Edited version of your private ruling

Authorisation Number: 1011970233492

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Subject: Capital gains tax - carrying on a business as a share trader - losses - deductions

Question: Will you be eligible to claim deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for losses made in relation to your share activities 2010-11 income year?

Answer: Yes.

This ruling applies for the following period:

Income year ending 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You commenced your share activities during an earlier income year on a small scale to gain exposure to the share market.

You conduct your share activities from a joint account held with your spouse and also from an account held solely in your name.

During the 2010-11 income year, you have undertaken over 160 share transactions.

Your forward planning in relation to your share activities is based on the holding period, and how much the share price will appreciate based on analyst recommendations.

You purchase a variety of shares ranging from blue chip to speculative shares as tipped by analysts with short term potential for gains.

You leverage your share activities with your margin loans for higher profit leverage.

Your buying strategy is based on analyst tips and recommendations sourced from various publications on shares with growth potential translating into short term gains, or when experience or price falls indicate bargain hunting and opportunities for short term gain.

Under your sell strategy, a sell might occur when the profit target is realised, short term mostly, or when the price falls or keeps falling, and based on analyst tips and recommendations. A sell might also occur to better employ capital to maximise short term gains on a bargain hunt in the market.

Your objective in conducting your share activities is to make a profit, or regular income through the buying and selling of shares.

You purchase some shares for long term investments and during the 2010-11 income year for the purpose of earning dividends, which become part of income during the holding period. You sometimes purchase shares with high dividend yields which might become good short term capital gain and dividend opportunities. You claim franking credits on dividends when they are eligible.

You disposed of a number of your long term investments during the 2010-11 income year.

Your budgeting strategy in relation to how many shares you buy is based on funds available in your margin lending credit facility and other funding in general. Decisions are also based on opportunities existing in the market on high gain potentials.

You take market fluctuations into account when you make decisions by employing non-guaranteed stop losses which are affected at a specified percentage level when market fluctuations are encountered, with some exceptions when you considered there were good opportunities for a short term share price rebound. You may not exercise the stop loss at the prescribed levels.

You diversify your shares to minimise risk in relation to your share activities.

You have accounting qualifications both in Australia and overseas.

Your current and previous full time employment has provided you with experience which has aided you with your strategies in relation to your share activities.

You use the brokerage services of certain bank broking, which you monitor on a daily basis.

You have attended share seminars in the past for product knowledge and techniques.

You have undertaken the following research in relation to your share activities:

· Conducting daily research on web sites and financial review publications;

· Watching late line business on television daily; and

· Researching in magazines.

You analyse daily recommendations provided on brokerage sites.

You utilise the following information and analytical models when making your share activity decisions:

· Graphs and analytical tools for decision making provided by brokerage services;

· Long and short term trend charts;

· Trigger charts;

· Updated news from various sources;

· Growth ratios;

· Funding and debt ratios;

· Profit forecasts and recommendations;

· Analyst recommendations; and

· Information sourced from publications and web sites.

You monitor the market and share developments on a daily basis via your brokerage provider, websites, and publications.

You use a home office for your share activities, with a dedicated personal laptop, wireless internet and a printer for use after full time working hours, including evenings, nights and weekends. You use the internet on your mobile phone to regularly check share prices to assist in buy and sell decisions during your full time employment work breaks.

You retain your share transaction statements and interest expense records and have provided copies of share transactions undertaken during the 2010-11 income year. These documents should be read in conjunction with, and form part of, this private ruling..

You spend a significant amount of time per week on your share and contracts for difference activities and are employed in full time employment.

You source your capital from a line of credit, personal loans and savings. Margin loan credit facilities are used as further funding leverage. The amount you invest is dependent on funds available in margin lending credit or other funding facilities and risk factors.

You expect to make a net revenue loss and a net capital loss during the 2010-11 income year.

You have provided a copy of your share trading business plan which forms part of, and should be read in conjunction with this private ruling.

We took these laws into account (legislation)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

The difference between a share holder (investor) and share trader (business)

There are two possible scenarios as to how share 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 will 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'.

