Edited version of your written advice

Authorisation Number: 1051444728039

Date of advice: 23 October 2018

Ruling

Subject: Are you in the business of share trading in the 2016-17 financial year

Question

Are you entitled to a deduction for the loss on disposal of your shares under section 8-1 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2017

The scheme commenced on

1 July 2016

Relevant facts

You began trading a number of different shares a few years ago.

You acquired some shares. You had a profit making intention from the initial purchase of the shares.

You conducted your share trading activities in earlier financial years. There was substantial borrowing incurred to fund the share purchases.

You had a split portfolio which was part investment and part share trading of which the relevant shares formed part of the share trading.

The share prices had declined since their purchase and therefore the shares were not sold.

You later decided to temporarily reduce your share trading activities for personal reasons.

You sold your shares in the 2016-17 financial year for a loss.

You did not commence your share trading activities again in the 2016-17 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision

Carrying on a business

Where a person trades in shares as a business, the associated income is assessable as business income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997). Deductions from carrying on a business are generally deductible under section 8-1 of the ITAA 1997.

However where a person is not in business, the shares will be capital assets and any gains/losses made from the shares would be subject to the capital gains tax provisions.

Therefore it is necessary to consider whether your share activities are regarded as a business.

Business is defined in section 995-1 of the ITAA 1997 to be ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

● whether the activity has a significant commercial purpose or character

● whether the taxpayer has more than just 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 regularity and repetition of the activity

● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

● the size, scale and permanency of the activity, and

● whether the activity is better described as a hobby, a form of recreation or sporting activity.

The fact that a person may be carrying on a business in a previous financial year, does not mean that the subsequent years a business is also being carried out. We need to look at the activities carried on in the relevant year.

Applying the relevant indicators to your circumstances

In your case you made a conscious personal decision to stop your share trading activities. You have not recommenced your share trading activities. The share activities carried out in previous years is not determinative for later years.

In the 2016-17 financial year you did not have regular share trading activities. Any previous business plan was not in operation during the 2016-17 financial year.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not a share trader and your activities are not regarded as a business for taxation purposes for the 2016-17 financial year.

Trading stock

Paragraph 70-10(1)(a) of the ITAA 1997 states that trading stock is anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of a business.

The issue of carrying on a business in one income year but not in a later year was discussed in Case M16, 80 ATC 98. In that case, although the taxpayer was a share trader in previous years, it was found that the shares in question were no longer trading stock but investment assets.

Similarly in your case, the fact that you may have been a share trader in past years does not necessarily mean you are a share trader in future years. As outlined above, you are not carrying on a share trading business in the 2016-17 financial year. Therefore, the shares you sold in 2016 are not trading stock for the purposes of Division 70 of the ITAA 1997.

Please note, if you cease carrying on a business of share trading and still hold the shares that were trading stock, section 70-110 of the ITAA 1997 will apply. Under that section you are treated as if just before the item stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business) for its cost and you immediately bought it back for the same amount.

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

As stated above, you are not considered to be carrying on a business for the 2016-17 financial year. Your shares are considered to be capital in nature. Therefore the losses on your sale of shares are not an allowable deduction under section 8-1 of the ITAA 1997.

The loss on the sale of your shares is a capital loss under Part 3-1 of the ITAA 1997.