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Ruling

Subject: Am I in business as a share trader?

Question

Are the gains and losses you made from your share transactions treated as profits and losses made from a profit making undertaking or scheme, and assessed under sections 6-5 and 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

You commenced buying and selling shares sometime during the income year ended 30 June 2011.

During the income year ended 30 June 2012 you completed a number of buy and sell transactions. A summary of your transactions is as follows:

You trade in penny stocks (shares that trade at low prices). You do not limit yourself to any industry.

You don't hold your shares as long term investments.

You take volume history, company news, and your stocks industry direction into account when deciding when to buy and sell shares. You also use charts and look at other indicators.

You take losses on shares to limit your loss of capital.

You use an on-line broker.

You have a home office set up, and also trade when you are away from home using your phone.

Your on-line broker keeps records of all your trades and provides sufficient reports for your trading.

You have incurred expenses in carrying in out your share transactions, including the purchase of software, internet charges, office stationary and equipment.

You spend approximately 40 hours per week on 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 Division 70

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

There are three 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:

1. 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.

2. 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 of the ITAA 1997.

3. Income from a profit making under taking or scheme
Your share trading activities would be considered to a profit making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. You would sell shares in the very short term, and generally you would not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1 of the ITAA 1997. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

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. If a business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each results in a different tax treatment.

Carrying on a business of share trading

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.

Investment income

Generally a capital asset is property that is used to produce income. Disposals of capital assets are subject to CGT provisions contained in the ITAA 1997 which includes a net capital gain as part of your assessable income.

A CGT asset is any kind of property. This specifically includes shares. If you dispose of a shares that are capital assets (as opposed to revenue assets) you will need to apply the CGT provisions of the ITAA 1997 to any capital gain or capital loss that you make as a result of that disposal.

A share would be considered to be a capital asset if it was not purchased in the ordinary course of a share trading business, or was not purchased as part of a profit making undertaking or scheme.

A profit making undertaking or scheme

Taxation ruling 92/3 Income tax: whether profits on isolated transactions are income and Taxation ruling 92/4 Income tax: whether losses on isolated transactions are deductible provide guidance on whether gains and losses from transactions that have a profit making purpose are considered to be assessable under section 6-5 of the ITAA 1997, and deductible under section 8-1 of the ITAA 1997.

In regards to share transactions, a transaction would be considered to be a profit making undertaking rather than a capital investment if the sole intention in purchasing a share is to sell it in the short term and realise a gain in share price. Short term would be considered a period from the same day to four weeks.

Applying the indicators to your situation

In the income year ended 30 June 2012 you made less than 50 share purchase transactions, and sold less than 50 parcels of shares. Your average holding period for these shares was approximately four weeks, however around 60% of your trades were completed within 10 days of purchase, while 75% of your trades were completed within a one month period. Your average purchase consideration paid for your shares during this period was approximately $10,000, while your average sale consideration was approximately $10,000.

This level of transaction activity would not be considered to be carrying on a business of trading in shares. The level of activity lacks commercial character, and your repetition and regularity of transactions is below what would be expected of a share trader.

However, the value of your transactions which is on average approximately $10,000 for your share purchases, and approximately $10,000 for your share sales is considered to be substantial, and at a commercial level. You have a strategy in place where you are purchasing low cost stocks in large volumes, and are taking losses rather than further risk capital. The majority of your share purchases were sold in the short term, within 10 days of purchase.

Although you do have some indicators that you are carrying on a business, in the weighing up of all the relevant indicators it is concluded that you were not carrying on a business of share trading during the income year ended 30 June 2012. However, as you have turned over your shares in short time frames your share transactions are in keeping with a profit making undertaking or scheme. Anti-overlap provisions contained in division 118-20 prevent your income from being assessable under both CGT provisions and as assessable income.

As a profit making undertaking or scheme any gains from your share transactions would be assessable as ordinary income, and would be assessable on revenue account rather than on capital account. Any gains would be included in your tax return as other income. Any losses would be deductions, and would be included in your tax return as other deductions. You must include a revenue gain or loss in your tax return in the year that it is incurred.

You cannot claim your expenses as losses, unless they can be directly attributable to a particular transaction. This means that you can claim brokerage, as that relates specifically to a particular transaction; however you cannot claim deductions for data fees, internet, home office or other expenses.

As you are not carrying on a business you cannot treat your shares as trading stock as per division 70 of the ITAA 1997. Your profit or loss from each transaction needs to be calculated from the historical purchase price and the historical sale price of each share purchased and sold.