Edited version of your private ruling

Authorisation Number: 1012008690480

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Subject: am I carrying on a business as a share trader? - loss - deduction

Question 1: Were you carrying on a business as a share trader during the 2010-11 income year?

Answer: No.

Question 2: Will you be eligible to claim a deduction for the loss you made in relation to your share activities during the 2010-11 income year?

Answer: No.

This ruling applies for the following period

Income year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You commenced your share activities a number of years ago and obtained a private ruling from the Australian Taxation Office (ATO) on your status in relation to your share activities during the income year in which you commenced your share activities. It was determined that you were carrying on a business as a share trader during the relevant income year and therefore could claim a deduction for the loss you had made on your share trading activities during that income year.

You undertook a number of share transactions during 2001-02, 2002-03, 2003-04, 2004-05, 2005-06, 2006-07 and 2007-08 income years. .

During the 2010-11 income year you undertook a small number of share activities in relation to shares held in a limited number of companies.

Your strategy was to make a profit through occasional trading, and backup these activities with some dividend earnings.

Your share trading activities were a part-time activity and on average you spent a small number of hours on your share activities, with significantly more hours spent on other income producing activities.

You do not have any formal training in relation to you share activities, but have obtained cumulative experience over the years while undertaking your share activities.

You do not have a formal business plan in relation to your share activities.

Your forward planning in relation to your share activities consists of:

§ Increasing trading activities and volume when the market is bullish, and extra capital can be injected;

§ You use a rough rule of thumb that 50% more can be injected and the value of your total share portfolio should not fall below 50% of the capital; and

§ Trading may come to a halt in bear markets for as long as needed and loan can be reduced.

At the beginning of the 2010-11 income year you had invested a significant amount of capital, which had been carried over from the previous income year. After undertaking the share transactions during the 2010-11 income year, you still have a significant amount of capital invested in your share activities.

Your capital was sourced from margin loans, lines of credit, personal savings and private sources. You could access additional capital from reserved margin loans and a fund related to your home loan if needed.

You invest in the following types of shares:

§ Banking and finance;

§ Biopharmaceutical;

§ Mining;

§ Telecommunication; and

§ Infrastructure.

You acquired a number of shares with the intention to keep them for long term investment for the purpose of earning dividends.

Your share trading strategy consisted of the following:

§ Your aim is to make a profit;

§ Your strategy is to buy low and sell high in bull markets;

§ Pull back and watch in bear markets;

§ Use blue chip shares as insurance;

§ Regulate your share portfolio every few years;

§ Seek extra capital when market is depressed for longer time. If capital is too costly, accept losses; and

§ Trading profit can be used to reduce loan balance when not used for trading activities.

You made decisions on whether to buy, hold or sell shares on an individual case basis.

You use the internet and information technology to monitor and analyse share markets and conduct research on the internet online brokers with the objective to make a profit and to become more knowledgeable.

You gain information in relation to shares from newspaper, media, television, and internet and use your gut feeling in relation to speculative shares.

You use broker watchlist, analysis, company announcements and news, traditional historical data and trading trends when making decisions in relation to your share activities.

For long term investments you usually use the PE ration and yield as a guide.

You conduct market analysis and research when making decisions through the daily use of the internet, broker's watchlist, company news, Australian Stock Exchange (ASX) announcements, company websites, shareholder's centre earning projection dividend yields, director's interest change sector, and trends such as mining and banking trends over a period of a few years.

You account for market fluctuations when making decisions by:

§ Changing your decision depending on markets;

§ Buying low and selling high;

§ Holding shares when uncertainties or risk is too high;

§ Speculate when rumours occur;

§ Have large reserve so that margin call will not happen;

§ Sell at a loss only when desperate.

You study the development of the markets and your shares on a daily to weekly basis as follows:

§ Speculative shares are usually checked for price fluctuations on a daily basis; and

§ Long term shares are reviewed less frequently.

You use the internet, websites, broker's facilities, magazines, newspapers, television media, company news, annual reports and director's interest on some occasions to study the development of the markets and your shares.

You use the brokering services of a number of brokers, which you use almost on a daily basis to source technical material such as price, volume, number of trades, high and low daily, weekly and monthly prices, pie charts, stock analysis by other brokerages, recommendations, PE ratio and dividend yields.

You do not obtain any expert advice in relation to your share activities.

