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Ruling

Subject: Revenue loss from share trading.

Question

For the year ended 30 June 2012, can your share market losses be returned as revenue losses?

Answer

Yes

This ruling applies for the following period

30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

From 1 July 2008 to on or after 1 January 2012, you conducted share market activities in the buying and selling of shares. During this time, excluding off-market shares purchases, you made over X share market transactions, consisting of over Y buy transactions, amounting to over $Z million, and over Y sell transactions, amounting to over $Z million.

For the years ended 30 June 2009, 2010 and 2011, you made a profit on your share market activities and returned the profits in your tax returns as capital gains.

From 1 July 2008 to on or after 1 January 2012, you did not acquire and hold any shares for a period over twelve months. However, during the year ended 30 June 2009, you did sell a small parcel of shares which were acquired several years before the 2008 financial year and during the year ended 30 June 2012 you did sell some shares, given to you by your family many years ago. It follows the only share sale that could have been returned in your lodged tax returns with a capital gains tax discount was the small parcel of shares held for over twelve months which were sold.

For the year ended 30 June 2012, you made a loss from your share market activities. At 30 June 2012, you held no shares. You ceased your share market activities because current market conditions in reaction to the issues in Europe.

You also had a business plan, which included sophisticated use of fundamental analysis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Where losses are of a capital nature, they are generally accounted for under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

The distinction between a share market investor and carrying on a business of share trading has been established in the body of law through many court cases. For example, in Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, the following were stated as indicators of carrying on a business:

· 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 by him;

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;

· whether the taxpayer is engaged in another full time occupation.

In your case, for the years ended 30 June 2009 to 2012, inclusive, your share market activity held the salient characteristics of a business because your activity demonstrated repetition and regularity in the buying and selling of shares, high turnover and operating in a business-like manner, with a degree of sophistication involved. Although you did not account for your share transactions on a gross receipts basis during the major years of your activity, not meeting this one indicator does not change the salient nature of your activity. As you gained a negligible advantage from reporting your prior income years as capital gains, for the year ended 30 June 2012, you may return your share market losses as revenue losses, to offset your other ordinary income.