Edited version of private ruling

Authorisation Number: 1011755650395

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Ruling

Subject: Carrying on a business

Question 1

Is The Superfund carrying on a business of share trading?

Answer

Yes

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.

The Superfund investments in property, managed funds and direct equities.

The trustees have allocated monies in a trading account for the purpose of buying and selling direct ASX listed equities. The trustees wish to trade frequently for the purpose of achieving a capital gain and have stop loss sales incorporated into their overall investment strategy.

The Shares currently being traded are generally:

· Not in the ASX top 200

· Limited to a particular industry sector

· Traded between varying short time frames

· Purchased in parcels with a preset minimum and maximum limit

Furthermore, the trustees are considering withdrawing monies from an under performing managed fund held within the superfund and using these funds to trade shares in the same manner.

Key points from the data derived from information provided are:

· The share holding account has significantly more trades than the share holding account.

· The average value of shares traded per transaction in the share trading account is significantly higher than that of the share holding account.

· No dividend was received for the shares held in the share trading account.

· The average holding period in between the time the shares were bought and sold is under a year.

Assumption

It is assumed that the frequency, volume and amount invested in the share trading account will be increased or remain at the same levels after the period tested.

Relevant legislative provisions

NIL .

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 Superfund is carrying on a business of share trading

Detailed reasoning

Australian Taxation Office (ATO) view on share trading and share holding

The ATO website provides guidance on the matter of whether a person is carrying on a business of share trading (The guide). This document can be sourced by searching the ATO website with the terms 'Carrying on a business of share trading' and finding the appropriate link.

The question of whether a person is a share trader or a share holder is a question of fact and is determined in each individual case. The following factors have been identified in various court cases:

1. the nature of the activities, particularly whether they have the purpose of profit making

2. the repetition, volume and regularity of the activities, and the similarity to other businesses in your industry

3. the keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number

4. the volume of the operations, and

5. the amount of capital employed.

The above factors will be applied to the facts of the case to determine if the superfund is carrying on a business of share trading.

The nature of activity and purpose of profit making

The following two definitions define a share holder and a share trader:

A person who invests in shares as a share holder (rather than a share trader) does so with the intention of earning income from dividends and receipts, but is not carrying on business activities.

A share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares.

The guide mentions the need to examine how the share trading activity had been carried out or whether a business plan existed.

Based on the facts of the case, The Superfund's business plan for its share trading activities would be:

The trustees have allocated monies in a trading account for the purpose of buying and selling direct ASX listed equities. The trustees wish to trade frequently for the purpose of achieving a capital gain and have stop loss sales incorporated into their overall investment strategy.

The Shares currently being traded are generally:

· Not in the ASX top 200

· Limited to a particular industry sector

· Traded between varying short time frames

· Purchased in parcels with a preset minimum and maximum limit

The fund's overall investment strategy indicates that the fund invested in shares as a share holder. Currently, the fund holds majority of its share portfolio in the capacity of a share holder. These investments are traded through a separate account from the one used for its share trading activities. The value of the shares in the portfolio used for share trading is marginally less than that of the share holding portfolio.

Unless there is information previously undisclosed to indicate otherwise, the income/loss derived from the buying, selling and dividends (if any) of securities held in that account will be treated as consistent with that of income derived from share trading.

Repetition, volume and regularity of activities

The following information is relevant for the analysis below:

· The Share holding account's valuation is marginally higher than the share trading account's valuation.

· The Share holding account will used as the control account in which the Share trading account's data will be compared.

Repetition

The relative size of the two share portfolios suggests that all things held constant, the Share trading account should have more trades than that of the share holding over any given period.

Based on the information provided, this does not appear to be the case. The Share holding account seems to have significantly more buy and sell trades than the Share trading account. The data, however, is misleading as majority of the share holding account's transactions are relatively small in comparison to those transactions in the Share trading account.

The determination of repetition of share trading activity cannot therefore be measured against the control and has to be gauged against other factors that can be reliably measured. This will be further discussed below under volume.

Volume

The purpose of a share trader is to carry out business activities with the aim of earning income from buying and selling shares. As previously indicated under the subheading repetition, the data states that the Share trading account has significantly less transactions than the share holding account. This difference can be, in part, explained by the dynamics of share trading. A share trader will under normal circumstances, seek to minimise the cost of his/her business activity. In this case, the only cost of the superfund is brokerage. A share trader will seek to minimise the transactions costs as much as possible (the brokage costs). In this case this is done by decreasing the number of trades and increasing the value of individual trades. This is because brokerage is paid on each transaction.

The data supports this assertion with the following key factors showing significant differences:

· Average value of shares traded

· Average number of shares traded

The average number of shares is the dependent on the average value of shares and is not indicative of in its own right. It appears that the decision to purchase the shares was based on funds allocated to invest in that particular transaction not the number of shares you could purchase. However the number of shares does indicate the intention to make a profit through a capital gain rather than a dividend payment. A 1 cent increase in a share worth $1 represents a gain of 1% where as an increase of 1 cent in a share worth $10 would be a 0.1% increase in capital gain. An increase of 1% in the lower price share in the market price of a lower priced share is theoretically easier than a 1% increase in the price of a higher priced share. This is consistent with the strategy of a share trader.

The self imposed limitation on industry sectors that can be traded in the Share trading account by the business plan explains significant difference in number of companies invested into by both accounts. The difference indicates that the business plan has been largely adhered to.

The difference in total value of shares traded is not statistically significant and is consistent with the relative sizes of the two portfolios.

Regularity

Regularity must be considered independently of the control account as it should not be expected that a portfolio largely held for income through dividends will be regularly traded. The term regularity will take the meaning for this ruling purpose as the time taken for the fund to close out of their holding position of any given share held for trading purposes. The ruling will consider any position that is closed out after more than one year to be considered held for the long term. Any time frames below one year is considered short term.

The average time taken for the fund to close out its holding position is well under a year. As the length of time that the fund has held the shares for trading is consistent with both the aim of a share trader (to achieve income through capital gains) and the business plan. The account held for share trading also received no dividend income from the shares it invested in, strengthening the assertion that the shares were not held as a share holding.

The facts indicate that the account held for share trading is carrying on the business of share trading.

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

The Superund has an Australian Business Number and keeps proper records about all its activities. This is a requirement by law regardless of any business activities it undertakes. Therefore, this factor will not be used as a primary factor when considering the overall result.

Volume of trading

As per the outcome concluded above in Repetition, volume and regularity of activities, the volume of shares (both in terms of value and number of shares) is indicative that a business of share trading is being conducted.

Amount of capital injected

The guide states that this factor is not a crucial factor in determining whether the fund is carrying on a business of share trading. However, this factor should be used in support of other factors. The Share trading account holds nearly half the value of all shares held and but only a small proportion of all investments held. It is not significant in terms of overall investments held but is significant in terms of shares held.

It is also worth noting from the facts that the trustees are considering withdrawing a significant sum of money from their other investments to increase the capital available in the Share trading account.

Their intention indicates that the trustee wants to derive income primarily from share trading (the percent of total funds allocated to share trading would then make up the majority of the entire portfolio if they decide to action their intention). The current levels of capital injected is not significant enough to indicate the fund is carrying on a business of share trading, however their intention seems to indicate that the current levels of capital used is only limited as the trustees current activities are a trial run for a significantly higher capital investment in the future. This intention would indicate the fund is carrying on a business of share trading.

Is The Superfund carrying on a business of share trading?

The effect of applying the facts of this case to the factors indicates that The Superfund is carrying on a business of share trading.