Edited version of your private ruling

Authorisation Number: 1051770607830

Ruling

Subject: Share trading

Question 1

Are you carrying on a business of share trading?

Answer

No.

Question 2

Are the gains you made from your share transactions treated as profits made from an isolated profit-making undertaking or scheme, and assessed under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Are the gains you made from your share transactions treated as capital gains made from share investing and assessed as statutory income and assessable under section 102-5 of the ITAA 1997 ITAA 1997?

Answer

Yes. However any capital gain will be reduced by the amount included as ordinary assessable income under section 6-5 of the ITAA 1997 (by virtue of the CGT anti-overlap provision section 118-20 of the ITAA 1997).

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

In mid- 2020 you obtained a loan from an Australian financial institution for the sole purpose of funding the buying and selling of shares.

During a period of less than two months in mid-2020 that time you transferred a large amount of funds to your share trading platform for the purpose of buying and selling shares, and during this period your intention was to make a profit from buying and selling shares.

You had no intention of holding the shares long enough to receive a dividend.

You did not draw up a business plan.

You did not set up a home office.

You spent a couple of hours per week on the activity between the abovementioned periods.

In mid-2020 you made a number if share trades (less than 30 -purchases and sales) for a large total value making a small overall gain / profit.

You have provided a spreadsheet detailing all of your share transactions made during the relevant period, and you have also confirmed that the number of days the shares were held for ranged from 0 to 30.

You select which shares to buy based on knowledge you gained from reading publications such as the Australian Financial Review and on-line non-subscription publications.

You have no formal training or education in share trading.

You also hold separate shares solely for the purpose of share investment, which you account for separately.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

There are three 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.    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 Income Tax Assessment Act 1997 (ITAA 1997), while your expenses would be deductible under section 8-1.

2.    Income from a profit-making undertaking or scheme

Your share trading activities would be considered to be a profit- making undertaking or scheme if you are purchasing shares for the sole purpose of realising short term capital gains, but your activities fall short of carrying on a business. You would sell shares in the very short term, and generally you would not receive dividends as your holding periods are usually too short to coincide with a dividend payment. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997. Any losses that you incur on disposal of your shares would be deductible under section 8-1. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

3.    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 ITAA 1997, while a loss would be deductible under section 102-10.

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. If a business is not being carried on, it then needs to be determined whether your shares should be accounted for under scenario 2 or scenario 3 above, as each result in a different tax treatment.

Question 1 - Carrying on a business of share trading

Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year to year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable the activity may no longer constitute the carrying on of a business.

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.

The following is your application to these indicators:

Whether the activity has a significant commercial purpose or character

The activity of buying and selling shares is a commercial activity, particularly where shares held in the short term only for resale at a profit and no dividends are received. However, given the relatively low level of your transactions it would be considered that your activities lack a significant commercial purpose or character.

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

You had more than an intention to engage in your activities, and did in fact buy and sell shares on a number of occasions (less than 30) during the income year ended 30 June 2020 (in mid-2020).

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

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

Whether there is repetition and regularity of the activity

As noted above you purchased shares on a number of occasions, and sold shares on a number occasions during the income period ended 30 June 2020. However, these all took place in a relatively short period in mid-2020 over a couple of months. For the rest of the income period ended 30 June 2020 there was no other share trading activity. Although there is a degree of repetition and regularity in your share transactions, overall this amount of repetition and regularity would not be considered to be at a level that would indicate that a business was being carried on.

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

You do not have a business plan, and you have not set up a home office to conduct your share trades.

You have a realised some short- term capital gains and losses.

You are also relying on your own market analysis to guide your decisions, having had no formal training or education in share trading.

However, a share trader would also realise their profits through larger volumes in trading to make a suitable profit over a short term.

Although your transactions are conducted in a way similar to a share trader, your low number of share trades, along with the other factors listed above do not support that your activities are carried out in a way similar to the ordinary trade of your business.

