly trading companies. You entered a limited number of trades, some have expired. The open/close trade lasted for days while the expired trades took up to months. You have imposed a trade limit of $xxx per bet.

You suffered a total net loss. The losses include purchase price, ASX fees, bank commissions and GST.

You kept monthly statements of options and meticulously recorded your trade valuations on a daily basis when the trades were executed. You retained a decision journal notepad file and the relevant decision making spreadsheets.

You utilised Option Trading Workbook, an Excel based spreadsheet. The spreadsheet estimates valuation of an option price include pricing inputs - implied volatility, interest rates, forecast dividends, time to expiry, current market price of stock, strike price of option.

You referred to an options pricing formula and standard finance formulas, including log returns and historical volatility in making decisions.

In addition to the Option Trading Workbook, you also compared your calculations from your Spreadsheet against current market information available on share trading platform to forward plan or make a budget.

You study the development of the market and your shares everyday

You spent an average number of hours per week on your shares activities.

You do not have a home office to use to conduct your share trading activities. You only require access to a mobile device and internet connection for your trading activities.

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 102-5

Income Tax Assessment Act 1997 section 102-10

Reasons for decision

Summary

You are not in the business of trading shares or options. The losses you sustained from the disposals would be capital losses under section 102-10 of the ITAA 1997.

Detailed reasoning

The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. If your 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.

Generally, where you carry out business activities for the purpose of earning income from buying and selling shares you are considered to be a share trader. Your shares are treated as trading stock with the income from your sales included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), and the expenses incurred to acquire the shares 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 or the ITAA 1997.

However, if you hold your shares for the purpose of earning income from dividends and capital growth, you will be regarded as a share investor. Your shares would be treated as capital gains tax (CGT) assets with any gains from the disposal of the shares included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997).

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.

There is also a comprehensive body of case law in respect to share trading activities. This case law has established the following factors as relevant considerations in such cases:

(a) the nature of the activities and whether they have the purpose of profit-making

(b) the complexity and magnitude of the undertaking

(c) an intention to engage in trade regularly, routinely or systematically

(d) operating in a business-like manner and the degree of sophistication involved

(e) whether any profit/loss is regarded as arising from a discernible pattern of trading

(f) the volume of the taxpayer's operations and the amount of capital employed by him,

and more particularly in respect of share traders:

(a) repetition and regularity in the buying and selling of shares

(b) turnover

(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

(d) maintenance of an office

(e) accounting for the share transactions on a gross receipts basis, and

(f) whether the taxpayer is engaged in another full-time occupation.

The overall impression gained from applying the above to your factual scenario is that you are not in the business of trading shares.

You have educated yourself by researching market conditions and forecasts about economic conditions. You utilised shares trading toolkits to monitor the movements of your shares and to make trading decisions. Notwithstanding your technical level of involvement, it is considered that your activities are not business-like.

Your circumstances do not indicate an intention to engage in the business of share trading. The magnitude of your transactions and the amount invested were not substantial. The share trading transactions lack repetition and regularity looking at the number of trades and the shares holding period. You held speculative shares for a few months that did not return dividends. It is viewed that your activities lack the required commercial purpose or character.

Accordingly, 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).

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