Edited version of your written advice

Authorisation Number: 1012999108542

Date of advice: 19 April 2016

Ruling

Subject: Am I in business as a share trader?

Question 1

Are you carrying on a business as a share trader?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 20yy

The scheme commences on:

8 February 20yy

Relevant facts and circumstances

You commenced buying and selling of shares during the income year ended 30 June 20yy.

You have provided a list of trades.

You use your own funds to buy shares, initially investing $xx,xxx and currently have more than $xx,xxx invested.

You do not have a loan facility and do not have access to any additional funds.

You purchase blue chip and undervalued shares with high dividend and franking credit ratio.

You provided the following as your business plan:

• to carry out dividend stripping in the 20xx-20yy financial year,

• use $xx,xxx to $xx,xxx to do dividend stripping,

• to trade xx to xx times a year (xx to xx buys and xx to xx sells), and

• your share trading strategy is to purchase shares with high dividend and high franking credit ratio before dividend ex-date and sell them after ex-date to make a profit.

You read information and reports from various relevant websites.

You read the various business papers each week.

Your focus is on the listed company value, and market fluctuations not taken into account when making decisions.

You currently use a particular brokerage facility however you may use others.

You have a Bachelor's Degree which helps you to understand the share markets.

You have not obtained any expert advice or technical material.

You spend less than 10 hours per week on your share transactions, and less than 40 hours per week in a full time occupation.

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. 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 of share trading

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.

It is then necessary to apply the criteria as outlined in TR 97/11 to your circumstances to determine if your activities amount to a business being carried on.

Whether the activity has a significant commercial purpose or character

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

Your relatively low level of transactions that you are completing indicates that your share transactions lack a commercial purpose.

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

You had more than an intention to engage in your activities, and have completed share purchases and sales.

Whether the taxpayer has a purpose of profit as well as a prospect of profit

You had a profit purpose as well as a prospect of profit.

Whether there is repetition and regularity of the activity

This is considered an important indicator when determining whether or not a business is being carried on. Of particular importance in the case of determining if a business of share trading is being carried on is the level of repetition of share sales activity.

For the purpose of this ruling, for the income year ended 30 June 20yy, you will conduct about xx purchase transactions and about xx sale transactions. Your focus is dividend stripping and the majority of your transactions will occur twice a year.

This level of transactions does not indicate that a business of share trading will be carried on during this period.

Whether the business is of the same kind that is being carried on in a similar manner to that of the ordinary trade in that line of business

Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry.

Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be:

• mitigation of risk through short holding periods and strict adherence to taking gains at a certain level and cutting losses at a certain level,

• a high turnover of shares,

• a share trading strategy in place,

• substantial levels of repetition and regularity of share sales,

• high value of share transactions to take advantage of small movements in price.

In your case from the information provided, it is not evident that you carried out your activities in a similar manner to others in this industry.

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

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as having some form of forward planning to take account of contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

It would be reasonable to expect someone in the business of share trading to be involved in the study of daily and longer-term trends and the seeking of advice from experts.

You keep records of your share transactions, however you are not undertaking any planning or budgeting activities, and do not have an overall strategy that is guiding your share transactions.

The size, scale and permanency of the activity

Share trading that is being conducted on a small scale is more likely to be considered investing, however a share trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

However, the frequency of your sales transactions falls short of what would be expected when carrying on a business of share trading. The size and scale of your activities do not indicate that a business is being carried on.

Whether the activity would be better described as a hobby, recreational or sporting activity

Your share transactions would not be better described as a hobby, recreational, or sporting activity.

Conclusion

In your case, between certain months you had a number of purchase and sale transactions. This pattern of share transactions would not be regular and repetitive as you will have completed close to half of your estimated purchase transactions for the year in less than two months.

Your holding periods for your shares is relatively short, on average 1-5 days.

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 the income year ended 30 June 20yy. Any gains from your share trading should be treated as 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.