Edited version of your written advice

Authorisation Number: 1012709206775

Ruling

Subject: Whether you are carrying on a business of share trading

Question 1

Are you considered to be carrying on a business of share trading for the years ended 30 June 2011 and 30 June 2012?

Answer

Yes.

Question 2

Are you considered to be carrying on a business of share trading for the year ended 30 June 2013?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2010

Relevant facts

You operate a consultancy business. You also trade shares, write options and enter into CFD transactions in your own name.

You became more active in the share market some years ago.

You registered with a share trade facility and arranged a margin loan facility for a substantial amount.

You operated from the offices of your business and also maintained a study at home.

You spent two to three hours each day to observe the share markets. You conducted research on a daily basis through finance magazines, books, the ASX website and discussions with share brokers. You used a laptop and mobile technology to access share information.

You have maintained comprehensive spread sheeting "Macros" to record transactions during the year. You provided these details of your share activities.

You have adjusted your trading activities over the years in light of the significant changes in the market. You undertook a strategy of writing call options and CFD's during this period to provide opportunities to make profits in a falling market.

In 2012/2013 the market started heading up again, so option positions were left to lapse as there is no reason to sell options when the market is going up.

You do not consider yourself to be a share trader in the 2013/14 income year.

You hold a number of shares in a separate investment portfolio.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Part 3-1

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income includes income according to ordinary concepts, which is called ordinary income. Ordinary income includes revenue derived from the carrying on of a business. Profits from the sale of capital assets are generally not ordinary income.

Similarly, section 8-1of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Where income and losses are of a capital nature, they are generally accounted for under the capital gains tax provisions in Part 3-1 of the ITAA 1997.

The Commissioner's view about carrying on a business is found in Taxation Ruling TR 97/11. Whilst TR 97/11 is about carrying on a business of primary production, the indicators in TR 97/11, which have been developed by the courts of law, are used for all cases about the carrying on of a business. These indicators include:

1. the nature of the activities, particularly whether the potential for profit making exists;

2. the repetition and regularity of the activities;

3. organisation in a businesslike manner, including whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business and the use of a system or method; and

4. the volume of the operations and the amount of capital employed.

In considering whether a person is carrying on a business, all of the above indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. The weighting given to each indicator may vary from case to case.

In carrying on a business of share trading, the greatest weighting is given to the repetition and regularity of the activities and organisation in a businesslike manner.

The difference between a share holder (investor) and share trader (business)

The distinction between a share market investor and carrying on a business of share trading has been established in the body of law through many court cases.

In Case X86 90 ATC 621; AAT Case 6297 (1990) 21 ATR 3747, the following were stated as indicators of carrying on a business:

(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 by him;

and more particularly in respect of share traders:

(a) repetition and regularity in the buying and selling of shares;

(b) turnover;

(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;

(d) maintenance of an office;

(e) accounting for the share transactions on a gross receipts basis;

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

In AAT Case 4847 (1988) 20 ATR 3182; (1988) 89 ATC 171, a taxpayer purchased twenty parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987. No share was held for more than five months. The Tribunal ruled the shares were purchased as trading stock in the carrying on of a business because the shares were bought and sold repeatedly with a view to making a profit and because all shares were sold within a year of acquisition.

In Shields v. Deputy Commissioner of Taxation (Cth); Case [1999] AATA 4 (1999) 41 ATR 1042; (1999) 99 ATC 2037, during the period from 6 February 1996 to 4 March 1996, the taxpayer bought shares in Australian banks which were about to pay franked dividends for cum dividend prices and sold shares in the same banks at their ex dividend prices. Applying the factors listed in Case X86, even though the activity was for a short time only, the Tribunal decided the taxpayer was carrying on a business because of the volume of transactions and because the transactions were so carefully and systematically organised and handled.

In contrast is the Federal Court case of Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689. Here, the taxpayer was held not to be carrying on a business of share trading because there was no pattern of buying and selling and a low volume and frequency of transactions.

Application of law in your case

In the years ended 30 June 2011 and 2012 you are considered to be carrying on a business of share trading. In the 2011 year there are a number of buys and sells in a variety of shares and the trades have been on a regular basis during the year. You have also been active in the writing of options and CFD's.

The shares that you have traded in are not limited to the shares that you have been writing options on. The shares have been held for short periods of time, this short turnover indicating your intention to make a profit from trading rather than dividend income or long term growth.

In the 2012 income year, there was a reduced number of buys and sells, and you were still active in writing options and trading in CFD's. There has been a reduction in the number of trades and the variety of shares held. The period the shares were held varies, but was still reasonably short. The regularity of trading was also reduced, where there were a number of months where there was no trading. The factors are indicative of a winding down of the business, but you are still considered to be carrying on a business in this year.

In the year ended 30 June 2013, you are not considered to be carrying on a business of share trading. There were a very limited number of buys and sells of shares for the year. There was very limited activity in options and no activity with CFD's. The share sales have been on an irregular basis with the majority of shares being held for a period of over a year. There has been no activity in X months of the year. You have indicated that you are not carrying on a business of share trading in the year ended 30 June 2014.

It is considered that all of the main factors that are indicative of a share trading business are not met in the 2013 income year. There is no regularity or repetition in trading of shares. The volume of operations is small and the activity has not been carried on in a businesslike manner or that similar to a business of a share trader. You have stated that the market started heading up again during this period, but rather than your activity increasing, it was very limited.

Note: The shares that are held in your investment portfolio are treated separately and under the capital gains tax regime.