Edited version of your written advice

Authorisation Number: 1013112962467

Date of advice: 25 October 2016

Ruling

Subject: Am I in business - Share trading

Question 1:

For the year ended 30 June 20YY, were you carrying on a business of share trading?

Answer 1:

No.

Question 2:

For the year ended 30 June 20ZZ, were you carrying on a business of share trading?

Answer 2:

No.

This ruling applies for the following periods:

Year ended 30 June 20YY.

Year ended 30 June 20ZZ.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

You commenced your share activity in 20VV/20WW and traded for a few years. You then took a break from buying and selling shares and recommenced your share activities in the 20YY income year.

You trade with an on line broker.

Since recommencing your share activity in the 20YY income year you have invested a significant amount of capital and you currently have a similar amount invested.

The source of the capital is borrowed funds. If you need to access additional capital you can use your margin lending account or equity on your home.

You have no written business plan, however in answers provided in the ATO share trading questionnaire you have said that 'The business plan is when the relevant industry recovers, to sell off the shares and use the profits for further investments.'

At question eight of the ATO share trading questionnaire you have stated that an overview of your trading strategy is to buy shares when the value goes up, and take the capital out and reinvest the profits. The reinvestment is in shares that are undervalued.

You have said that you generally sell if the share price falls below the historic value. When asked what this strategy means you have said it is to buy if the shares are close to the bottom of the historic value and the company has had similar lows and has survived from these positions. You hold onto the shares until they turn to a profit.

For the 20YY and 20ZZ financial years your plan was for the shares that you purchased to grow fast, the shares did not grow as anticipated.'

You make decisions on whether to buy, hold or sell shares; and on the amount to invest by reviewing the share portfolio including the debt to capital ratio. You review recommendations from your on-line trade membership. You use market analyst recommendations.

You will not put any more funds into your share trading over the next two years, you will use the funds currently in the share activity to sell and buy other shares.

You stated in your share trading questionnaire that you purchased speculative shares. When asked to identify which shares you classify as speculative you nominated a number of different companies that you invested in to be speculative purchases and that the other shares you purchase are done so on proven history.

You have said that there is no intention to hold shares as long term investments.

You have said that you have bought shares in X companies for the purpose of earning dividends.

In regard to stop loss limits at question 12 of the ATO share trading questionnaire you have stated that you regularly watch the charts. Generally if the value falls below the historic value you will sell the shares.'

You study the development of your shares in the market weekly by watching analyst opinions and conducting searches on the internet.

You had the following share buy and sell transactions in the following years:

The following table for the year ended 30 June 20YY shows the number of trades that you had in each calendar month.

The following table for the year ended 30 June 20ZZ shows the number of trades that you had in each calendar month.

For the year ended 30 June 20YY you made a small profit of, however if your activity is classified as a business you intend to re-value the closing stock at market value instead of using the purchase cost value. This method would then add an additional significant trading loss.

For the year ended 30 June 20ZZ, you made an overall loss, however you wish to re-value the closing stock at market value which will result in significant additional losses as follows:

Various historic price charts from the Australian Stock Exchange provided examples of when you bought and continued to buy shares in a falling market and hold for the longer term and examples of you neither buying nor selling despite rises and falls in the market.

You use your computer and your phone to conduct your share trading activity.

You retain online trade notes and excel spreadsheets.

On average you spend more than fifteen hours per week on your share buying and selling activity and you submitted a further break down of your time into related categories.

You have a degree with a related speciality.

You spend more than twenty five hours a week working in your primary employment which is a senior position. You have flexible working hours.

You have included a copy of the following documents which are to be read with and form part of the scheme for the purpose of this private binding ruling:

● Share trading questionnaire.

● Share register and Profit and loss statement for the period 1 July 20XX to 30 June 20YY.

● Share register and Profit and loss statement for the period 1 July 20YY to 30 June 20ZZ.

● On-line trading account displaying transaction records for the period 1 July 20XX to 30 June 20YY.

● Closing Stock Balances as at 30 June 20YY.

● Closing Stock Balances as at 30 June 20ZZ.

● Email from your tax agent with responses to further information requested.

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 995-1

Income Tax Assessment Act 1997, Section 70-35

Reasons for decision

Am I in business as a share trader

There are two possible scenarios as to how 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'.

