Edited version of your private ruling

Authorisation Number: 1012586637852

Ruling

Subject: Am I in business as a share trader?

Question

Are you carrying on a business as a share trader?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You started buying and selling shares in Year 1.

During Year 1 you completed less than X share purchases, and less than X sale transactions. Of these transactions, around half were valued at under $Y, while around a third were for less the $Z.

In Year 2 you completed less than Z share purchases, and less than Z share sales. The consideration for these share transactions were all around $Y

The following shows your transaction history by month:

All of your trades were in Year 2 were in a single stock. In Year 1 your average share holding period was around five weeks.

In Year 2 you closed out less than 15 transactions (bought and sold within the same period), and sold one parcel of shares from your opening balance. You held your shares for variable periods.

You do not have a business plan or a trading plan in place. You make decisions on whether to buy, hold or sell shares based on price fluctuations.

You initially invested nearly $X into your share activities, and currently have around $Y invested. Your capital is sourced from your savings.

You conduct your share transactions through X and spend less than ten hours a week on your trading activities, and more than 40 hours per work in other employment.

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

Income Tax Assessment Act 1997, Section 102-15

Reasons for decision

Tax treatment of gains and losses resulting from share transactions

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. 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 Income Tax Assessment Act 1997 (ITAA 1997), while a loss would be deductible under section 102-10 of the ITAA 1997.

2. 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.

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.

Carrying on 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:

· 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.

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, in Year 1 you made less than X purchase transactions and less than X sale transactions. These were all conducted over a four month period, with the majority of transactions taking place during the first month of you commencing your share transactions. There was little to no activity undertaken in Month B and Month C, and a less than Y transactions took place in Month D.

This pattern of share transactions is not regular and repetitive. Two months of inactivity in a four month period indicates that you share trading is not conducted on a regular basis.

Your holding periods for your shares is relatively short, at on average X days.

The scale of your transactions, which were generally less than $5,000 would not be considered commercially significant.

Although you held your shares for relatively short periods which is indicative that a business of share trading was being carried on, the repetition and regularity of your trading falls short of what would be expected of a share trading business.

Accordingly, the overall weighing up of the relevant factors indicates that you were not carrying on a business of share trading during Year 1. It follows that your business of share trading did not carry on to Year 2, and your transactions for this period would need to increase in repetition and regularity for your share transactions to be considered to constitute a business in Year 2.

Year 2 saw a reduction in the repetition and regularity of your share transactions. Your transactions were commercially significant at around $Y per share transaction, however you only made less than 15 transactions in a three month period. Your holding periods were variable, and do not show a discernible pattern of trading.

Accordingly, the overall weighing up of the relevant factors indicates that you were not carrying on a business of share trading during Year 2. Any gains from your share trading should be treated as a capital gain that is included as part of your assessable income. Any losses from your share trading should be treated as a capital loss to be offset against a current or future year capital gain.