Edited version of your private ruling

Authorisation Number: 1012505356778

Ruling

Subject: Am I in Business - share trading

Question

Were you carrying on business of share trading during the relevant income year?

Answer

Yes

This ruling applies for the following period

1 July 2011 to 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You used a margin loan plus your savings to trade shares during the relevant income year.

You entered into more than 150 buy contracts and approximately 150 sell contracts. A large number of these trades are same day trades.

The value of shares purchased was in excess of $2 million, and the value of shares sold was also in excess of $2 million.

You generally carried out your share trading activity from home; however, you also carried out some of your share trades from your place of employment.

You undertook your own research of the stock market.

You spent approximately 20 hours per week on your share trading activities.

You received dividend income.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

There are three possible scenarios as to how share trading activities may be treated for income tax purposes. These scenarios, and their consequences, are as follows:

1. Business Income

In this scenario you would be a share trader, your shares are trading stock, income from sales are included in your assessable income under section 6-5 of the ITAA 1997, and expenses incurred to acquire the shares are deductible under section 8-1 of the ITAA 1997. Other expenses incurred in the course of carrying on the business would also be deductible under relevant provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

2. Investment income

In this scenario, you would be regarded as a share investor. Your shares are treated as CGT assets, any gains from the disposal of the shares are included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals will be a capital loss (section 102-10 of the ITAA 1997).

3. Income from profit making undertaking or scheme

In this scenario your share trading activities would be considered to be a profit making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term profits or gains, but your activities fall short of carrying on a business. As such, your shares are not treated as trading stock, income from sales would be included in your assessable income under section 6-5 of the ITAA 1997, and expenses that relate directly to the acquisition of the shares would be deductible under section 8-1 of the ITAA 1997. Other expenses that you incur that do not relate directly to the acquisition of shares are not deductible.

Dividend income is assessable under section 44 of the ITAA 1936 irrespective of which of the above scenarios applies.

Carrying on a business of share trading

The question of whether a business is being carried on is a question of fact and degree and is determined on a year by year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 (Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business.

Having regard to the indicators contained in TR 97/11, you are considered to have carried on a business of share trading in the relevant income year because:

· the buying and selling of shares is an activity with a goal of making a profit, which gives the activity a commercial purpose

· you had repetition and regularity in your share trading activities, entering into more than 150 buy contracts and approximately 150 sell contracts, and a large number of these trades were same day trades with trades occurring over the full income year

· the value of shares traded was commercially significant, with both purchases and sales exceeding $2 million

· while you do not maintain an office you have the necessary resources and maintain adequate records for the activity, and

· while you are engaged in full-time employment you devoted appropriate time to your share trading both from work and at home.