Whether a share trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained. The following case law supports the concept of impression gained about the distinction between a share market investor/speculator and someone who is carrying on a business of share trading.

In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) 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.'

This was re-iterated more recently in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470:

The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained.

The factors that are considered relevant in determining whether an activity is carried on as a business have 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 DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 (Shields v DFC of T (Cth)) and Smith 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 traders,

· 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.  

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

In Case W8 89 ATC 171; (1988) 20 ATR 3182 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, with 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 trading. 

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. 

In a recent decision handed down by the AAT on 5 August 2010, Smith, it was found that Mr Smith was not in the business of share trader during the year ended 30 June 2007 or 30 June 2008 when the following factors were taken into account:

· 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/loss is regarded as arising from a discernible pattern of trading; the volume of the taxpayer's operations and the amount of capital employed by him;

· Repetition and regularity in the buying and selling of shares;

· Turn-over;

· Whether the taxpayer was operating to a plan, setting budgets and targets, keeping records;

· The maintenance of an office;

· Accounting for the share transactions on a gross receipts basis; and

· Whether the taxpayer was engaged in another full-time profession.

The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit making because:

· He held his shares for periods longer than a share trader generally would;

· Took DRP's and dividends;

· His activities did not demonstrate to the Tribunal's satisfaction repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business;

· The applicant did not maintain a separate office;

· The applicant worked fulltime in a very responsible position at Babcock & Brown. He qualified this by stating "although I do not put much weight on that, I was concerned that he was unable to indicate what kind of time he spent on buying and selling shares"; and

· He did not keep any separate accounting but relied on third party systems (BT and the WBC platform).

The tribunal concluded that "The evidence points strongly to, and my overall impression is, that Mr Smith was not conducting a business either in 2007, or in 2008, that he was not in business, and not in the business of share trading. I was satisfied that he had more disposable income than previously, and invested it in shares as an investor might. I have preferred the submissions of the Respondent in that regard".

To summarise, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

Applying the criteria to your circumstances

We have considered the relevant factors, as outlined above, when determining whether you were carrying on a business as a share trader during the 2010-11 income year. The factors or indicators that give the overall impression that you were carrying on a business of share trading for the income year ended 30 June 2011 are:

· Your objective in conducting your share activities is to make a profit, or regular income through the buying and selling of shares;

· You traded shares in a regular, routine and systematic manner during the 2010-11 income year, with the exception of the month of November 2010, as supported by copies trading statements of your share activities during the 2010-11 income year;

· You operated in a business like manner, that is you used a degree of sophistication and your trading was not left to chance;

· You have a business plan which outlines you objectives in relation to your share activities, conditions for 2011, your assessment of opportunities, stock selection and criteria and funding for your share activities;

· Your buying strategy is based on analyst tips and recommendations sourced from resources publications on shares with growth potential translating into short term gains or when experience or price falls indicate bargain hunting and opportunities for short term gain;

· Under your sell strategy, a sell might occur when the profit target is realised, short term mostly, or when the price falls or keeps falling, and based on analyst tips and recommendations. A sell might also occur to better employ capital to maximise short term gains on a bargain hunt in the market;

· You take market fluctuations into account when you make decisions by employing non-guaranteed stop losses which are affected a specified percentage level when market fluctuations are encountered, with some exceptions when you considered there were good opportunities for a short term share price rebound. You may not exercise the stop loss at the prescribed levels;

· Your budgeting strategy in relation to how many shares you buy is based on funds available in your margin lending credit facility and other funding in general. Decisions are also based on opportunities existing in the market on high gain potentials;

· You have accounting qualification and your current and previous full time employment has provided you with relevant experience to apply to your share activities; and

· You use a home office for your share activities, with a dedicated personal laptop, wireless internet and a printer for use after full time working hours, including evenings, nights and weekends. You use the internet on your mobile phone to regularly check share prices to assist in buy and sell decisions during your full time employment work breaks.

As it is viewed that you were in the business of share trading during the 2010-11 income year, any gains will be assessable income under section 6-5 of the ITAA 1997 and any losses will be deductible under section 8-1 of the ITAA 1997.