Whether a share trading activity is carried on as a business is a question of fact. Case law has determined certain factors as being relevant in making this decision and concluded that no one factor is determinative, it is the overall impression gained. The following case law supports the concept of impression gained about the distinction between a share market investor/speculator and someone who is carrying on a business of share trading.

In Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689, (Radnor) 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.'

And more recently re-iterated in Smith v Federal Court of Taxation 2010 ATC 10-146; [2010] AATA 576 (Smith) Ettinger J stated at paragraph 12 ' by way of general guidance, I am mindful of the frequently cited words from Martin v Federal Commissioner of Taxation (1953) 90 CLR 470:

“The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and … the determination is eventually based on the large or general impression gained.”

The factors that are considered relevant in determining whether an activity is carried on as a business have 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)) and Smith 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,

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; and

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

Three cases provide examples of the application of these factors by the Administrative Appeals Tribunal (AAT). 

In Case W8 89 ATC 171; (1988) 20 ATR 3182 a trainee accountant purchased 20 parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987, no share having been held for more than five months. A small loss made on four parcels was claimed as a deduction. The AAT held that the shares were purchased as trading stock during the 1987 year. As the shares were bought and sold repeatedly with a view to making a profit and all shares were sold within a year of acquisition, the person was in the business of share trading. 

In contrast to that decision, 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 a decision handed down by the AAT on 5 August 2010, Smith, it was found that Mr Smith was not in the business of share trader during the year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit making because:

●he held his shares for periods longer than a share trader generally would;

●took DRP's and dividends;

●his activities did not demonstrate, to the Tribunal's satisfaction, repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business;

●the applicant did not maintain a separate office;

●the applicant worked fulltime in a very responsible position at Babcock and Brown. The AAT Member qualified this by stating “although I do not put much weight on that, I was concerned that he was unable to indicate what kind of time he spent on buying and selling shares”.

●he did not keep any separate accounting but relied on third party systems (BT and the WBC platform).

The tribunal concluded that “The evidence points strongly to, and my overall impression is, that Mr Smith was not conducting a business either in 2007, or in 2008, that he was not in business, and not in the business of share trading. I was satisfied that he had more disposable income than previously, and invested it in shares as an investor might. I have preferred the submissions of the Respondent in that regard”.

To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

In a recent decision handed down by the AAT on 9 February 2016 [2016] AATA 67 'Devi', it was decided that Ms Devi was not carrying on business as a share trader. Accordingly, Ms Devi was not entitled to a deduction pursuant to section 8-1 or section 70-35 of the ITAA 1997. Ms Devi was found to be an investor because of the following factors:

● the share transactions were not regularly and systematically carried out throughout the 2011 income year - there were only 10 share transactions in the second half of the income year;

● the activities were very basic and lacked sophistication to constitute a share trading business;

● there was no demonstrated pattern of trading although I accept there was a business plan even before the written document was later produced; and

● she had no skills or experience or interest in shares.

The tribunal concluded that 'Having regard to the evidence and to all of the factors set out above, Ms Devi was not carrying on business as share trader, Her activities were very basic and lacked sophistication to constitute a share trading business particularly as there was no demonstrated pattern of trading.'

Applying the criteria to your circumstances

(a) Nature of the activities and profit-making purpose

It is accepted that your intention was to make a profit and that your activities were not a hobby.

However your motivation to make a profit is consistent with both carrying on a business as a share trader and carrying out share investment. It is considered that your share activity was a side to your main employment in a senior positon.

This factor is considered neutral.

(b) Complexity and magnitude of the undertaking

You undertook XX transactions in the 20YY income year. The turnover was high. Your wages income was in the higher range. You traded in XX different companies. At the end of the financial year you held shares in X companies, the market value was considerably less than the cost value.

In the 20ZZ income year you had XX transactions. The turnover was much less than in the 20YY income year. You traded in X different companies. At the end of the financial year you held shares in X companies with a cost value that was significantly less than the market value.

You traded using an on-line account and subscribed to a share trading membership, thus utilising recommendations for trading.

You have shown that there is nothing complex about your share transactions. You have not taken profits when they arise or stopped losses from becoming larger. In relation to mining stocks you have held them for the longer term waiting for a recovery, this strategy is in line with an investor.

Whilst your employment relates to a specific field, these skills do not necessarily relate directly to share trading and financial markets.

