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Ruling

Subject: Am I in business as a shares and options trader

Question 1: For the year ended 30 June 2008 and 30 June 2009, were you carrying on a business of trading in shares and options?

Answer 1: Yes.

Question 2: For the year ended 30 June 2008 and 30 June 2009, will the losses from your business of share trading in shares and options be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2: Yes.

This ruling applies for the following period

Year ended 30 June 2008.

Year ended 30 June 2009.

The scheme commenced on

1 July 2007.

Relevant facts and circumstances

You work a few days a week and own a private company.

You began trading in shares many years ago.

Prior to you commencing your share trading activity, you conducted analysis and assessments of developments in equity markets with the help of your advisor. You also attended conferences held by your advisor's firm on the topic.

Your trading has been successful. You have made profits in prior years.

You have a separate home office and have a computer and printer specifically set up for your share and option trading activity.

You have sufficient funds to keep your share and option trading activity going indefinitely.

The amount of shares at cost as at 1 July 2007 was a significant amount. A balance of an even greater amount was owed to your margin loan as at 1 July 2007, with an approved spending limit of a higher substantial amount.

Monies have also been withdrawn from your home equity loan to finance the acquisition of your shares and options. Total withdrawals for the year ended 30 June 2008 and 2009 were very high.

You have used a certain broker from December 2007. You engaged your broker as an advisor and followed their recommendations. You attended investment seminars and conferences conducted by your broker and your previous advisor. You also subscribe yearly to a share management organisation.

You had many share and option transactions in the year ended 30 June 2008 and 30 June 2009.

For the year ended 30 June 2008 and year ended 30 June 2009, your acquisitions costs were in the millions and your disposals also in the millions.

The dollar amount of shares at cost as at 30 June 2011, is also substantial.

In regard to options you initially invested a significant amount.

You continue to have a significant amount of capital invested in options.

You have sourced capital from:

· income from your salary and wages;

· dividend income from shares and your private company;

· your margin loan; and

· withdrawals from your home equity loan.

You could obtain additional capital from your home equity loan and your private company if required.

You generally purchase blue chip shares (e.g. Macquarie Group, ANZ, Westpac, Woolworths QBE, IAG, IPL) and mining shares (e.g. BHP, ZFX).

Shares are not purchased particularly for the purpose of earning dividends.

Your objective is to identify shares which will increase in value in the short term to enable you to sell at a profit after holding them for a brief period.

Your option and share trading activity is one business for you, the options trading was recommended to you by your broker to use as a strategy to leverage the risk in shares trading.

You have provided details of your option trading strategy and you have a detailed business plan:

The following documents are to be read with and form part of the scheme for the purposes of the private binding ruling:

· Your private ruling application of a certain date;

· Answers to the share trading questionnaire for both options and shares signed and dated by you;

· Shares profit and loss statement for the year ended 30 June 2008 and 30 June 2009;

· Detailed summary of share purchases and sales;

· Schedule of withdrawals from your home equity loan account and statements;

· A certain bank's statements for the years ended 30 June 2008 and 30 June 2009;

· A certain bank's Margin Loan Statements from 24 December 2007 to 30 June 2009;

· Margin Loan Statements from 1 July 2007 to 31 December 2007;

· BPay from your private company for the a certain share purchase plan;

· Buy confirmation from your broker;

· Sell confirmation from your broker;

· Options profit and loss statement for the years ended 30 June 2008 and 30 June 2009;

· Detailed summary of options purchases and sales;

· An example of recommendation and research from your broker;

· Broker monthly current Account Statements; Monthly Position and Financial Statements; and

· Monthly Position Information Notices; Monthly Collateral Holdings Statements; Daily Transactions Trading Statements for the period November 2007 to June 2009.

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 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

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.'

And more recently re-iterated 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, 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. 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 Tribunals 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 qualifying 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".

· 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 summarize, 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.

Conclusion - Applying the criteria to your circumstances

The factors or indicators that give the overall impression that you were carrying on a business of trading in shares and options for the year ended 30 June 2008 and 30 June 2009 were:

You had a profit making intention and you had made a profit from this business activity in previous years;

· you did not hold shares and options for long periods of time, most of the shares and options acquired were disposed of within a six month period of time.

· you traded shares and options in a regular, routine and systematic manner;

· there was high number of trades and a high turnover;

· there was a discernable pattern of trading;

· you operated in a business like manner, that is you followed your business plan and used a degree of sophistication; your trading was not left to chance. Complimenting this, you engaged a broker as an advisor and followed their recommendations. You attended investment seminars and conferences conducted by your broker and a certain bank. You also subscribed yearly to share management group;

· you injected large amounts of capital into your share and option trading. For the year ended 30 June 2008 and 30 June 2009, your acquisitions cost were high and disposals were also high. The amounts were significant. You had access to further additional capital if necessary, either from your home equity loan and/or your private company;

· you maintained a separate home office and had a dedicated computer for carrying out your share and option trading activities; and

· you were engaged in part time employment only, which allowed you to spend up to fifteen hours a week on your share and option trading activities.

The overall impression gained is that you were in the business of trading in shares and options as one business activity for the year ended 30 June 2008 and 30 June 2009.

Question 2

As you are in the business of trading in shares and options 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.

Note: Options and trading stock

Options are not trading stock as defined in section 70-10 of the ITAA 1997. ATO Interpretative Decision ATO ID 2004/526 Income Tax Options Trading (ATO ID 2004/526) further clarifies this ATO view. Therefore when completing your income tax return there will be no opening or closing stock in regard to options that remain in the open position at 30 June. A copy of ATO ID 2004/526 is enclosed for your reference.