Edited version of private ruling

Authorisation Number: 1011711583282

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Ruling

Are you carrying on a business as a share trader?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

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:

· the application for private ruling, and

· the trading schedule for the 2008-09 income year.

Your intended strategy was to set up a Self Managed Super Fund (SMSF) for short to mid-term profit making. You did not intend to invest in long term investments due to your age health and retirement plans.

You intended to trade in speculative mining stocks in exploration or developmental phase for a short to mid-term profit.

Your research was undertaken from company reports, mining magazines, news items or geological maps. This methodology was adopted due to your years in the mining industry, directly involved in drilling and exploration and several years training as a geologist.

You used technical analysis and charting, but you found it unreliable in the global financial crisis. You subscribe to various email market alerts.

You normally spend approximately 30 hours per week at the computer watching markets live, seeking trades for the super fund and for your corporate entity.

You made five buy transactions and 4 sell transactions resulting in a loss of in the 2008-09 income year.

The majority of the loss is a result of passing up options in a company before they expired. You did not want to take up the options because of sudden uncertainties in the company. You did not want to risk a large sum of money to exercise the options.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 8-1.

Subject: Am I in Business - share trading

Share trading versus share investing

For income tax purposes, there are two possible scenarios as to how share activities can be treated. These scenarios are:

1. Business income this is where a person is a share trader and the shares would be regarded as trading stock and income/losses are included as assessable income/allowable deductions.

2. Investment/speculator this is where a person is not in business and any shares are regarded as capital assets. Any gains earned from the disposal of the shares would be assessable 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 as assessable income.

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

Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors can be applied to other types of businesses, such as share transactions. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

The question of whether a person is engaged in share trading has been addressed in a number of court cases and is essentially based on the facts of the situation.

In Case W8 89 ATC 171; (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 Administrative Appeals Tribunal (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 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), disallowed a deduction for losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains tax provisions. 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.

The taxpayer was unable to satisfy the AAT that he had established a proper pattern of trading in shares and that the share trading was not done in a regular, routine and systematic manner. This was despite arguments that he traded in speculative shares, received regular advice from his accountant, had discussions with his stockbroker and there was a continuity of business, the aim of which was to make a profit.

These cases give a good explanation of the difference between a share trader and a speculator. A share trader was seen as one whose dealings were seen as part of a more extensive business of buying and selling shares. The transactions have the character of a continuing business enterprise. A speculator makes individual forays in particular stock with a view to resale. The difference was determined by following a two-stage test:

(a) Is there a discernible pattern of trading in shares?

(b) If not, is there an evident intention to trade regularly, routinely and systematically?

In Case X86 and in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 the following were stated as factors to be considered:

(a) the nature of the activities and if 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 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:

(g) repetition and regularity in the buying and selling of shares;

(h) turnover;

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

(j) maintenance of an office;

(k) accounting for the share transactions on a gross receipts basis;

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

These factors are outlined below:

(a) The nature of the activities and profit making intention

Shares may be held for either investment or trading purposes, and profits on sale are earned in either case.

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

A business plan might show, for example:

· an analysis of each potential investment,

· analysis of the current market value and various segments of the market,

· 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.

Generally shares purchased for the purpose of making a profit on sale would be re-sold within a relatively short period of time, whereas shares held as an investment would be held over the medium to long term.

It is necessary to consider not only the subjective intention to make a profit, but also the objective facts of the case. This includes evidence of how the activity has actually been carried out, or evidence of how the activities were conducted.

In your case, you spend approximately 30 hours per week at the computer watching markets live, seeking trades for the super fund and for your corporate entity.

The purpose of your share activities is make a profit. You had nine transactions in the 2008-09 income year.

(b) The complexity and magnitude of the undertaking

You have bought and sold shares and spend approximately 30 hours per week on your share activities for your super fund and your business entity. You research specific mining stocks reading company reports, mining magazines, news items or geological maps.

(c) The repetition and regularity of the activities

Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions or the number of similar transactions.

In FC of T v. Radnor (91 ATC 4689), Hill J considered that the taxpayer was not carrying on a business of dealing in shares, primarily because there was no pattern of buying and selling. The low volume and low frequency of transactions was emphasised in finding that a business was not being carried on.

Similarly, in Case X86, there was no pattern of buying or selling, and the taxpayer was not considered to be carrying on a business of share trading.

In your case, there is no pattern or regularity to your buying and selling shares. You purchased the shares with the intent of selling to make a profit on the sale, they were not bought and sold repeatedly. There were only nine transactions during the income year.

(d) Organisation in a business-like manner and the use of a system

In general, most businesses have some form of forward planning to take account of contingencies and market fluctuations, as well as setting profit targets, budgets, periodic financial reviews, record keeping systems and an appropriate office. It would be reasonable to expect a share trading business to involve study of daily and longer-term trends, analysis of a company's prospectus and annual reports, and the seeking of advice from experts. As per Case X86, this means having or operating on a particular plan with the main goal of maximising profits.

You received no formal training in shares. You have read many publications and consult with your accountant. No other expert advice has been sought.

(e) Profit/loss arising from discernible pattern of trading

Your buying and selling activities have resulted in an overall loss for the 2008-09 income year.

(f) The volume of operations and the amount of capital employed

The higher the volume of purchases and sales of shares, the more likely it is that the taxpayer would be regarded as being in business.

The amount of capital employed in the activity is not a determinative factor and must be considered in line with other factors. An example is provided by Case X86 where the taxpayer invested $100,000 and was found not to be carrying on a business whilst in Case W8, the taxpayer invested $1,300 and was found to be carrying on a business. However, the larger the amount of capital that is invested, the more likely it is that the person is carrying on a business.

In Case W8 the taxpayer made a profit on buying and selling shares. He sold 21 parcels of shares, 17 of which generated a net profit of almost $4,500; the other four sales resulted in losses of $325.

You invested a significant amount of capital purchasing shares.

(g) Turnover

After you failed to take up the options on some of your shares, you had a significant loss.

(h) Keeping records

If records of purchases and sales of shares were not kept, it would be more difficult for a person to demonstrate that a business of share-trading was being carried on.

You record each share transaction and have profit and loss details. You keep electronic records as well as other documentation.

(i) Maintenance of an office

You have an office, computer, internet access and the necessary resources to carry on your share activities.

(j) Another occupation

You are retired but continue to run a company, trading in shares.

Conclusion

Although you carry out extensive research on the specific company that you invest in within the mining industry. It is considered that your activities do not amount to that of a business.

Your case is similar to Case X86. A deduction for losses on two parcels of shares sold after the 1987 stock market crash was disallowed. The taxpayer entered the stock market with 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.

In your case it is acknowledged that the global financial market was not good during the 2008-09 income year. However, when you purchased your initial shares in the 2007-08 year, the market was in a better state, yet little trading activity occurred.

You have not established a pattern of trading in shares and your share purchases are not performed in a systematic manner. The fact that you intended to trade in speculative mining stocks in exploration or developmental phase for a short to mid-term profit does not mean that a business is being carried out. Although you spend approximately 30 hours each week on share activities and keep records of your transactions, your situation is not indicative of a share trading business. You generally hold your shares for more than six months. After considering the above factors and your specific circumstances, it is considered that you are not carrying on a business as a share trader during the 2008-09 income year. Your trading activities were not repetitive or regular. You are regarded more as a share speculator rather than a trader.