You conduct your share activities from a home office in which you have laptops and desktop computers, internet facilities, computer software, fax machine which you use for your activities.

You keep the following records in relation to your share activities:

§ Broker's statements;

§ ASX statements;

§ Buy and sell activities;

§ Loan facilities;

§ Payment details; and

§ Annual summaries of activities.

You provided copies of a number of documents, which form 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

Reasons for decision

Taxation Ruling 97/11 (TR 97/11) provides guidance on the Commissioner's view about carrying on a business. Whilst TR 97/11 is about carrying on a business of primary production, they have been developed by the courts of law, are used for all cases about the carrying on of a business. These indicators include: 

- The nature of the activities, particularly whether the potential for profit making;

- The repetition and regularity of the activities;

- Organisation in a business like manner, including whether the activity is of the

same kind and carried on in a similar manner to that of the ordinary trade in

that line of business and the use of a system or method; and

- The volume of the operations and the amount of capital employed.

In considering whether a person is carrying on a business, all of the above indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. The weighting given to each indicator may vary from case to case.

Two specific factors assist in determining the activities as a business, repetition and the existence of a purpose of making a profit.  

The decision in Smith v FC of T 2010 ATC 10-146 identifies a number of factors as being relevant as to whether a taxpayer is carrying on a business as a share trader including the nature of the activities, complexity and magnitude of the undertaking, whether there was a discernible pattern of trading, whether there was repetition and regularity in buying and selling of shares, the volume of transactions, whether the taxpayer had an operating to a plan and whether professional advice was sought.

In that case, the taxpayer was one of five directors employed by Babcock & Brown. The taxpayer's evidence was that, until 2006, he did little share buying and selling, holding his shares for considerable periods. In July 2006 he undertook a new margin loan facility and transferred his existing share portfolio to Bankers Trust on favourable terms. He then substantially increased the level of his day-to-day activities in share dealing, including the number and value of purchases and sales of parcels of shares and securities, the equity and loan capital invested, the level of personal time commitment, and the range, complexity and method of operation of share dealing.

According to the taxpayer, from July 2006 he was actively dealing and trading in shares and securities through buying, holding and selling the shares and securities for short-term profit-making by way of regular and repetitive transactions.

Nevertheless he did not represent himself as a share trader until after he had lodged his income tax returns for 2007 and 2008; rather he treated himself as an investor in the share market, with gains and losses from the share market returned in his income tax returns as capital gains or losses.

At issue was whether the taxpayer was carrying on a business, and specifically whether he was in the business of being a share trader rather than an investor in 2007 and/or 2008. The taxpayer submitted that whether a person was a dealer or trader was a matter of fact, and that "purpose" was relevant only where the activity had not yet commenced. In the alternative, he argued that he was carrying on a business of trading in revenue assets, and that the profits and losses from the realisation of sales of shares would be ordinary income.

The decision affirmed that the taxpayer invested reasonably large amounts of money in shares during the relevant period, and conducted various buying and selling transactions. However, he did not meet the tests in order to be held to have been conducting a business in 2007 and 2008, nor to have been a share trader in the relevant years.

The taxpayer's activities in buying and selling shares did not demonstrate that he was conducting a business, or in the business of share trading. There was no plan, repetition or regularity in the buying and selling of his shares. Moreover his activities did not demonstrate the purpose of profit-making: he held shares for longer periods than a trader would, and did not take profits as they arose. He was reliant on (and restricted by) Babcock & Brown's processing of approval to buy and sell, and he did not keep any separate accounting. During 2008 his sales appeared to be due to the substantial downturn in values of his shares, which occurred due to the economic downturn. He gave the impression that he was more of an investor than a trader.

The taxpayer was not carrying on a business of dealing in revenue assets, rather his disposals of shares and other securities were none other than a mere realisation or change of investment. His shares could not be treated as trading stock on revenue account

Whilst each case turns on its own particular facts, the determination of the question is the result of a process of weighing all the relevant factors. The general factors listed in Case X86 are as follows (at 629):

1. The nature of the activities and whether they have the purpose of profit-making;

2. The complexity and magnitude of the undertaking;

3. An intention to engage in trade regularly, routinely or systematically;

4. Operating in a business-like manner and the degree of sophistication involved;

5. Whether any profit/loss is regarded as arising from a discernible pattern of trading;

6. The volume of the taxpayer's operations and the amount of capital employed by them;

and more particularly in respect of share traders, the following specific factors:

