Edited version of private advice

Authorisation Number: 1052080069332

Date of advice: 7 February 2023

Ruling

Subject: Share trading

Question

Are you carrying on a business of share trading?

Answer

No, you are considered to be a share investor.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You work full-time as accountant who has commenced buying and selling shares during the 20XX financial year.

You have achieved a tax profit in the 20XX and 20XX financial year.

You reported these profits as capital gains.

You suffered a tax loss in the 20XX financial year.

You consider a purchase and sale within the same year to be a trade.

You have maintained a record of all trades.

You did the following number of trades:

You sell 99% of shares within a year of buying.

You do your own research and analysis though media, mostly online by looking at announcements and statistics from corporate and government sources.

You use this research to identify opportunities.

You use stock charts, announcements, news, and the market to decide to buy, hold and sell.

You normally buy on rumour or belief that certain industries will have a boom.

You get these rumours from fellow investors you find on Facebook groups, WeChat, Reddit and HotCopper.

Your belief comes from the idea that knock on effects in a supply chain can create opportunities; an example provided was a boom in electronics means a boom in lithium could occur.

You study charts you generate though apps Tiger trading, IG and Comsec.

You use general news, financial statements, essays, online forums and word of mouth.

You have no consistent pattern or trends in your trading activity.

When asked to explain your reason for sales you made in June you said you used multiple strategies when trading.

You do not have a business plan.

You have no risk mitigation measures in place.

You normally spend more than an hour per day for research, study and analysis.

You had an average of $X invested in trading activities. You bought shares worth $X and sold shares worth $X for the 20XX financial year on buy and sell transactions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

Whether you are carrying on a business of share trading or are a share investor is dependent on whether you conduct your activities in a businesslike manner. While some of your conduct is businesslike your overall conduct does not show you to be operating as a business. Predominately you do not operate to the same industry standards as other share trader businesses and base most of your trades off speculation as opposed to having a business plan or consistent strategy outlining how you intend to make a profit. As a result, you are not considered to be a trader but, an investor.

Detailed reasoning

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines a 'business' to include any profession, trade, employment, vocation or calling but does not include occupation as an employee. This definition, however, 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.

For the purpose of determining whether an activity is the carrying on of a business the facts of each case must examined having regard to relevant indicators that have been established through case law. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production lists these general indicators and although the ruling is in respect of primary production the general indicators can be applied to any industry. These general indicators 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

•         whether the activity is organised in a businesslike manner

•         the size or scale or permanency of the activity

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

In respect of share market trading, AAT Case 6297 (1990) 21 ATR 3747; Case X86 90 ATC 621 (AAT Case 6297), listed the following indicators of carrying on a business:

•         the nature of the activities and whether they have the purpose of profit-making

•         the complexity and magnitude of the undertaking

•         an intention to engage in trade regularly, routinely, or systematically

•         operating in a business-like manner and the degree of sophistication involved

•         whether any profit or loss is regarded as arising from a discernible pattern of trading

•         the volume of the taxpayer's operation and the amount of capital employed by him

and more particularly in respect of share traders

•         repetition and regularity in the buying and selling of shares

•         turnover

•         whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

•         maintenance of an office

•         accounting for the share transactions on a gross receipts' basis

•         whether the taxpayer is engaged in another full-time occupation.

Of these indicators, paragraph 16 of TR 97/11 says when considering whether a person is carrying on a business, all of the indicators must be weighed up. However, in doing so, equal weighting may not be given to each indicator. Whether a business is carried on depends on the general impression gained and whether it has a commercial flavour or character. In most cases, the greatest weighting is given to the repetition and regularity of the activities followed by organisation in a business-like manner as a supportive indicator.

In AAT Case 6297, one factor contributing to the decision the taxpayer was not carrying on a business was the term 'share trader'. Here, share trader was used to describe a person who dealt in shares such that his transactions had the character of a continuing business enterprise, whereas a 'speculator' in the stock market was a person whose speculations were in the nature of individual forays in particular stocks with a view to resale. The sale of shares by the 'speculator' were deemed to be on capital account.

