Edited version of private advice

Authorisation Number: 1052044525399

Date of advice: 12 October 2022

Ruling

Subject: Commissioner's determination

Question 1

Was the Taxpayer carrying on a business of share trading in the 20YY and 20ZZ income years?

Answer

Yes.

Question 2

Will the Commissioner exercise the discretion in section 35-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the Taxpayer to include the carried forward losses from his share trading activity in the calculation of his taxable income for the 20ZZ income year?

Answer

Not necessary to answer as the discretion in section 35-55 of the ITAA 1997 is not required.

This ruling applies for the following period:

1 July 20XX to 30 June 20ZZ

Relevant facts and circumstances

Taxpayer (you) is an Australian resident for tax purposes.

Prior to the 20YY income year, your share transactions were infrequent and on capital account.

You have a sophisticated investor certificate and have been investing in shares for years. You have been a member of Commsec for more than XX years and you opened a trading account with Bell Potter in the 20ZZ income year.

During the 20YY income year, you began to buy and sell shares more frequently with the intention of making a profit from trading.

For the 20YY income year, you:

• purchased XXX parcels of shares for an aggregate value of $XXX;
• sold XXX parcels of shares for an aggregate value of $XXX; and
• made a trading loss of $XXX.

Of the XXX parcels of shares purchased in the 20YY income year, XX parcels (for an aggregate value of $XXX) were purchased during the period 1 July 20XX to 28 February 20YY and XXX parcels (for an aggregate value of $XXXX) were purchased during the period 1 March 20YY to 30 June 20YY.

Of the XXX parcels of shares sold in the 20YY income year, XX parcels (for an aggregate value of $XXX) were sold during the period 1 July 20XX to 28 February 20YY and XXX parcels (for an aggregate value of $XXXX) were sold during the period 1 March 20YY to 30 June 20ZZ.

For the 20ZZ income year, you:

• purchased XXX parcels of shares for an aggregate value of $XXXX;
• sold XXX parcels of shares for an aggregate value of $XXXX; and
• made a trading profit of $XXX.

The value of your shareholdings as at the end of the 20YY income year was $XXXX and the value of your shareholdings as at the end of the 20ZZ income year was $XXX.

You did not buy and sell shares during the 20YY and 20ZZ income years for the purpose of receiving dividends.

You do not have a dedicated office for share activities, but you keep trading records, perform daily/weekly financial charting analysis and undertake regular research of shares in the Australian Financial Review (to which you subscribe) and on many online platforms, as well of the research material provided to you as a Commsec One member.

You spend approximately two hours per weekday on these activities and approximately four hours on the weekend.

You have also sought expert and professional advice in relation to share trading.

You work as an engineer and your salary for the 20YY and 20ZZ income years was less than $XXX.

You have a Graduate Diploma in Business from Curtin University which assists you to read financial reports and undertake financial analysis of companies.

You have a detailed business plan and a trading strategy. That strategy largely involves purchasing diversified parcels of shares for short term holds with an intention to profit from trading gains.

Your volume of trading increased once Covid-19 reached Australia and you started to work from home for a long period of time, during which there was more flexibility to enable trading in the early morning and late in the afternoon.

You submit that your trading loss in the 20YY income year is principally due to the initial decline in market values from Covid-19. That is, during the pandemic you made decisions to sell 'speculative' shares to limit losses. As an example, the collapse in oil prices in the latter part of the 20YY income year led to your decision to sell large holdings of energy stocks to limit what were already material losses.

You also increased your volume of trades during this period with a view to profiting from that increased volatility.

Technology shares were favoured by you during this period of time as that sector was one that benefited from increased online sales during the pandemic.

You satisfied the income requirement set out in subsection 35-10(2E) of the ITAA 1997 in respect of the 20YY income year.

You satisfied the assessable income test in section 35-30 of the ITAA 1997 and the other assets test in section 35-45 of the ITAA 1997 in respect of your trading activities for the 20YY income year.

The $XXX trading loss made by you in the 20YY income year exceeded the income made by you for the year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 subsection 35-35

Income Tax Assessment Act 1997 subsection 35-40

Income Tax Assessment Act 1997 subsection 35-45

Income Tax Assessment Act 1997 section 35-55

Income Tax Assessment Act 1997 Division 36

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Carrying on a business

Where a person trades in shares as a business, the associated income is assessable as business income under subsection 6-5(2). Deductions from carrying on a business are generally deductible under section 8-1.

However, where a person is not in business, the shares will be capital assets and any gains/losses made from the shares would be subject to the capital gains tax provisions.

Therefore, it is necessary to consider whether your share trading activities are regarded as a business.

Business is defined in section 995-1 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative but should be weighed up in conjunction with the other factors.

The factors that are considered important in determining the question of business activity are:

• whether the activity has a significant commercial purpose or character;
• whether the taxpayer has more than just 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 regularity and repetition of the activity;
• whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business;
• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit;
• the size, scale and permanency of the activity; and
• whether the activity is better described as a hobby, a form of recreation or sporting activity.

The fact that a person may be carrying on a business in one income year, does not mean that a business is also being carried out in subsequent years. We need to look at the activities carried on in the relevant year.

