Edited version of your private ruling

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Ruling

Subject: Am I carrying on a business as share and commodities trader?

Question 1

Are you carrying on a business as a share trader?

Answer

No.

Question 2

Are you carrying on a business as a commodity trader?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You started buying and selling shares prior to the income year ended 30 June 2011.

For the income year ended 30 June 2011 you bought and sold shares, and also traded in commodities.

For the income year ended 30 June 2011 you completed less than 20 share purchases, with a combined value of approximately $100,000.

For the income year ended 30 June 2011 you completed less than 20 share sales, with a combined value of approximately $200,000.

Overall you made a profit from your share trading.

You have a strategy in place where you buy long term shares that have a precious metals exposure, and shorter term shares that have a positive speculative drilling program.

For the income year ended 30 June 2011 you completed less than 20 closed out commodity trades.

All of your commodity trades were completed in a foreign currency. Each commodity trade was paired with a foreign exchange option to hedge your losses against price movements in your commodity unit price.

Your commodities trading resulted in a deficit, your hedged foreign exchange options resulted in a surplus.

Overall you made a loss from your commodities trading.

Approximately 30% of your capital is from your savings, and 70% is from borrowed funds.

You research companies before buying their shares, and use charting software to analyse trend lines. You conduct analysis and research when choosing what shares to buy and sell.

You conduct your transactions through online brokers.

You spend approximately 24 to 28 hours a week on your activities, and 40 hours per week in paid employment.

You believe that the amount of capital invested and the regular hours that you spend on your trading activities indicate that your trading activities are more than a hobby.

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 15-15

Income Tax Assessment Act 1997 Section 102-5.

Reasons for decision

Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

· Whether the activity has a significant commercial purpose or character,

· Whether the taxpayer has more than an intention to engage in business,

· Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity,

· Whether there is repetition and regularity of the activity,

· Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

· Whether the activity is planned, organised and carried out in a business like manner,

· The size, scale and permanency of the activity,

· Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In your case you are carrying on two different types of activities, that is buying and selling shares and commodities trading. However, the activities are similar enough to be looked at as one activity. It is then necessary to apply the criteria as outlined in TR 97/11 to your circumstances to determine if your activities amount to a business being carried on.

Whether the activity has a significant commercial purpose or character

The activities of buying and selling shares and commodity trading are inherently commercial activities. However, given the limited amount of trades that you completed during income year ended 30 June 2011 it would be considered that your activities lacked a significant commercial purpose and character.

Whether the taxpayer has more than an intention to engage in business

You had more than an intention to engage in your activities, and did in fact complete both share purchases and sales as well as commodity trading transactions.

Whether the taxpayer has a purpose of profit as well as a prospect of profit

You had a profit purpose as well as a prospect of profit, and your share purchases and sales did generate a profit.

Whether there is repetition and regularity of the activity

For your share transactions you conducted less than 20 buying transactions, and less than 20 selling transactions over a 12 month period.

For your commodity trading you completed less than 20 closed out transactions (bought and sold) accompanied by matching foreign currency hedging options in a nine month period.

Although this level of activity does show some repetition and regularity it is far short of what would be expected in the usual course of trade for a business of share and commodities trading. The repetition and regularity of your activities is not indicative of a business being carried on.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

You are carrying on your activities in a similar manner to that of the ordinary trade in your line of business in that you are conducting your activities through brokers, you are utilising finance as well as your own personal funds to conduct your trading, you use the internet to place trades and also to research the market in which you are investing.

You are also dealing in significant quantities and values that would be considered to be at a commercial level. However the quantity and pattern of your transactions is below what would be considered usual when conducting a business of share and commodity trading.

Whether the activity is planned, organise and carried out in a business like manner

Your activities appear to be planned and organised in a business like manner in that you have set times that you spend on your activity and you have a strategy in place that governs your share buying and selling.

The size, scale and permanency of the activity

Your share and commodity transactions are of a significant value, however the frequency of your transactions falls short of what would be expected when carrying on a business of share and commodities trading. The size and scale of your activities do not indicate that a business is being carried on.

Whether the activity would be better described as a hobby, recreational or sporting activity

Your trading activities would not be better described as a hobby, recreational, or sporting activity.

Your activities do have some of the characteristics of a business as you have a commercial purpose, a profit motive, and are carrying out your activities in a similar way of a your trade. You have also invested significant resources and time into your activities. However, your low level of transactions lack the repetition and regularity, as well as size and scale that would be expected when carrying on a business of share and commodity trading.

The weighing up all of the relevant factors would then indicate that a business of share and commodity trading is not being carried on.

Your share purchases and sales would be considered to be investment activities. Any profits or losses from your share investments would then be subject to capital gains tax.

Your commodity trading activities would be considered to be isolated transactions which are assessable as ordinary income.