Edited version of private advice

Authorisation Number: 1052067067490

Date of advice: 20 January 2023

Ruling

Subject: Share trading

Question

Am I carrying on a business as defined in subsection 995-1(1) of the Income Tax Administration Act 1997 (ITAA 1997) during the 2020-21 income year?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You commenced your share trading activity during the relevant income year.

You have provided a basic business plan. The plan covers basic trading strategies as well as basic financial forecasts, basic risk assessment, basic market analysis and business goals.

You use the online brokerages to conduct your share trading activity.

You invested a sum of your own capital to allow you to start trading.

You conducted X trades over the course of the income year. The value of the shares purchased are worth $X and the value of the shares sold are worth $X You held shares valued at $X at the end of the income year.

The majority of your trades were on companies within specific sectors.

You made a trading loss during the relevant income year.

You have an area dedicated to operation of your income producing activity.

You spend X hours a week engaged in share trading activities.

You have a qualification which forms the foundation of your knowledge. You also completed an online qualification during the relevant income year.

You have taken expert advice from your mentor during the 20XX-XX income year.

You work full time as an assistant accountant on salary and wages.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Issue

'Am I carrying on a business?'

Summary

You are not carrying on a business as defined by subsection 995-1(1) of the ITAA 1997.

Detailed reasoning

Determining whether or not an activity amounts to carrying on a business is a matter of fact and degree.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' provides indicators that the courts have concluded are relevant when determining whether a business is being carried on. These indicators are no different in principle, from the indicators as to whether activities in any other area constitute carrying on a business.

The indicators provided in TR 97/11 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;

•         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.

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on.

Application of the indicators to your circumstances

Whether the activity has significant commercial purpose or character

This indicator generally covers aspects of all the other indicators and broadly requires that a taxpayer be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. A taxpayer needs to be able to show that the interaction between the size and scale of the activity, the repetition and regularity and the intention and prospect of profit are sufficient to conclude that the activity has a significant commercial purpose.

During the relevant income year you completed X number of trades. This is less than what is typically expected of a commercial operation and therefore indicates a lack of commercial purpose.

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

Based on the information provided you have commenced your trading activity and did not make a profit in the relevant income year. Although you did not make a profit you attempted to implement basic trading strategies and supplied capital to initiate trading with. You have a qualification which gave you foundational knowledge of the market. You reviewed trades where you lost money in an attempt to improve your strategies to increase profit. It is clear that this activity has both the purpose and prospect of profit.

Whether there is repetition and regularity

In the case of share trading repetition and regularity are considered to be important indicators on whether or not a business is being carried on, with the size and scale of the activity being supporting factors.

In your case you made X number of trades over the course of the relevant income year. Although the total value of buys and sells is substantial, the actual number of trades is not consistent with someone who is operating a business of trading.

You have also provided that you spent X hours a week on related activities. Although these activities are relevant to the operation of a business there is no discernible pattern to your activities, and they are not themselves indicative of business. It would be reasonable to expect someone who is not operating a business and is simply investing to also participate in these activities.

Overall, it is not considered that the activities are repetitious and regular enough to be consistent with a commercial operation and more closely reflect someone who is actively investing.

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

Although you have stated that you use several trading strategies to generate income, the complexity of these strategies that has been demonstrated is not the same or similar to other trading operations that would generally be considered to be carrying on a business. Additionally, your trade choices were limited to specific industries and did not have the variety or diversity that would normally be expected of commercial trading operation.

Whether the activity is planned, organised, and carried on in a business-like manner

Activities are more likely to amount to the carrying on of a business where they are carried out in a systematic and organised manner. This usually involves matters such as having some form of forward planning to take account of contingencies and market fluctuations, setting profit targets, budgets, maintaining operations on a consistent basis, retaining, and pursuing profitable activities, discontinuing unprofitable activities, and keeping appropriate business records.

You have a basic business plan as well as online brokage reports to assist you. You conducted basic research into the companies you trade in. You perform technical analysis of charts by analysing moving averages and trend lines. You read brokers reports and articles. You use this information to create buy/sell plans and you also follow the news regarding interest rates and inflation.

However, these actions are not indicative of business activity, and it would be reasonable to expect someone who is investing to do a similar level of diligence. To further this, you do not keep other basic records like spreadsheets to assist you with your trades and your share trading strategy lacks the complexity and sophistication that may be expected of a share trading business.

Overall, it is not considered that the activity is planned, and carried out in a business-like manner such as that it is directed at making a profit.

The size, scale, and permanency of the activity.

Share tradingthat is being conducted on a small scale is more likely to be considered investing, however a share trader could trade small amounts with high regularity, while a share investor could have several million dollars at stake.

The total value of share purchased shares valued at $X and sold shares worth $X however, you reached this value with only X trades. Although this equates to a reasonably sized average buy transaction, the number of share trading transactions completed for the financial year has limited the size and scale of the share trading activity.

These figures indicate that you are more likely trading shares as capital investment and not as a share trading business.

Conclusion

After weighing up the relevant business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner's view that the overall impression is that you are not carrying on a business of share trading in the relevant income year.

The shares you held at the end of the relevant income year were not trading stock for the purposes of Division 70 of the ITAA 1997.

As the losses are capital in nature they cannot be claimed as a deduction under section 8-1 of the ITAA 1997. They are capital losses and can be offset against capital gains made that year or carried forward to future year.