Edited version of private advice

Authorisation Number: 1051928375885

Date of advice: 2 December 2021

Ruling

Subject: Am I in business of share trading - CGT provisions

Question 1

Are you considered to be in business of trading shares?

Answer

No, your share activity is considered a profit-making undertaking or scheme. Your profits and losses will therefore be treated as assessable income under section 15-15 with deductions claimable under section 25-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Do the Capital Gains Tax provisions apply to this activity?

Answer

Yes, however any capital gain will be reduced by the amount included as assessable income under section 15-15 of the ITAA 1997 by virtue of the CGT anti-overlap provision in section 118-20 of the ITAA 1997.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

01 July 20XX

Relevant facts and circumstances

You commenced your share trading activity in 20XX and ceased in 20XX.

You used a trading platform to complete your share transactions.

You had part-time employment throughout the trading period.

You did not register for an Australian Business Number (ABN).

You had no formal business plan in place.

You completed your share trading research yourself and based your decisions on information found through social media groups.

You spent time regularly throughout the week on share trading activity.

Your strategy was to buy and sell shares within the same day or next day.

You aimed to produce a profit from the change in share price throughout the day.

You made XX transactions during the trading period. This included XX Buy and XX Sell transactions.

You advised that almost XX% of these trades were the same day or next day sell transactions.

Your trading history shows you made $XX worth of purchases and $XX worth of sales. This resulted in your loss of $XX at the end of the trading period.

You did not have any previous experience with share trading or seek expert advice prior to commencement.

You conducted share trading activity out of your home using your personal computer.

You kept records of your share trading history in spreadsheets.

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 15-15

Income Tax Assessment Act 1997 section 25-40

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Question 1

Are you considered to be in business of trading shares?

Summary

No, your share activity is considered a profit-making undertaking or scheme. Your profits and losses will therefore be treated as assessable income under section 15-15 with deductions claimable under section 25-40 of the ITAA 1997.

Detailed reasoning

There are three possible scenarios as to how gains and losses from share trading activities can be treated for income tax purposes. To determine which of these treatments applies to your situation it is necessary to make a determination of whether 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 as income from a profit-making undertaking or plan, or as capital gains from investment. 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, while your expenses would be deductible under section 8-1 of the ITAA 1997.

Carrying on a business

The Commissioner's view on carrying on a business is found in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). 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. 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 repetition and regularity of the activity;

•         Whether the activity is of the same kind and 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 on in a business-like manner such that it is directed at 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 a sporting activity.

Applying the relevant indicators to your circumstances

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 not with the intention to receive dividends. In your case, given the volume of your trading and your intention to produce a profit by buying and selling shares mostly in the same day or the next day it would be considered that your trading activity is commercial in nature.

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

The mere intention to carry on a business is not enough, there must be activity. You had more than just intention to engage in your activity, as you did in fact buy and sell shares during the 20XX financial year.

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

We believe it is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business.

In your case, your share trading activity has the purpose to produce profit by buying and selling shares in the short term however your research on the prospect of profit is limited to your own research from an online social media group.

Whether there is repetition and regularity of the activity

The repetition of activities by the same person over a period on a regular basis helps to determine whether there is the 'carrying on' of a business. Repetition refers to the frequency of transactions or the number of similar transactions.

In your case, you completed all trading activity yourself. You made XX share transactions throughout your trading period, with most shares sold in the same or next day. The commissioner considers that you may have regularly repeated your share trading activity throughout your trading period. However, you ceased the activity after a relatively short period - the repetition ceased after around XX months.

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

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. In your case, you had no formal business plan and did not utilise additional resources or decision-making tools in conducting your share transactions. You also had outside employment unrelated to the industry, which may have limited your time and effort that could be committed into the activity. Therefore, your activity would not be considered to be carried out in a similar manner to ordinary trade within the industry.

Whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit

A business is characteristically carried on in a systematic and organised manner. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. It could be reasonably expected this would include the study of trends, market analysis or seeking advice from experts.

In your case, you do not have prior experience with the trading, nor did you seek expert advice prior to conducting your activity. While you have a business strategy in place you do not have any forward planning in place to account for contingencies or market fluctuation. Therefore, your activity would not be considered organised and carried out in a business-like manner.

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

Given the commercial nature of share trading, your trading activity is not better described as a hobby, recreation, or sporting activity.

Overall, the above factors indicate that a business of buying and selling shares is not being carried on.

2. Income from a profit-making undertaking or scheme

In this scenario 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. Income would be assessable under section 15-15 of the ITAA 1997 and any losses that you incur on disposal of your shares would be deductible under section 25-40. You cannot treat your shares as trading stock, and you can only make deductions for expenses that relate directly to a share transaction.

Income from a profit-making undertaking or scheme

The Commissioner's 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 (TR 92/3). This ruling is applicable in this case as 'isolated transactions' refers to transactions entered into by non-business taxpayers.

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 this 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 had a profit-making intention and were inherently commercial in nature.

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 share trading are supported by;

•         the short period of time that you held the shares; and

•         the number of transactions undertaken in the period you were trading shares.

Therefore, your share activity is considered to be a profit-making undertaking or scheme. Your gains and losses are therefore assessable under section 15-15 and 25-40 of ITAA 1997.

3. Capital gains from investment

In this scenario your share trading activities would be regarded as investing. Your shares are treated as CGT assets. Gains from the disposal of the shares are included in your assessable income as a capital gain under section 102-5 of the ITAA 1997 and any losses sustained from the disposals will be a capital loss under section 102-10 of the ITAA 1997.

Your trading activity would not be considered capital in nature as the holding time of your shares was short term and you did not receive dividend income for shares you purchased, nor did you have the intention to hold shares for capital appreciation overtime to earn dividend income.

Conclusion

Your share trading activity falls short of carrying on a business and is therefore considered to be a profit-making undertaking or plan. As a result, your profits and losses from share trading will be treated as assessable income under section 15-15 of the ITAA 1997 and deductions claimable under section 25-40 of the ITAA 1997.

Question 2

Do the Capital Gains Tax (CGT) provisions apply to the share trading activity?

Summary

Yes, however any capital gain will be reduced by the amount included as assessable income under section 15-15 of the ITAA 1997 by virtue of the CGT anti-overlap provision in section 118-20 of the ITAA 1997.

Detailed reasoning

The capital gains tax 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 of the 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, the anti-overlap provisions in section 118-20 of the ITAA 1997 would prevent gains and losses from your share trading being assessed under the CGT provisions.

Conclusion

You do not need to include the profits from your share trading activity under the CGT provisions where you have already included them as assessable income under section 15-15 of the ITAA 1997.