1. The repetition and regularity in the buying and selling of shares;

2. Turnover;

3. Whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

4. Maintenance of an office;

5. Accounting for the share transactions on a gross receipts basis;

6. Whether the taxpayer is engaged in another full-time profession.

The AAT in Case X86 also adopted the High Court distinction in Williams v. Federal Commissioner of Taxation (1972) 128 CLR 645, between a 'share trader' and a 'speculator'. At 622 member Todd stated that a share trader is 'a person who deals in shares such that his transactions have the character of a continuing business enterprise'. He stated further at 628 that a share trader will be 'inclined to take advantage of good, short-term profits' and will 'accept small percentage losses'. In comparison, a speculator is a person whose transactions are 'in the nature of individual forays in particular stocks with a view to resale' (at 626-627). A speculator will hold on to the shares 'in the hope of making an abnormal profit' and will prefer to 'hold on to his shares indefinitely rather than accept small percentage losses' (at 628).

In the Williams Case the taxpayer was the managing director of a company engaged in the import and export business. In 1966 through to 1969 he bought shares in four mining companies (ranging from $1,900 to $13,000 in cost). He sold most of the shares in the latter half of 1969, making a net profit of $80,000 due to the minerals boom. To try and reduce his taxable income, he bought $105,000 shares in another mining company on 14 June 1969 and sold half of them at cost on 25 June 1969. In deciding whether to buy or sell the shares, the taxpayer relied upon his own knowledge of the prospects of particular companies, gained from his contacts with their management in the course of his export and import business.

The High Court held that the taxpayer was a speculator. There was no system or method in the undertaking of his stock exchange transactions. Rather, the transactions had the character of 'individual forays in particular stocks which he bought with a view to resale' (at 4168).

The question of whether a person or entity is carrying on a business as a share trader or an investor/speculator is determined by considering the following factors (although no particular factor provides a conclusive decision):

We have considered the following factors when determining your status as either that of a share trader or a share investor during the 2010-11 income year:

The nature of the activities and whether they have the purpose of profit making

The mere intention to make a profit is not, on its own, sufficient to establish that a business is being carried on. It is necessary to consider not only the intention to make a profit, but also the objective facts of the case. This would include details of how the activity has actually been carried out.

In FCT v Whitfords Beach Pty Ltd (1980) 150 CLR 355, Gibbs J said,

the conclusion that a profit made on the realisation of a capital asset does not become income by reason only of the fact that the asset was acquired for the purpose of profit-making by sale accords with ordinary concepts. Such a profit is ordinarily regarded as a capital gain, even though the asset was bought for the purpose of making a gain.

The buying and selling of speculative shares is consistent with being a speculator in shares that is taking high risk for large return. This is consistent with the purpose of profit-making by sale rather than carrying on a business of a profit-making undertaking.

Your strategy is to make a profit through occasional trading, with some dividend income. You held shares in a small number of companies which does not support that you sought to maximise opportunities to make profits in relation to your share activities.

It is reasonable to expect any individual, whether in their role as a share trader or share investor, to enter into share transactions with the intent to make a profit. As outlined above, the mere intention to make a profit is not sufficient to establish that a taxpayer is carrying on a business as a share trader.

You invest in banking and finance, biopharmaceutical, mining, telecommunication and infrastructure shares.

You purchased and held the shares disposed of during the 2010-11 income year for over twelve months. It might be expected that 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.

The fact that you held your shares for significant periods of time indicates that your activities were not those of a share trader who would generally buy and sell share within a short period of time, while a share investor would generally hold their shares for longer periods of time. The body of case law, such as in the case of Radnor, holds that holding shares for long periods of time is the salient indicator in determining a taxpayer is an investor.

In general, a share trading business should have some form of business plan for buying and selling shares, particularly speculative mining shares which carry a high risk. The plan would require:

1. Setting profit targets,

2. Budgets,

3. Periodic financial reviews,

4. Record-keeping systems,

5. Study of daily and long term trends,

6. Careful research of the companies,

7. Regular analysis of the market,

8. The use of hedging techniques,

9. Operate to a plan apart from the goal of maximising profits,

10. Contingency plan in place should the market deteriorate; and

11. Seeking advice from professionals.

You do not have a business plan, but your strategy consists of the following:

§ You aim to make a profit;

§ To buy shares at a low price and to sell at a high price in bull markets;

§ Pull back and watch in bear markets;

§ Use blue chip shares as insurance;

§ Regulate your share portfolio every few years;

§ Seek extra capital when market is depressed for longer time. If capital is too costly, accept losses; and

§ Trading profit can be used to reduce loan balance when not used for trading activities.