Applying the relevant indicators to your circumstances

Nature of activity and purpose of profit making

The intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. Where a business trading in shares exists, there is usually a business plan of how the activities will be conducted.

A business plan might show, for example:

•         an analysis of the current market, various segments of the market and potential investments;

•         research to show when or where a profit may arise; and/or

•         the basis of decisions as to when to hold or to sell shares.

You have demonstrated an intention to make a profit from trading in shares during the 20YY and 20ZZ income years and you have a detailed business plan setting out a trading strategy which provides a basis for decisions as to what type of shares to buy and when to buy and sell those shares.

Repetition, volume and regularity of the activities

Repetition is a key characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions. A business of share trading would be expected to involve the purchase of shares on a regular basis through a regular or routine method.

You had XXXX share transactions in the 20YY income year and XXX transactions in the 20ZZ income year.

There was regularity to your buying and selling and you spent hours each day on your share trading activities.

Organisation in a business-like manner and the keeping of records

Generally, a share trading business would involve study of trends, analysis of relevant material and reports, plans to take account of contingencies and market fluctuations and the seeking of advice from experts. As per Case X86 90 ATC 621, this means having or operating on a particular plan with the main goal of maximising profits. If records of purchases and sales of shares were not kept, it would be more difficult for a person to demonstrate that a business was being carried on.

You kept records of your share transactions and other relevant details. You used information from various resources (online, newspaper and expert advice) to study trends and undertake your analysis of companies, market segments, market fluctuations and volatility from which you created and carried out your business plan with the goal of maximising profits.

Conclusion

After weighing up the factors outlined above, it is considered that you were carrying on a business of share trading in the 20YY and 20ZZ income years. You used various sources of information to help you formulate a trading strategy and make decisions and you have kept sufficient records. You had a high volume of purchases and sales throughout each income year, your injection of capital into your investments was significant and you had a view to making a profit.

Business losses

Where a person has a business loss, Division 35 needs to be considered.

Division 35 applies to losses from certain business activities. Under the rule in subsection 35-10(2), a loss made by an individual from a business activity will not be taken into account in an income year unless:

•         the exception in subsection 35-10(4) applies;

•         you satisfy the income requirement in subsection 35-10(2E) and one of the four tests in sections 35-30, 35-35, 35-40 or 35-45 are met; or

•         the Commissioner exercises the discretion in section 35-55.

Exception

The exception in subsection 35-10(4) applies to a primary production business or a professional arts business and where your assessable income for the income year (except any net capital gain) from other sources not related to that activity is less than $40,000.

Subsection 35-10(2E)

The income requirement in subsection 35-10(2E) will be met where the sum of the following amounts for an income year is less than $250,000:

•         taxable income (ignoring losses subject to the non-commercial loss rules);

•         reportable fringe benefits;

•         reportable superannuation contributions; and

•         total net investment losses.

Assessable income test and other assets test

The assessable income test in section 35-30 is met if the amount of assessable income from the business activity for the year is at least $20,000, and the other assets test in section 35-45 is met if the total values of trading stock (among other assets that may be counted for the purposes of this test) used on a continuing basis in carrying on the activity in the year is at least $100,000.

Commissioner's discretion

Taxation Ruling TR 2007/6 Income tax: non-commercial business losses: Commissioner's discretion sets out the Commissioner's interpretation of the exercise of the Commissioner's discretion. There are two discretions available to the Commissioner under section 35-55: lead time and special circumstances.

1.    Lead time

The Commissioner may decide that the loss deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity has started to be carried on and:

(i)    because of its nature:

-       in the case of a business activity carried on by an individual who does satisfy the income requirement in subsection 35-10(2E), it has not satisfied, or will not satisfy, one of the tests set out in sections 35-30, 35-35, 35-40 or 35-45; and

-       in the case of a business activity carried on by an individual who does not satisfy the income requirement in subsection 35-10(2E), it has not produced, or will not produce, assessable income greater than the deductions attributable to it; and

(ii)   there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will produce assessable income for an income year greater than the deductions attributable to it for that year.

This discretion is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income such that they will not be able to produce a profit in the early years.

2.    Special circumstances

The Commissioner may also decide that the loss deferral rule in subsection 35-10(2) does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because the business activity was or will be affected by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster.

'Special circumstances' are those circumstances which are sufficiently unusual or different to distinguish them from the circumstances that occur in the normal course of conducting a business activity.

Application to your circumstances

The exception in subsection 35-10(4) does not apply to you.

As you satisfied the income requirement in subsection 35-10(2E) and both the assessable income test and the other assets test in respect of the 20YY income year, the $XXX loss made by you in the 20YY income year from your share trading business may be taken into account in that year (i.e. not be subject to the loss deferral rule in subsection 35-10(2)).

As there was not enough assessable income in the 20YY income year to absorb all of your share trading loss for that year, the excess will create tax losses which are treated in the same way as any other carry forward loss under Division 36, i.e. they can be carried forward and applied against all forms of income in the future without being subjected to the same requirements under Division 35, including the exercise of the Commissioner's discretion under section 35-55.

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