Edited version of private ruling

Authorisation Number: 1011738158949

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Ruling

Subject: Share trading Vs share investing

Question 1

Are you carrying on a business of share trading and losses incurred from share trading are allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 2004 30 June 2010

The scheme commences on:

July 2004

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have been actively buying and selling shares on the Australian Stock Exchange (ASX) for the purpose of income.

You trade through Commsec online and use their trading tools.

The tool helps you to look at graphs and monitor the market movements of share trading.

You use this tool and do the online research before buying and selling shares.

You buy approximately about 200 shares per year and sell similar quantity.

You have attached contract note summaries for the years 2005 to 2010.

We contacted you for further information.

You provided detailed statements of your share transactions for the years 2007 and 2008.

You also have all the necessary documents for all the years and confirmed that you did this on a part time basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 6-5

Summary

You are carrying on a business of share trading and any losses incurred from share trading are allowable deductions.

Reason for decision.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but… not 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. The Tax Office has also issued Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?

TR 97/11 is of general application. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, 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;

§ whether the activity is better described as a hobby, a form of recreation or sporting activity; and more particularly in respect of share traders:

§ repetition and regularity in the buying and selling of shares

§ turnover

§ maintenance of records of share transactions

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Commercial purpose or character

Generally it can be said that to carry on business means to 'conduct some commercial enterprise systematically and regularly' with 'features of continuity and system': Hyde v. Sullivan (1956) 73 WN (NSW) 25. The usual aim of business is to maximise profits. This is achieved by organising trading activities as efficiently as possible.

The extent of the system and organisation is often used to distinguish between a business and a mere hobby. Ferguson v. FC of T (1979) 9 ATR 873; 79 ATC 4261 provides an example of the application of this test. In this case, the taxpayer was found to be carrying on a business of primary production based largely on the systematic and well-organised way the activities were carried out.

In FC of T v. JR Walker (1985) 16 ATR 331; 85 ATC 4179 the taxpayer was found to be carrying on a business of goat breeding even though he only owned one Angora goat.

Profit making

The nature of activity that you have undertaken seems to be share trading. In your case a conclusion can be drawn that you have a motivation to make a profit from your share trading activity.

Engage in trade regularly, routinely and systematically

An intention to engage in trade regularly, routinely and systematically is a significant characteristic when considering if someone is a share trader. In FCT v. Radnor Pty Ltd (1991) 22 ATR 344, a trader was held not to be carrying on a business of share trading, primarily because there was no pattern of buying and selling and the low volume and frequency of transaction that were made. The numbers of transactions made by you are as follows:

for the year ended 2005 575

for the year ended 2006 629

for the year ended 2007 286

for the year ended 2008 289

for the year ended 2009 289

for the year ended 2010 349

You have done an average of about 400 transactions per year. An analysis of your trading shows that trades were spread fairly evenly across the time-frame for which you have been trading. Therefore it can be said that you were trading on a routine and regular basis.

You monitor markets, newspapers and magazines for information. You use your software tool for the analysis of shares in the market. As a result of this we consider your share trading is systematic.

Organisation in a business like manner

Generally it can be said that most businesses would have some form of forward planning to take account of contingencies and market fluctuations. They would also set profit targets, budgets, have periodic financial reviews and record keeping systems. You have stated that for record keeping purposes, you retain copies of all buy and sell contracts for your share contract.

Profits and losses

You have undertaken an average of about 400 transactions in one year. The listing of the share trades that you have provided shows that those trades were fairly evenly spread over the financial year. Profits and losses on trades in themselves are usually quite small. There is also a relatively even spread between those transactions which are profitable and those which result in losses.

Volume of operations

The amount of capital invested in the activity is not a determinative factor and must be considered in line with the others. An example is provided by Case X86 ATC 621 where the taxpayer invested $100,000 and was found not to be carrying on a business whilst in Case W8 89 ATC 171 the taxpayer invested $1300 and was found to be carrying on a business.

Conclusion

It is considered the above factors indicate that you are carrying on a business of share trading during the income years for which the ruling is sought. This is on the basis that you have a profit making plan, trade on a routine and regular basis, have a discernible approach and have invested a moderate amount of capital. As a share trader, income from the sale of shares will be considered to be assessable income under section 6-5 of the ITAA 1997. You will also be entitled to claim a deduction for expenses that you have incurred in regards to the share trading activity under section 8-1 of the ITAA 1997.