Edited version of your private ruling

Authorisation Number: 1012554328708

Ruling

Subject: Am I in business as a share trader?

Question

For the income year ended 30 June 2013 were you carrying on a business as a share trader?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 2013.

The scheme commenced on

1 July 2012.

Relevant facts and circumstances

You commenced the activity of buying and selling shares during the 2012-13 income year.

During the income year ended 30 June 2013 you made a number of share transactions, a summary of which follows:

You use your own funds to buy your share holdings. You do not have a loan facility.

You trade in a mixture of stocks, including, blue chip, mining and banking stocks.

You use an on-line broker for your trading.

You keep records of your share transactions.

You work full time at another occupation, but receive updates on the market throughout the day.

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 102-5

Income Tax Assessment Act 1997, Section 102-10

Reasons for decision

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:

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 Income Tax Assessment Act 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 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, 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:

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

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

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

o Whether there is repetition and regularity of the activity,

o 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,

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

o The size, scale and permanency of the activity,

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

In the case of share trading repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

In your case, you have carried out around 60 purchase transactions and around 50 sale transactions during the income year ended 30 June 2013. This is a total of around 110 transactions, which is approximately two transactions per week. However, it is also noted that during two of the months of 2013 your trading activity increased significantly. During this period you completed around 60 transactions, which is approximately 8 transactions per week.

For a portfolio of your size this is considered to be a commercial level of share trading and would be a supporting indicator that a business of share trading was carried on.

Your share holding period is on average approximately 50 days. However, many of your share holdings were held for a week or less, and all of your purchases made in two months in particular were closed out during that period. The regularity of your turnover is also a supporting factor that a business of share trading is being carried on.

The scale of your share trading activities is also significant in that your share purchases amounted to approximately $1,000,000, while you sold shares to the value of approximately $900,000. This is a significant scale of trading in relation to your own personal circumstances. These figures are considered to be beyond mere passive capital investment, and support that a business of share trading was carried on.

Although you have not indicated that you have a share trading plan in place and are not spending a substantial amount of time on your share trading, overall the weighing up of the relevant factors indicate that for the income year ended 30 June 2013 you were carrying on a business as a share trader.

Your share purchases and sales would be considered to be business activities. Any profits or losses from your share investments would then be considered to be assessable income and reported in your tax return as Net income or loss from business.