Edited version of private advice

Authorisation Number: 1013028203404

Date of advice: 02 June 2016

Ruling

Subject: Am I in business of share trading

Question 1

Are you carrying on a business as a share trader?

Answer

No

Question 2

Are you eligible to claim the Small Business Tax write off?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You commenced investing in shares many years ago as a long term investor.

You have a degree in Electrical Engineering and a Masters in Business Administration.

You worked as a Telecommunications Analyst at XXX Pty Ltd.

You manage your own Super Fund and keep separate trading and bank accounts.

You manage investment accounts for related parties.

You have a dedicated room in your house used for share trading for you, your SMSF and the related parties.

You purchased a new Notebook and basic computer.

You have access to additional funds.

You study the market every day and spend in excess of seventy hours a week on this.

You use real-time trading platform to conduct your trades.

You have trading multiple trading accounts, although you primarily use Amscot due to the lower commission rates.

You have nominated that X, Y and Z as shares held long term rather than trading stock.

You have not maintained separate accounts or records for the shares held as investments and the shares identified as being held as trading stock.

You have a Trading Plan.

You retain all Contract Notes and monthly statement and you also maintain an excel spreadsheet that maintains a current snapshot of your share portfolio which you update as required.

You use a hashtag and number sequence system (#1) when you purchase a new parcel of the same stock to identify it as a separate transaction.

You have provided statements showing less than 50 buy and less than 20 transactions. Of these transactions the majority were non market transfers between you, your SMSF and the related parties.

The non market transfers were completed as part of rebalancing and tidying up of related parties accounts and to move shares to your super Fund that were income stock.

You suspended your trading activities awaiting a decision on your private ruling application.

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 35-10

Income Tax Assessment Act 1997 section 35-30

Income Tax Assessment Act 1997 section 100-25

Income Tax Assessment Act 1997 section 100-55

Income Tax Assessment Act 1997 section 328-175

Income Tax Assessment Act 1997 section 328-185

Reasons for decision

Question 1 - Am I in business as a share trader

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:

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.

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? 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 low level of transactions indicates that your share trading lacks 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 is the level of repetition of share buy and sells activity.

For the income year ended 30 June 2016, you have conducted less than 50 buy transactions and less than 20 sell transactions. Of these the majority of your buy transactions were to related parties, and all of your sell transactions were to related parties.

Your focus has been to tidy up and rebalance the share portfolios held by yourself, your SMSF and the related parties accounts you manage.

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 you did not carry out your activities in a similar manner to others in this industry that are recognised in the business of share trading.

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.

In your case, you keep records of all your share transactions however you do not maintain separate accounts and records for your investments and trading portfolios.

You have a Trading Plan however it is unclear whether you have adhered to your strategy given that you predominately traded by buying and selling from related parties using non market transfers.

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 buy and sell 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 described as a hobby, recreational, or sporting activity.

Conclusion

In your case, over an 8 month period you had less than 50 buy transactions and less than 20 sell transactions, the majority of which were non market transfers between you, your SMSF and three related parties to tidy up and rebalance the accounts.

Although you held some of your shares for relatively short periods which is indicative of profit making on revenue account, 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 2016. 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.

Question 2 - Small Business Tax write off

You are not considered to be in business for the year ended 30 June 2016, therefore you will not be able to claim an immediate deduction for the cost of depreciating assets acquired for less than $20,000.

The following general information is provided:

If you are a small business entity, you can choose to deduct amounts for most of your depreciating assets on a diminishing value basis using a pool that is treated as a single depreciating asset. Such a choice would be instead of making a claim under Division 40 of the ITAA 1997.

Broadly, a pool is made up of the costs of the depreciating assets that are allocated to it or, in some cases, a proportion of those costs.

The pool rate is 30% for most depreciating assets, and 5% for depreciating assets that have an effective life of 25 years or more.

Section 328-175 of the ITAA 1997 allows small business entities to choose to calculate deductions and some amounts of assessable income under Subdivision 328-D of the ITAA 1997 instead of Division 40 of the ITAA 1997 in relation to depreciating assets that they hold and they use or have installed ready for use during or before that income year.

Depreciating assets costing more than $1,000 with an effective life of less than 25 years, can be allocated to the general small business pool, section 328-185 of the ITAA 1997. For assets allocated to the general small business pool, the depreciation rate is 30%.

In calculating a deduction using this method you must also take into account your taxable purpose proportion. That is, the small business entity must make a reasonable estimate for that year of the proportion they will use the asset for a taxable purpose. The asset's cost does not include any amount that can be claimed as a GST credit.