The amount of capital invested is significant especially in the 20YY income year; however investors can equally have similar amounts invested.

This factor is not determinative on its own as the number of transactions and the lack of complexity do not assist your cause to be treated as in business.

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

Your share trading has lacked regularity, in the 20YY income year there were XX transactions and in the 20ZZ income year XX. There were some months when no trading occurred at all. In the 20YY income year you only traded on XX days and in the 20ZZ income year on XX separate days.

In regard to a system, there were times when the share price in stocks that you owned went up and down and you took no action and then at other times you would either buy or sell.

In regard to mining stocks you initially purchased shares and did not sell when the price rose. When the share price began to fall you did not sell. You have continued to purchase these shares and hold them long term as an investor would. Some of your mining stocks you have only had buy transactions and no selling transactions.

Similarly with other mining stocks you have bought and held them for over 12 months experiencing upturns and downturns in price without acting.

Again with other mining stocks you bought these shares at a historically low price and continued to hold and further purchased these shares when the only change in the share price was to continue to fall albeit slightly. This behaviour is more in line with a long term investor.

One of your strategies does appear to be to hold shares until they have paid a dividend and then sell regardless of whether the price has been falling or rising or whether there was a better opportunity to trade earlier.

Otherwise your trading has been ad hoc and does not appear to follow any strategy.

On the whole this factor points against you having conducted a share trading business.

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

You use your phone and computer to operate your share transactions. You operate a margin loan. You subscribe to an on-line membership and trade using an on-line account which provides you with recommendations. You have also stated that you spend time reading news relating to your shares, opinions and monitoring developments and charts. All of these resources are not considered sophisticated research tools and the same kind of resources are used by investors.

You have said that you purchase shares that are speculative, however most where mining and energy/resources.

The overall impression is that your trading is basic and lacked sophistication.

This factor points against you being in business as a share trader.

(e) Did profits/losses arise from a discernible pattern of trading?

You have no written business plan. You have made general statements in answers provided in the ATO share trading questionnaire and requests for further information as follows:

● 'The business plan is when the mining industry recovers, to sell off the shares and use profits for further investment'

● 'The strategy is to buy shares where the value goes up, to then take the capital out and reinvest the profits. The re-investment is in shares that are undervalued. YouI look at the share market value of shares and sell when the price hits the fair market value.' You have identified the fair market value as what the analyst's opinion is. You then decide whether to sell the shares.

● You state that you regularly watch the charts and generally if the value falls below the historic value you will sell the shares. You were asked to tell us what this means and you elaborated by saying that your strategy is to buy if the shares are close to the bottom of the historic value and the company has had similar lows and has survived from these positions, you then hold onto the shares until they turn to a profit.'

Your trading did not appear to follow any pattern, some months you had no transactions. You have chosen to hold some shares for the longer term and these were still held at 30 June 20ZZ. In other cases shares rose in price and you did not sell or fell in price and you did not sell.

It is unclear whether you had a strategy or followed it. Your trading was not regular or systematic.

This factor points against you having conducted a share trading business.

(f) The volume of the taxpayer's operations and the amount of capital employed

The amount of capital involved in your share transactions was substantial. More so in the year ended 30 June 20ZZ; however the amount of capital involved in share investing can be similar to the amount involved in a share business.

This factor is therefore neutral and does not assist you.

(g) Specific share trading factors

The factors in your favour are:

● The turnover was substantial; and

● You had equipment to carry out the share transactions.

The factors which do not favour you are:

● The share transactions were not regularly and systematically carried out throughout the 20YY and 20ZZ income years;

● The activities were very basic and lacked sophistication to constitute a share trading business;

● There was no demonstrated pattern of trading, you did not have a written business plan and apart from holding on to your mining shares long term it was difficult to decipher if you followed any of your general trading strategies.

● It is unclear whether your education or occupation has assisted you in having the necessary skill, available time or experience to be successful at your share activity.

On balance the specific share trading factors weigh against you carrying on a share trading business in both the 20YY and 20ZZ income year.

Conclusion

For the year ended 30 June 20YY and 30 June 20ZZ it has been determined that you were not carrying on a business of share trading. Your activities were considered very basic and lacked sophistication to constitute a share trading business, particularly as there was no demonstrated pattern of trading.