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Ruling

Subject: Am I in business as a share trader

Question 1: For the year ended 30 June 20XX, were you carrying on a business of share trading?

Answer 1: No.

Question 2: For the year ended 30 June 20XX, were you carrying on a business of share trading?

Answer 2: No.

Question 3: For the year ended 30 June 20XX, will the losses from your involvement in certain investment accounts operated by a certain managed investment firm be assessed on revenue account?

Answer 3: No.

Question 4: For the year ended 30 June 20XX, will the losses from your involvement in certain investment accounts operated by a certain managed investment firm be assessed on revenue account?

Answer 4: No.

This ruling applies for the following period

Year ended 30 June 20XX.

Year ended 30 June 20XX.

The scheme commenced on

1 July 20XX.

Relevant facts

Sometime in 20XX, your spouse met with a representative of your managed investment firm to discuss your and their own investment objectives and the possibility of switching some of your investments to a higher level investment service and certain investment accounts were you retained beneficial ownership of the shares that were bought and sold.

Just prior to commencing the new investment products you had a substantial amount in your holdings of cash and securities, of which listed securities had a substantial value (and were later transferred to your managed investment firm's owned and appointed custodian, a certain company (custodian).

Cash injections totalling a substantial amount were progressively made to the investment account operators.

Unlisted securities of a substantial amount were not transferred to the custodian and you have maintained these on capital account.

You completed various application forms with your managed investment firm agreeing to certain terms and conditions including the authorisation to transfer your existing CHESS Sponsored holdings to the custodian.

Later in 20XX, you transferred your listed equities worth a substantial amount to the custodian.

Later again in 20XX, you sold your existing managed fund investments and transferred the proceeds together with most of your existing cash deposits to the upgraded financial service, with a substantial amount of funds then allocated during the year ended 30 June 20XX, to a number of discretionary portfolios within the investment accounts.

The shares bought and sold in the investment accounts are not shares owned by you personally, they are owned by the custodian.

After receiving and analysing the investment account reports for the year ended 30 June 20XX, you became alarmed at the trading results achieved by the investment account operators and verbally communicated your concerns to the your managed investment firm via your spouse.

On receipt of the investment account reports for the quarter ended 31 December 20XX, you decided to close the investment accounts and the underlying upgraded investment service account.

For the year ended 30 June 20XX and 30 June 20XX the investment accounts achieved a considerable net loss.

During the period between the initial investment in each investment account and when the accounts were closed an extremely large number of buy and sell transactions took place.

The fund pool in your investment accounts was kept quite separate from your other investments. Even though you had the ability to transfer stock 'in specie' without charge out of your investment accounts, this did not occur, (until the accounts were closed) despite most of the investment accounts portfolios holding the same securities as were held directly by you.

You are not seeking clarification of the transactions in your directly held portfolio as these have and always will be reported on a CGT basis.

Your application for a private binding ruling refers only to the investment accounts for the time that it was in existence.

Stock transferred from the investment accounts 'in specie' on closure of the investment accounts are now held as direct investments and reported on a CGT basis.

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

Your private ruling application of a certain date.

Annexure 1 - Letter of a certain date, addressed to your spouse from the managed investment firm regarding the upgraded service.

Annexure 2 - Letter of a certain date, addressed to your spouse from the managed investment firm regarding the investment accounts versus managed funds -Including the investment accounts terms and conditions and the Investment profiles.

Documents about how the investment accounts work, including investment risks you need to consider before investing.

Annexure 3 - Letter of a certain date, from your spouse to your managed investment firm regarding the upgraded investment service applications, including a completed form for you and a completed investment account application for investment form.

Annexure 4and 5 - Letters of certain dates, from your managed investment firm to you regarding the investment accounts, confirming various cash deposits.

Annexure 6 - The consolidated tax report for you for the year ended 30 June 20XX, including the transactions listings for each of the investment accounts held by you.

Annexure 7 - the investment account reports for you, for the period 1 July 20XX to 30 June 20XX.

Annexure 8 - investment account reports in spreadsheet format.

Annexure 9 - Details of a note included in your income tax return for the year ended 30 June 20XX, regarding your intention to lodge an application for a private binding ruling for the years ended 30 June 20XX and 30 June 20XX, regarding whether or not your gains and losses from the sale of equities constitutes share trading or not.

Annexure 10 - Cash movement reports for the year ended 30 June 20XX, provided by the managed investment firm for the various investment accounts.

Annexure 11 - Various requests by your spouse to your managed investment firm regarding the investment accounts reporting.

Annexure 12 - Cash movement reports for the year ended 30 June 20XX, provided by your managed investment firm for the various investment accounts.

Annexure 13 - The first page of an email request from your spouse to the managed investment firm regarding the custodian account for you.

Annexure 14 - Spreadsheet dated in 2010, highlighting a percentage.

Annexure 15 - One page spreadsheet document titled Share Trading Application - Managed Accounts Behaviour - Initial Trading for you and others of a certain date in 2011.

Annexure 16 - One page spreadsheet document titled Managed Accounts Behaviour - Excluded Franking Credits for you dated sometime in 2010.

Annexure 17 - One page spreadsheet document titled Managed Accounts Behaviour - Trading turnover for you dated sometime in 2010.

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 and Question 2

Summary

For the year ended 30 June 20XX and 30 June 20XX you were not carrying on a business of share trading.

Detailed reasoning

Fundamental to determining whether or not a person is in the business of share trading is whether or not the person is the legal owner of the shares that are being bought and sold.

The shares that are bought and sold through the investment accounts are owned by the custodian.

You invested with your managed investment firm with the expectation of making an investment return. As a part of your investment objectives and goals you signed up for the upgraded service offered by your managed investment firm which involved the use of certain investment accounts.

The use of investment accounts as an investment choice involved the concept of you being the beneficial owner of the shares bought and sold in your investment accounts. This introduced the idea that the shares are held on trust for you. Beneficial ownership of an asset arises when an asset is owned by one person, (in this case the custodian) and they have a duty to use it on behalf of another, (in this case you); one person holds the asset as trustee for another.

The use of certain investment accounts meant that the investment managers (apart from adhering to the investment rules of the investment account) had full decision-making authority for investments and transactions in each of your investment accounts.

To summarize, you are an investor with the managed fund, who have then made investment decisions on your behalf.

Question 3 and Question 4

For the year ended 30 June 20XX and 30 June 20XX, the losses from your involvement in certain investment accounts operated by your managed investment firm will not be assessed on revenue account. You are an investor; therefore your losses will be on capital account.