You account for market fluctuations when making decisions by:

§ Changing your decision depending on markets;

§ Buying low and selling high;

§ Holding shares when uncertainties or risk is too high;

§ Speculate when rumours occur;

§ Have large reserve so that margin call will not happen;

§ Sell at a loss only when desperate.

You did not set up any stop loss limits to account for when share prices fell in order to reduce losses.

You make decisions on whether to buy, hold or sell your shares on an individual case basis and conduct market analysis and research when making decisions through the daily use of the internet, broker's watchlist, company news, Australian Stock Exchange (ASX) announcements, company websites, shareholders centre earning projection dividend yields, director's interest change sector, and trends such as mining and banking trends over a period of a few years.

You use information and analytical models sourced from newspapers, media, television, internet, speculation and gut feeling for making decisions in relation to speculative shares. You also use broker watchlist, analysis, company announcements and news, historical data and trading trends. For long term investments, you usually use the PE ratio and yield as a guide.

It is reasonable to expect that both share investors and share traders would conduct research into the companies in which they were reviewing for the purpose of share acquisition.

Based on the information you have provided in relation to your share activities, it is not considered that there was sufficient commercial activity to amount to the carrying on of a business. Although there was an intention of profit, which would be expected of a share trader or a share investor, the nature of your activities does not support that your status during the 2010-11 income year was that of share trader.

The repetition and regularity of the activities

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

In determining whether your trading activities constitute a share trading business, the following test should be imposed:

§ Is there a discernible pattern of trading in shares; and

§ If not, is there evident of an intension to engage in trade regularly, routinely or systematically.

The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business.

As outlined in the Federal Court case of Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; (1991) ATC 4689, the taxpayer was held not to be carrying on a business of dealing in shares, primarily because there was no pattern of buying and selling, and 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.

During the 2010-11 income year you undertook a small number of share activities. The volume of your activities is not indicative of a share trader based on the number of times you traded during the 2010-11 income year. You did not undertake any share activities during the majority of the year and did not enter into any buy transactions during the entire income year.

Therefore, it is not viewed that the volume of share transactions you undertook during the 2010-11 income year would be viewed as those undertaken by a share trader.

Also the frequency of the limited activities does not support regularity, but random activities undertaken by you.

Organisation in a business-like manner, the keeping of records and the use of a system.

It would be reasonable to expect a share trading business to involve the studying of daily and longer term trends, analysis of a company's prospectus and annual reports and seeking advice from experts, In addition to this, any qualifications, expertise, training or skills you may have would be relevant to determining whether your activities constitute a business.

You do not obtain any expert advice in relation to your share activities.

You use the internet, websites, broker's facilities, magazines, newspapers, television media, company news, annual reports and director's interest on some occasions to study the development of the markets and your shares.

You conduct research on the internet online brokers with the objective to make a profit and to become more knowledgeable.

You study the development of the markets and your shares on a daily to weekly basis as follows:

§ Speculative shares are usually checked for price fluctuations on a daily basis; and

§ Long term shares are reviewed less frequently.

While you review the market on a daily and monthly basis, this does not constitute a plan that operates apart from the goal of maximising profits. This does not provide an explanation for how you have incorporated the critical success factors, key performance indicators and targets into your strategy in relation to your share activities.

In Thomas v. FC of T 72 ATC 4094 Justice Walsh noted that any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative.

You do not have any formal training in relation to you share activities, but have obtained cumulative experience over the years of undertaking your share activities.

You use the brokering services of a number of brokers, which you use almost on a daily basis to source technical material such as price, volume, number of trades, high and low daily, weekly and monthly prices, pie charts, stock analysis by other brokerages, recommendations, PE ratio and dividend yields.

The use of brokerage services does not necessarily provide evidence that you are carrying on a business as held in FCT v Radnor Pty Ltd 91 ATC 4689, when Hill J said:

the mere fact that an investment adviser was employed and brought to bear professional portfolio management principles did not, of itself,

require the conclusion that a business was carried on if the activities themselves did not mount to a business.

