Edited version of private ruling

Authorisation Number: 1011612332892

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Ruling

Subject: Income Tax: Share Trading

Question

Are the losses you incurred in securities and commodities trading, necessarily incurred in carrying on a business for the purposes of producing assessable income and therefore allowable income tax deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Answer

No.

This ruling applies for the following period

July 2008 to June 2010

The scheme commenced on

July 2008

Relevant facts

You are currently working full-time. You started trading in shares, warrants, CFDs and options. All trading is done by you online through Etrade facility.

You have flexible working hours which help you to trade either from your home or work. You also trade CFD after hours as it is available nearly 24 hours. You state you have a capital and also a margin lending facility.

Shares

You trade with intention of making a profit through price volatility during the day or week for blue chip shares and do not hold shares more than twelve months.

You state that you are fully informed of the stock market through news and by researching on the internet and subscribing to researchers.

Warrants

You traded warrants but only for a short period due to the unsatisfactory returns.

Exchange traded options

You mainly traded in call options.

CFD

All CFD transactions were done by you through a CFD supplier.

In the year 2009, you traded in share transactions. In the 2009 financial year, you lodged a capital loss.

In the year 2010, you traded in options and CFDs. It resulted in a loss. You believe you should qualify for the revenue loss due to the nature of your trading.

You believe that enough research is done prior to making any trade transaction. However, in the last couple of years as the financial market was too volatile, too many unexpected variables came beyond consideration.

Currently, you are not trading as a result of the losses you incurred in the past couple of years. You are now saving up some money to start investment again next year. Your longer term objective is to make a living from trading. In the meanwhile you are still are going to work full time until it is stable.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The losses you incurred in securities and commodities trading, necessarily incurred in carrying on a business for the purposes of producing assessable income are not allowable income tax deductions under section 8-1 of the ITAA 1997.

Detailed reasoning

For losses incurred to be allowable deductions, your activities must amount to carrying on a business. 'Business' is defined in section 995-1 of the ITAA 1997.

Once it has been established that your activities amount to carrying on a business, any losses, for which a deduction is sought, must have been necessarily incurred in carrying on that business activity.

Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344 states that, whether the trading activities of the taxpayer amount to the carrying on of a business is dependent on the facts of the particular case.

The existence of a business or otherwise is a question of fact. A number of factors/indicators have emerged from case law which are considered relevant in considering this question. The Commissioner in Taxation Ruling TR 97/11 discussed the relevance of these factors in considering whether an activity amounts to carrying on of a business. These factors were also relied upon by the Administrative Appeals Tribunal in Case X86 90 ATC 621 and was subsequently applied in Shields v. Deputy Federal Commissioner of Taxation 99 ATC 2037.

The relevant factors include but are not necessarily limited to:

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 profits or loss is regarded as arising from a discernible pattern of trading;

f) the volume of the taxpayer's operation 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 tests of whether you are carrying on a business of securities and commodities trading are based on the subjective purposes and the objective evidence provided.

A determination is made on the general impression gained from various indicators of carrying on a business and the individual circumstances of the taxpayer. In Martin v. FC of T (1952) 10 ATD 37), it was held that:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and... the determination is eventually based on the large or general impression gained.

Based on the information provided to us, your circumstances are similar to those in Case X86 90 ATC 621, where the activity of the taxpayer was not conducted in a business like manner.

While it has been your intention at all times to maximise profits by trading in shares, this does not however inevitably lead to the conclusion that you are engaged in a business of share dealing and accordingly a share trader. It is necessary to consider not only your subjective intent, but also the objective surrounding circumstances.

You did not employ sophisticated share-trading techniques in the management of your share acquisitions and you did not however operate to any particular plan apart from your goal of maximising profits.

You did not have any contingency plans in place should the conditions in the share market deteriorate.

Further, there was no maintenance of a separate office by you. This however, does not of itself necessarily deny the existence of a business. Similarly, the fact that you continued with your full-time professional occupation does not preclude a finding that your additional activities constitute the carrying on of a business.

It is difficult in all the circumstances of your case to conclude that your activities exhibited a system of operations which objectively evidenced that you are carrying on a business of share trading.

Your activities are conducted in a similar manner to that of an investor or speculator in that:

1) you predominantly relied on professional advice to make decisions about investments. There is no discernible trading pattern of trading but rather discrete decisions to invest in shares that have been speculated.

2) your method of operation is simple.

3) you do not have a trading plan. You have not demonstrated that there is continuity of your activity for an indefinite period of time that can be maintained.

4) you do not have a contingency plan in place to absorb market downturns. You have stopped trading now due to the losses you made. Therefore you do not have an intention to trade regularly, routinely or systematically.

5) the extent of the activities is such that a home office is not maintained. You trade either from your work or home.

6) you are working full time in another professional occupation. This activity seems to constitute a subsidiary activity to your main income-producing activity. The share trades would have been conducted while you were engaged in your full-time professional occupation.

Consequently, this does not support the view that you are carrying on the business of share trading. Any income derived is not assessable under section 6-5 of the ITAA 1997. Hence, any gains and losses resulting from the activity may be subject to the capital gains tax provisions of Part 3-1 of the ITAA 1997.

Therefore, the losses you incurred in securities and commodities trading are not allowable income tax deductions under section 8-1 of the ITAA 1997.