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Subject: Am I in business as a share trader? - shares

Question: Were you carrying on a business of trading in shares during the 2010-11 income year?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You and your spouse use your combined finances to purchase and sell Australian listed shares.

For the income year ending 30 June 2010, and prior income years, you included dividend income and capital gains from your share activities as a share investor in your income tax returns.

During the 2010-11 income year you did not invest any new investment funds into your share activities, but sold a number of shares that had been acquired in a previous income year. You conducted almost daily transactions during one month when selling a large parcel of shares to avoid flooding the market. You reinvested the proceeds from the disposal of your shares.

Your intention in relation to your share activities is to earn income in the form of dividends and to hold the investments for longer periods to obtain capital growth.

You did not have the intention to engage in trade and your share activities are not conducted when opportunities arise based on your feelings at any given time.

You acquire shares that provide higher dividends and have the potential for capital growth, with the intention to hold the shares as long as the dividend yield is high and/or the potential for capital growth remains strong.

You dispose of your shares when their dividend yield and/or potential capital growth falls, or there have been changes in the underlying management of the company which reduces your confidence that the dividend yields and capital growth in that company will not meet your expectations.

You generally hold the shares as long term investments for periods greater than twelve months. When conditions affecting the underlying company and share values occur, you sell your shares regardless of whether a gain or loss will arise. Turnover of specific share is low due to their nature of long term investments.

Your share activities are not complex and do not involve a significant amount of daily management with you spending three to five hours per week on average on your share activities.

You conduct your share activities from your home and use the services of two on-line brokers.

You do not maintain any spreadsheets, register or tracking system, or use any accounting programs for your share activities.

You do not account for your share transactions on a gross receipts basis.

You do not subscribe to any research facilities in relation to your share activities.

You do not have a business or investment plan or strategy in relation to your share activities and do not set budgets or targets.

You have invested large amounts of capital on your share activities.

You and your spouse operate a registered business not related to your share activities.

Relevant legislative provisions

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

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.

Taxation Ruling 97/11 (TR 97/11) outlines the Commissioner's view about the carrying on a business. Whilst this ruling deals primarily with the issue of carrying on a business in primary productions, the courts have determined that factors included in this ruling are also significant when determining whether a business is being carried on.

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

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 and more recently in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 and Smith v FC of T 2010 ATC 10-146 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.  

Applying the factors 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.

After reviewing the facts of your situation, and applying the factors to your circumstances it has been determined that the overall impression is that you were a share investor during the income year ended 30 June 2011 because:

§ Your objective in conducting your share activities was to keep shares as a long term investments to obtain dividends and for capital growth. This is not consistent with a share trader who carries out their share activities for the purpose of earning income from buying and selling shares;

§ You did not trade shares in a regular, routine and systematic manner during the 2010-11 income year, with the exception of one month when you disposed of a number of shares. You did not purchase any shares during the 2010-11 income year.

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.

Accordingly, your share activities give the impression of those of a share investor rather than a trader, with no discernable pattern of trading, but a series of discrete share transactions during the 2010-11 income year.

§ You did not operate in a business like manner and did not have a business or investment plan or strategy in relation to your share activities. In general, a share trading business should have some form of business plan for buying and selling shares.

§ You do not set budgets or targets in relation to your share activities;

§ Your buying strategy is based on your feelings at any given time;

§ You only spend a small number of hours on average per week on you share activities;

§ You use the services of two on-line brokers. The use of brokerage services does not necessarily provide evidence that you are carrying on a business

§ You operate your share activities from your home;

§ You are engaged in the operation of a business with your spouse which is not related to share trading;

§ You do not maintain any spreadsheets, register or tracking system, or use any accounting programs for your share 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 is being carried on; and

§ You invested a large amount of capital into your share activities. The amount of capital that you invest in share activities 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 invest a substantial amount of capital and not be considered a share trader.

In your case, while you have invested a large amount of capital which may be comparable to some commercial share traders, the volume of your activities does not support that you were a share trader, only that you were a share investor who had significant capital resources available to you which you used for your share activities.

Therefore, any gain or loss made from your share activities in the 2010-11 income year will be covered by the capital gains tax provisions under under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997).