Edited version of your written advice

Authorisation Number: 1012913355492

Date of advice: 18 November 2015

Ruling

Subject: Income - dividends share trader

Question:

Are dividend received from shares that are held for the purposes of carrying on a business of share trading included as assessable income of a business for the purposes of Division 35 of the Income tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts

You commenced buying and selling shares a number of years ago.

Your sole propose was to derive revenue gains from your trading activity.

You received dividend income from shares as part of your trading activity where the holding period of the shares was satisfied.

You included the dividend income from the shares as part of your trading activity at the dividend income section of your tax returns.

You lodged a number of tax returns and returned gains and losses from the trading activity in the business and professional items schedules.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 Division 35

Reasons for decision

Non-commercial business losses

Division 35 of the ITAA 1997 sets out the rules associated with the deferral of losses from non-commercial business activities.

The general rule in section 35-10(2) of the ITAA 1997 is that, where deductions in relation to the non-commercial business activity for that year exceed the assessable income (if any) from the business activity for that year, the excess cannot be deducted in the income year in which it is incurred. Rather, the excess is treated as being deductible from the assessable income from the business activity in the next income year in which the business activity is carried on. The deductions relating to that activity must be deductible under ITAA 1936 or ITAA 1997 before Division 35 of the ITAA 1997 applies.

The word from in the phrase assessable income from a business activity for that year requires that the relevant income be from the taxpayer's business activity in the relevant income year - it is not sufficient to show that the income could be related in some way to a business conducted by the taxpayer.

In Watson v Deputy Commissioner of Taxation [2010] FCAFC 17; (2010) 182 FCR 104; 2010 ATC 20-167; (2010) 75 ATR 224 (Watson's case), the taxpayer argued that payments from an income protection policy which were made when the taxpayer became partially incapacitated were income from his business as a self-employed financial planner. However, the Full Federal Court disagreed, finding that the income was received from the policy because of the taxpayer's incapacity to conduct his business not from the business activity he actually undertook.

As noted in Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses at paragraph 92A:

The Full Federal Court held at paragraph 29 that the word 'from' is intended to have its dictionary meaning. It indicates the starting point, source or origin of the assessable income. It was held at paragraph 31 that '[i]f the starting point or source of the assessable income must be the business activity ..., [then] the extent and nature of that business activity must be identified ... [to] determine whether or not particular income is 'from' it'.

Further, it states at paragraph 92C of TR 2001/14:

That in Watson the question was whether the source or origin of the policy income was the business activity. At paragraph 32 the court concluded that the policy income was not from the business activity in question because it was derived from the taxpayer's incapacity to conduct business activity, not from the activity the taxpayer actually undertook.

Share trader

For a person who carries out business activities for the purpose of earning revenue gains from the buying and selling of shares, the receipts from the sale of shares constitute assessable income, the purchased shares would be regarded as trading stock, the costs incurred in buying or selling shares are an allowable deduction in the year in which they are incurred and dividends and other similar receipts are included as assessable income. Any losses will be deductible as a business loss, subject to Division 35 of the ITAA 1997.

In your case, you have been buying or selling shares over a number of years and as noted above the word from in the phrase assessable income requires that the relevant income be from the taxpayer's business activity in the relevant income year.

Accordingly where shares are held to derive revenue gains it follows that any dividends received where the holding period of the shares are satisfied, are receipts received as an ordinary incident of your business activity and as such are assessable income in relation to your buying and selling shares activity.