Edited version of your written advice

Authorisation Number: 1012691644087

Ruling

Subject: Share trading

Question

Are you in business?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You purchased highly speculative short term shares with the intention of making a profit quickly.

You widely researched share performance on line prior to making purchases.

In particular you relied heavily on an online resource which provides dynamic data on share price movements; streamed live in real-time, even to your mobile. 

This resource enabled you to optimize purchases and sales according to hour by hour price fluctuations in the share market environment.

Company reports from this resource, are updated frequently and you scrutinized them closely.

The shares were chosen for their good profit-making prospects, according the research material.

The reason those good prospects did not eventuate apparently, was due to the overseas country suspending trading for one day, during which the company did a revaluation for capital raising purposes, after which the share price dropped. This led to you selling.

You are still tracking the share market continuously and making purchases and sales in accordance with your profit-making pursuit; using the online resource, as you found it provides best real-time data.

You did discuss share purchases with a family member however such discussions (and those with other family members) were more in the line of bouncing off ideas. Negligible reliance, if any, was placed by you on family opinions.  

You did and still do your own research, using online resources which you compare to other available resources to determine which has the most integrity and is the most current at the time, for you to rely upon for your decision making.

In late 2014 you purchased shares making 11 buys and six sells in one month, one buy in a later month and one sell each in two other months.

You did not make a profit and to minimise your losses you sold X% of the shares in the 2013-14 financial year. The remaining shares will be sold during the 2014-15 financial year.

There is no written plan.  The plan is to actively track the market in real-time and to make decisions in line with what the market movement dictates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

There are two possible scenarios as to how the share trading activities can 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, the shares would be regarded as trading stock and any income/losses would be included in your assessable income.

(2) Investment/Speculator In this situation, you would be regarded as a share investor or speculator. The shares will be capital gains tax (CGT) assets, any gains earned from the disposal of the shares would be income as a capital gain and any losses sustained from the disposals will be a capital loss. Any dividends and other similar receipts would be included in your assessable income.

'Business' is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

In Federal Commissioner of Taxation of T v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, Hill J stated 'Ultimately, the question of whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression.'

Whether an activity is carried on as a business is a question of fact. This matter has been addressed in a number of court cases.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747 (Case X86), and more recently in Shields v DFC of T (Cth) 99 ATC 2037; (1999) 41 ATR 1042 (Shields v DFC of T (Cth)) the following were stated as factors to be considered:

(a) the nature of the activities and whether they have the purpose of profit-making

(b) the complexity and magnitude of the undertaking

(c) an intention to engage in trade regularly, routinely or systematically

(d) operating in a business-like manner and the degree of sophistication involved

(e) whether any profit or loss is regarded as arising from a discernible pattern of trading

(f) the volume of the taxpayer's operation and the amount of capital employed,

and more particularly in respect of share traders

(g) repetition and regularity in the buying and selling of shares

(h) turnover

(i) whether the taxpayer is operating to a plan, setting budgets and targets,

(j) keeping records

(k) maintenance of an office

(l) accounting for the share transactions on a gross receipts basis, and

(m) whether the taxpayer is engaged in another full time occupation.

The following is an example of the application of these factors by the Administrative Appeals Tribunal (AAT).

Case X86, disallowed losses on two parcels of shares sold after the 1987 stock market crash. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market.

In AC Williams v. Federal Commissioner of Taxation 72 ATC 4157;(1972) 128 CLR 645; (1972) 3 ATR 236; (1972) 46 ALJR 581(Williams Case) Stephens J, stated a speculator is a person whose purchases were in the nature of individual forays in particular stocks with a view to resale. This view is in contrast with the definition of a share trader as their dealing should be seen as part of a more extensive business of buying and selling shares. Gains and losses made by both share investors and share speculators are treated as capital gains and capital losses respectively.

The above criteria as applied to your case

In your case purchased highly speculative short term shares where Y% of your buys and 50% of your sells occurred in the month of early 20XX. In two other months Z% of the sells for the 2013-14 financial year occurred with the remaining V% of the stock expected to be sold in the 2014-15 financial year.

Your entry into the market is similar to Williams Case where your purchases were directed to particular highly speculative short term stock. When there was a suspension to the market you commenced selling those particular stocks. There was a minimal (one) further purchase of stock in the relevant financial year. This indicates that the buying and selling stock had been limited to the initial speculative purchase.

After considering all the factors which would indicate if you were in the business of share trading, the general impression gained is that you are not in the business of share trading with regards to the activities in the 2013-14 and 2014-15 financial years.

As you are not in the business of share trading your activities are indicative of a share speculator.

Consequently your share activities would be returned under the CGT provisions.