Edited version of private ruling

Authorisation Number: 1011623585232

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Ruling

Subject: Am I in Business - share trader

Are you carrying on a business as a share trader during part of the income year?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· a private ruling application

· a spread sheet of your buying and selling transactions.

You commenced buying and selling shares early in the income year.

You hold business qualifications.

Before commencing the activity you conducted research and had sought advice from a relative who is a share trader.

Your intention in undertaking this activity was to make short term gains.

Your trading strategy was to identify which shares offered the best potential for price increase. You would purchase shares and then sell them once the share price had increased by a certain percentage and as part of your strategy you put in place stop loss measures to minimise any losses if the share price fell.

Your decision to buy or sell shares was based on daily research ongoing analysis and evaluation of the overall market. You used the following research information:

· reading publications in relation to shares and finance

· subscribing to online websites trading websites.

You did not use the services of a broker.

You had one room of your residence dedicated to carrying out this activity which had one computer. You also utilised a laptop computer at home and a computer at your workplace. You use computer software to keep a record of your trading transactions.

You kept records of all purchases and sales and maintained a spreadsheet of the buys and sales.

You spent a number of hours a day on this activity and also a number of hours on other income producing activities.

You initially invested a small amount of capital and this increased as you purchased more shares.

You had access to additional fund.

You have provided a copy of a spreadsheet of your trading transactions. The information extracted from the spread sheet indicates you have undertaken a substantial number of buying and selling transactions and brought parcel of shares in large volumes.

Some shares were purchased and sold on the same day while other shares were held for a short period on time.

You ceased this activity later in the income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 995-1.

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 70-30

Reasons for decision

There are two possible scenarios as to how the share/option trading activities can 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, the shares would be regarded as trading stock and any income/losses would be included in your assessable income.

(2) Investment/Speculator - In this situation, you would be regarded as a share investor or speculator. The shares woud be capital gains tax (CGT) assets, any gains earned from the disposal of the shares would be income as a capital gain and any losses sustained from the disposals will be a capital loss. Any dividends and other similar receipts would be included in your assessable income.

'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

In FC of T v. Radnor 91 ATC 4689; (1991) 22 ATR 344, Hill J stated:

Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.

Whether an activity is carried on as a business is a question of fact. This matter has been addressed in a number of court cases.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), and more recently in Shields v. Deputy Commissioner of Taxation [1999] AATA 4; 99 ATC 2037; (1999) 41 ATR 1042 (Shields) the following were stated as factors to be considered:

· the nature of the activities and whether they have the purpose of profit-making

· the complexity and magnitude of the undertaking

· an intention to engage in trade regularly, routinely or systematically

· operating in a business-like manner and the degree of sophistication involved

· whether any profit or loss is regarded as arising from a discernible pattern of trading

· the volume of the taxpayer's operation and the amount of capital employed, and more particularly in respect of share trader

· repetition and regularity in the buying and selling of shares

· turnover

· whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

· maintenance of an office

· accounting for the share transactions on a gross receipts basis, and

· whether the taxpayer is engaged in another full time occupation.

Two cases provide examples of the application of these factors by the Administrative Appeals Tribunal (AAT).

In Case W8 89 ATC 171; AAT Case 4847 (1988) 20 ATR 3182 (Case W8) a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share dealing.

In contrast to that decision, Case X86, disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market.

Applying the criteria to your circumstances

In your case, you held shares as a share investor and commenced trading early in the income year after seeking advice from a relative and carrying out research into shares. You do not have a business plan; however, you invested in shares with the intention of making short term gains.

You had initially invested a small amount of capital which increased as more buying and selling of shares was undertaken. Your buying and selling strategy relies on an overall market analysis and research and the monitoring of the market daily. You traded frequently and purchased shares in large volumes. You put in place stop loss measures to minimise any losses and based your gains on a percentage increase in share prices. The holding periods of the shares were short in comparison to the periods noted in Case W8.

You have an area set aside to undertake your buying and selling of shares and use computers and software programs to undertake this activity. You maintained records of your trading transactions and a substantial amount of time per week on this activity and a large number of hours on other income producing activities.

After weighing up the above factors, and the circumstances surrounding your buying and selling of shares, the Commissioner considers you were carrying on a business of share trading up until the time you ceased carrying on this activity.

Your share portfolio, that is actively traded, is regarded as trading stock. Section 70-35 ITAA 1997 shows how to work out your assessable income and deductions. However, if stock is held as a long-term investment it is not considered trading stock and is subject to the CGT provisions.

The losses related to the business activity are allowable as deductions under section 8-1 of the ITAA 1997.