The size, scale and permanency of the activity

As noted above you purchased shares on a number of occasions, and sold shares on a number of occasions during the income period ended 30 June 2020, however these all took place in a relatively short-period over a couple of months.

For the rest of the income period ended 30 June 2020 there was no other share trading activity.

In mid-2020 you made a number if share trades (less than 30 -purchases and sales) for a large total value making a small overall gain / profit.

This frequency and the size of your share transactions do not exhibit the size and scale that would be expected of a business of share trading.

In addition, as all of your trading was completed within a period of a couple of months within a 12 month period, it would not be considered that your trading exhibits the permanency that would be expected of a business of share trading.

Accordingly, the size, scale and permanency of your share transactions would not support that you are carrying on a business of share trading.

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

Your trading activities would not be better described as a hobby, recreational, or sporting activity.

Your activities do have some of the characteristics of a business as you have some degree of repetition and regularity, along with a profit motive.

However, your activities lack commercial purpose and character, and the size, scale and permanency of your share purchases do not support that you are carrying on a business of share trading.

Conclusion

The weighing up of all the factors indicate that a business of buying and selling shares is not being carried on.

Question 2 - Income from a profit-making undertaking or scheme

Our view on profits and losses from isolated transactions and whether or not they are income is contained in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (and are therefore assessable under section 6-5 of the ITAA 1997).

Paragraph 6 of TR 92/3 explains that profit from an isolated transaction will be ordinary income when:

• the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and
• the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction.

When a transaction involves the sale of property (shares) as in the present case, for a profit or gain on the sale of the property to be categorised as ordinary income, it is usually necessary for a taxpayer to have a profit-making intention at the time the shares were acquired.

As outlined above, we do not view that you were carrying on a business in relation to your share transaction activities. However, your activities were inherently commercial in nature and had a profit-making intention.

In considering whether or not your share transactions should be accounted for on capital or revenue account weight has been given to the fact that you have held your shares for very short periods of time, and you have not received any dividend income from the shares that you have purchased, and nor did you have any intention of receiving any share dividends. This demonstrates that your relevant purpose in purchasing shares is to gain a profit on the selling price, as opposed to gaining an income stream through dividends.

Your share transactions will be viewed as activities carried out by you as part of a profit-making undertaking for the following reasons:

the commercial character or nature of your option buying and selling;

·         the short period of time that you held the options; and

·         the number of transactions undertaken between the period you were trading shares.

As such your share transactions would be considered to be a profit-making undertaking or scheme, and are ordinary income. Your gains are therefore assessable under section 6-5 of ITAA 1997.

Question 3 - Capital gains tax

The capital gains tax (CGT) provisions are contained in Parts 3-1 and 3-3 of the ITAA 1997. Broadly, the provisions include in your assessable income any assessable gain or loss made when a CGT event happens to a CGT asset that you own.

Section 102-20 if the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or loss happens only as a result of a CGT event. The most common event is CGT event A1 which happens when a person disposes of a CGT asset to someone else under section 104-10 of the ITAA 1997. CGT assets include shares acquired on or after 20 September 1985.

The inclusion of the profit or gain on the sale of a CGT asset as ordinary income does not mean that a CGT event does not happen in relation to the asset. However, section 118-20 of the ITAA 1997 operates to ensure that amounts which are assessable income outside of the CGT provisions are not also taxed as capital gains.

Therefore, while CGT event A1 will occur when an asset is sold, any capital gain will be reduced by the amount included as ordinary assessable income under section 6-5 of the ITAA 1997.

Conclusion

The gains/profits made from your share transaction activities are assessable as ordinary income under section 6-5 of the ITAA 1997.

While CGT event A1 occurred on the sale of each parcel of shares sold at a gain, any capital gain made on the disposal of the shares will be reduced to the extent that the profit from its sale will be included in your assessable income under section 6-5 of the ITAA 1997.