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Edited version of private ruling
Authorisation Number: 1011821248256
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Ruling
Subject: Am I in business - share trader
Question
Are you carrying on the business of share trading?
Answer: No.
This ruling applies for the following periods:
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You are in full time employment.
You commenced buying and selling options and warrants a few years ago.
You did not complete any courses, and you do not have any qualifications in share trading. You did consult with a stockbroker before commencing trading activities.
You commenced your trading activities with funds accumulated over a number of years. You invested an amount of your cash reserves in the following three months. You do not use other facilities to access further capital.
You do not use a business plan when conducting your trading activities, however you and your stockbroker did devise a strategy when you met to purchase short term options and warrants. You have not advised any further details of your trading strategy.
You purchase predominately blue chip options and warrants. You did not retain shares as long term investments. You did not purchase shares for the purpose of earning dividends. You purchases were restricted to the amount of available funds at the time of purchase.
In making decisions for your share trading activities you accessed your broker's web site which included charts, pricing and company announcements. You also daily reviewed other websites to research the market, and to help you make decisions.
You did not use stop loss limits, but did consider market fluctuations on a daily basis.
You conducted 32 transaction in your second year of trading. Your average hold time was seven days. You conducted eight transactions in your third year of trading. Your average hold time could not be established for this period. Your trades were generally about $5,000 in value.
You do not have a separate business address for your share trading activities. Your only equipment used is your computer.
Your only records retained are transaction listings.
On average you spend two hours per day on your share trading activities, and eight hours per day on other income producing activities.
You are no longer trading in shares.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 70-10
Income Tax Assessment Act 1997 Section 102-5
Reasons for decision
Question 1
Your assessable income includes any ordinary income that you earned during the income year. Assessable income can be offset against deductions for any expenditure that you incurred in gaining or producing your assessable income. However, you cannot make a deduction for any expenditure that is capital or private in nature.
Ordinary income includes income that you earn as an employee, as well as any income you earn from business activities. If you are carrying on a business of share trading, options and shares that you purchase will be held to be trading stock, and will be on revenue account.
Your assessable income also includes amounts that are not ordinary income, but are included by provisions in the Income Tax Assessment Act 1997. These amounts are called statutory income.
Statutory income includes amounts that you earn from investing activities. Any losses from realising a capital gain can only be carried forward to be offset against future capital gains. If you are someone who invests in shares and options your purchases will be considered capital.
To determine if you are carrying on a business of share trading it is not necessary that a taxpayer derives all of their income from that activity. What is important is that the taxpayer's activity amounts to the carrying on of a business. No one indicator is decisive, but must be considered in combination as a whole.
The following table provides a summary of the main indicators of carrying on a business, as well as an application of the facts of your own situation.
Indicators which suggest a business is being carried on |
Application of your facts to business indicators |
a significant commercial activity |
Your activity is share trading which is an inherently commercial activity. |
purpose and intention of the taxpayer in engaging in the activity |
You did not purchase shares to be held long term, and you did not purchase shares so as to receive dividends. Your intention in trading was to make a profit. |
an intention to make a profit from the activity |
There appears to be a profit making intention in your share trading activities. |
the activity is or will be profitable |
You have not supplied any information in regards to whether or not your activities are profitable, however share trading could be profitable. |
repetition and regularity of activity |
During your second year of trading you conducted 32 trades, this is approximately one trade every 11 days. Your average hold time was approximately 7 days. During your third year of trading you conducted 8 trades. You have not supplied enough information to establish hold times. |
activity is carried on in a similar manner to that of the ordinary trade |
Trade frequency is low for a share trader who would generally trade multiple times on a daily basis. Share traders would generally use other sources of finance, such as margin loans, to fund trading activities, whereas you have used cash reserves. It would be expected that share traders would spend more than two hours per day on their trading activities. |
activity organised and carried on in a businesslike manner and systematically - records are kept |
You only keep records of transaction lists. |
size and scale of the activity |
You trades are generally about $5,000, and conducted infrequently. You do not have a commercial premise where you conduct your activities, and your only equipment used is your computer. |
not a hobby, recreation or sporting activity |
Not applicable. |
a business plan exists |
You do not have business plan. |
commercial sales of product |
Options and warrants are a commercial product and you traded at arms length. |
taxpayer has knowledge or skill |
You do not formal training on share trading. Your level of knowledge or skill cannot be determined from the information that you have provided. |
Although your share trading activities do have some indicators that you are in business, such as it is a commercial activity and that you had the intention to make a profit, these factors are outweighed by other indicators such as infrequency of trading, not conducting your activities in a way a share trader would, the relative small size of your trades and your lack or record keeping. To support this argument you also have no business plan, or training in the area of share trading.
It is then considered that you are not in the business of share trading, but are instead some one who invests. Accordingly, any capital gains or losses made would be included in your assessable income as statutory income. Any losses from your share trading activities can be carried over to future years to be offset against future capital gains.