Edited version of private advice

Authorisation Number: 1051910566390

Date of advice: 15 October 2021

Ruling

Subject: Share trading

Question

Are you carrying on a business of share trading?

Answer

Yes

This ruling applies for the following:

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have been investing in shares for a number of years prior to the 20XX-XX financial year.

You have net carry forward losses attributable to your previous share investor activity. However your main employment is as a xxxx, unrelated to share trading.

During the 20XX-XX financial year you were locked down, stood down or otherwise unemployed from your normal occupation for extended periods due to the COVID-19 pandemic. This provided you with extra time and you significantly increased your share activity.

Despite the high volume of trading you still considered yourself a share investor.

You have provided information on the share activity for the 20XX-XX financial year:

•                   You conducted close to 1000 buy and sell transactions, amounting to more than $X in share sales and $X share purchases transactions.

•                   You made a profit from the buy and sell transactions of more than $X.

•                   You incurred $X of trading expenses being brokerage and other fees.

•                   You earned dividend income of $X. You claimed to hold stocks for both dividend yields and capital gains.

•                   You analysed the share market through generally available media and through discussions with friends.

•                   You analysed potential investments by considering company reputation and stability along with market swings that were exacerbated due to market instability during the COVID-19 pandemic.

•                   You considered both daily and longer-term trends for your decision making.

•                   >You have not consulted with experts.

•                   You traded on a daily basis during the COVID-19 lockdowns and periods where you were not employed in your normal occupation.

•                   You have not undertaken any formal or informal training in share trading.

•                   Apart from the trading platform reports, you do not keep records of your share transactions.

You do not have a dedicated office for share activities.

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

The question of whether a business is being carried on is a question of fact and degree and is determined on a year-by-year basis.

Generally, where you carry out business activities for the purpose of earning income from buying and selling shares you are considered to be a share trader. Your shares are treated as trading stock with the income from your sales included in your assessable income under section 6-5 of the ITAA 1997, and the expenses incurred to acquire the shares deductible under section 8-1 of the ITAA 1997.

However, if you hold your shares for the purpose of earning income from dividends and capital growth, you will be regarded as a share investor. Your shares would be treated as capital gains tax (CGT) assets with any gains from the disposal of the shares included in your assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposals would be capital losses (section 102-10 of the ITAA 1997).

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 (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 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.

•                   Whether the activity is better described as a hobby, a form of recreation or sporting activity.

Applying the relevant indicators to your circumstances

The repetition, volume and regularity of your trading activity during the 20XX-XX financial year, would indicate that you were trading at a commercial level. The value of your transactions was also commercially significant.

You engaged in the share trading activities on a daily basis for much of the year with the purpose of profit from increases in the prices of shares in the relatively short term. You did in fact make a profit from the gains on the share price of the shares for the year which amounted to more than $X.

For the same period the dividend yield was relatively low, indicating that your activity was not predominantly for the purpose of achieving longer terms yields characteristic of share investor.

The weighing up of all the relevant indicators within the context of your own situation it is considered that you were carrying on a business of share trading for the relevant period. Consequently, your income is assessable as ordinary income under section 6-5 of the ITAA 1997, while your losses are deductable under section 8-1 of the ITAA 1997.