You conduct your share activities from a home office in which you have laptops, desktop computers, internet facilities, computer software, fax machine which you use for your activities.

Your share trading activities are a part-time activity and on average you spend a small number of hours on your share activities and significantly more hours on other income producing activities.

Investors generally maintain limited records of their transactions such as buy and sell contracts for capital gains tax purposes and keep spreadsheets to maintain information in relation to their buys and sells. If records of purchases and sales of shares are not kept, it is more difficult for a taxpayer to establish that a business of share trading was being carried on.

You keep the following records in relation to your share activities:

§ Broker's statements;

§ ASX statements;

§ Buy and sell activities;

§ Loan facilities;

§ Payment details; and

§ Annual summaries of activities.

Overall, your activities are similar to that of a share investor and it is viewed that your record keeping tools are simple and characteristic of an investor as opposed to a trader.

The volume of operations and amount of capital employed.

Generally, the higher the volume of purchases and sale of shares, the more likely it is that you will be carrying on a business. A commercial share trader trades on a basis that is both routine and regular.

A specific minimum number cannot be assigned, however, the courts are more likely to characterise small-scale activities as hobbies or pastimes rather than a business, as in Fairway Estates Pty Ltd v FCT (1970) 123 CLR 153; 1 ATR 726; 70 ATC 4061 per Barwick CJ. Obviously, the smaller the scale of a taxpayer's activities, the more important other factors such as system and organisation become.

You undertook two share transactions during the 2010-11 income year. The amount of activity is considered low and would generally not be regarded as being regular when being compared to that of a commercial trader.

The amount of capital that you invest in buying shares is not considered to be a determinative factor in determining whether you are carrying on a business of share trading. It is possible to carry out business activities with a relatively small amount of capital, and alternatively, you may also invest a substantial amount of capital and not be considered a share trader.

At the beginning of the 2010-11 income year you had invested a significant amount of capital, which had beeen carried over from the previous income year. After undertaking the sharel transactions during the 2010-11 income year, you still had a significant amount of capital invested in your share activities.

You source the capital from margin loans, lines of credit, personal savings and private sources. You can also access additional capital from reserved margin loans and reserved fund from a home loan, if needed.

It is viewed that the amount of capital you invested in your share activities was significant. However, as outlined above, the amount of capital you invest in share activities is not a determinative factor, the volume of activities is.

In your case, the volume of your share activities was not high and suggests that you were a share investor rather than a share trader during the 2010-11 income year and the amount of capital you invested indicates that you had a significant amount of disposable income that you invested in shares.

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 and have determined that you were not 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 not carrying on a business of share trading for the 2010-11 income year are:

§ Your strategy was to make a profit through occasional trading, with some dividend income;

§ You held shares in a small number of companies which does not support that you sought to maximise opportunities to make profits in relation to your share activities;

§ You held your shares for significant periods of time, considered longer than a share trader generally would;

§ Your activities did not demonstrate repetition and regularity in the buying and selling of shares in order to demonstrate that you were in business;

§ The strategies you utilised could not be considered to be comparable as that of a share trader as opposed to that of a share investor;

§ The volume of your share activities during the 2010-11 income year was small and not the volume expected to be undertaken by a share trader;

§ Your share activities did not use any degree of sophistication;

§ You did not have a business plan in relation to your share activities; and

§ You did not carry on your share activities in a businesslike manner, that is, in a manner similar to that of the ordinary trader in that line of business. A share trader is expected to regularly take profits, either partially or in full, use methods such as fundamental or technical analysis and even stop losses and, ideally, buy back the same or other shares at lower price valuations or technical lows.

Therefore, as you were not carrying on a business as a share trader, you cannot claim a deduction for any losses made in relation to your share activities during the 2010-11 income year. Those losses will be capital losses, covered under Part 3-1 of the Income Tax Assessment 1997.

Note: You obtained a private ruling from the ATO on your status in relation to your share activities during an earlier income year in which it was determined that you were a share trader during that income year.

A taxpayer's status can change from income year to income year, and also change within the same year depending on the taxpayer's circumstances.

While your share activities during the earlier income year met the necessary conditions for you to be viewed as a share trader, your share activities during the 2010-11 income year do evidence that the necessary factors are in existence for you to be viewed as a share trader during that income year.