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Ruling

Subject: Am I in business as a share trader

Question 1

Were you carrying on a business of share trading during the income year ended 30 June 2009?

Answer

Yes.

Question 2

Are the shares that you held for resale during the income year ended 30 June 2009 permitted to be treated as trading stock as outlined in Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You commenced buying and selling shares.

You bought and sold your shares through a joint broker account.

Throughout the 2007-08 income year, you bought and sold shares regularly. You completed approximately X share purchase transactions. Your purchase value for this period was approximately $Y.

During the income year ended 30 June 2009 you continued with your share purchase and sale activities.

During this period you completed approximately X share purchases. Your share purchase value for these transactions was approximately $Z.

Your shares were held for short periods, being on average five days, although the majority of share sales took place within one to three days of purchase.

Your trading methodology was to sell shares when the purchase price increased by A%, and also to sell shares if the purchase price dropped by B%.

You did not receive any dividend income from you share trading activities.

Share trading was generally completed at your home office however, orders could also placed from your work office. You have estimated that approximately 20 hours per week was spent on your share trading activities.

You have records of your share transactions, including your profit and loss from each trade.

You ceased your share trading activities in 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 Division 70

Income Tax Assessment Act 1997 Section 70-10

Reasons for decision

Question 1

Carrying on a business as a share trader

There are two possible scenarios as to how gains and losses from share trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows:

Business Income

In this scenario your share trading activities would be considered to constitute the carrying on of a business. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997, while your expenses would be deductible under section 8-1 of the ITAA 1997.

Investment Income

In this situation your share trading activities would be regarded as investing. Your shares would be considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares would be income as a capital gain. Any losses sustained on the disposal of your shares would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10.

To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share trading activities amount to the carrying on of a business.

Whether or not a person is carrying on a business is a question of fact. The determination of whether or not a business is being carried on is generally a process of weighing up all the relevant indicators within the context of your own 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 a 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 describer as a hobby, a form of recreation or a sporting activity.

In your case;

The buying and selling of shares is an activity with a goal of making a profit, which gives the activity a commercial purpose. Your share transactions were also conducted at a commercial level, with your settlement considerations often exceeding $X per trade. It would be then considered that your share trading activities have both a commercial purpose and character.

You have more than an intention to engage in business, and you engaged in your share trading activities for a period of months.

You had a profit purpose as well as the prospect of profit and did in fact make profitable trades.

You have repetition and regularity in your share trading in that you have conducted approximately Z trades over a three month period during the income year ended 30 June 2009.

Your share trading activities were monitored on a daily basis. You employed a share trading strategy that would be considered suitable for a share trader. You had stop loss limits in place of X% of your purchase price on your shares, and realised short term gains by selling your shares after they increased Y% in price. You hold your shares for only a short length of time, on average 5 days. You also traded in commercial quantities for substantial consideration. Conducting your share trading activities in this way is carrying out of your activities in the usual way of a person who is carrying on a business as a share trader.

The volume of your trading would indicate that you are trading at a commercial level. The value of your transactions was also commercially significant. Although you only traded for a three month period during the income year ended 30 June 2009, you did trade very actively during this time. This would indicate that your share trading activities display the size, scale and permanency that would be expected of a person carrying on a business of share trading.

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

The weighing up of all the relevant indicators within the context of your own situation would indicate that you were carrying on a business of share during the income year ended 30 June 2009. Consequently, your income is assessable as ordinary income under section 6-5 of the ITAA 1997, while your losses are deductable under section 8-1 of the ITAA 1997.

Question 2

Shares as trading stock

Trading stock is defined in section 70-10 of the ITAA 1997 as anything that is produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business.

If you are carrying on a business of share trading, your shares that you hold for the purposes of resale can be accounted for as trading stock, as outlined in Division 70 of the ITAA 1997.

In your case, your share transactions during the income year ended 30 June 2009 do amount to a business of share trading being carried on. Consequently, you can treat your share holdings during this period as trading stock as per Division 70 of the ITAA 1997.