In Case X86 losses on two parcels of shares sold after the 1987 stock market crash were disallowed as immediate deductions. Instead, the losses were quarantined under the capital gains provisions of the Act. It was found that there was a lack of sophisticated share trading techniques, business plan, market research in shares invested, contingency plan in falling market or large number of transactions, such that the applicant's activities did not exhibit a system of operation of a business in share trading. The applicant had only a limited contact with the share market, which he then entered for the purpose of making quick profits by generally buying and selling speculative mining shares. The applicant was not engaged in a business of share trading but rather that he was a speculator in the share market.

In the Federal Court case of Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187; (1991) 22 ATR 344; (1991) 91 ATC 4689, it was decided the taxpayer did not carry on a business because there was no pattern of buying and selling of shares.

Again, in AAT Case 9183, 27 ATR 1168; Case 1/94, 94 ATC 101, whilst accepting the taxpayer's evidence that shares in one company were purchased for resale and the dominant motive was profit making by sale, the primary factor contributing to the decision the taxpayer was not carrying on a business was there was no evidence of any regular, routine, or systematic trading in shares. The purchase of any of the shares appeared to have been made on a very spasmodic basis.

The existence of a period of dormancy, where trading activity ceases, often raises an issue as to whether a business is truly still in existence, though greatly reduced in scale or has actually ceased altogether.

In a decision handed down by the AAT on 5 August 2010, Smith v FC of T 2010 ATC 10-146, it was found that Mr Smith was not in the business of share trading during the financial year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit-making because he held his shares for periods longer than a share trader generally would, and his activities did not demonstrate, to the Tribunal's satisfaction, repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business. To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

In a more recent case Hartley v FCT (2013) AATA 601 (Hartley case) the AAT affirmed a decision of the Commissioner that a taxpayer was a share investor and was not carrying on a business of share trading, and therefore denied deductions that had been claimed on the premise that a business existed for the relevant years.

In the Hartley case the taxpayer was during relevant times a full-time council employee. According to the taxpayer, he had been actively involved in the share market for many years, which occupied about 15 hours of his time per week. He also claimed he had an arrangement with his employer where he could trade during business hours and then make up any time after hours. For the relevant tax years (the financial years ended 30 June 2010 and 30 June 2011), the taxpayer lodged tax returns claiming significant deductions on the basis that he was carrying on a business of share trading. After an audit, the Commissioner determined that the taxpayer was a share investor and issued assessments refusing the deductions. The AAT considered each of the relevant factors established in case law (in particular, the factors listed in AAT Case 6,297 (1990) 21 ATR 3747) in determining whether or not the taxpayer was engaged in a business of share trading. Although noting the 'matter was finely balanced', the AAT was of the view that the factors pointing against the existence of a share trading business were more significant than those pointing in favour of the existence of a share trading business. The factors in favour of the Commissioner's position identified by the AAT included the following:

•         the buying and selling of shares was not regular or routine;

•         there appeared to have been very little in the way of a plan, although a written plan was produced belatedly; the AAT added that very little appeared to have been done in terms of setting budgets and targets, and that the trading and the background research was simple and unsophisticated; and

•         the taxpayer was engaged in another full-time profession as a council employee. In particular, the AAT expressed the view that 'the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an ongoing-business'.

Based on the factors of your situation, we have considered the following indicators:

Whether the activity has a 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.

The following indicate a lack of commercial purpose:

•         You were unable to provide business plan to show how you plan to achieve profit

•         You have not sought any expert advice, instead you gain insight though community groups

•         You are not an expert on share trading and haven't attained any technical literature or training on how to carry on the activity

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

You had an intention to engage in your activities and have completed share purchases and sales.

You stated your portfolio to be on average $X.

Whether there is repetition and regularity of the activity

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 were running a services business as a sole trader.

You spent over 1 hour a day on share activities. You conducted the activity thought out the whole year. There was no discernible pattern to your trading.

This is not considered to be a high level of share transactions and is not in keeping with the sales that would be expected of a person who was in business as a share trader.

The size, scale, and permanency of the activity

Share trading that 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.

You had an average of $X invested in trading activities, but you bought shares worth $X and sold shares worth $X for the relevant income year on buy and sell transactions. You had about XXX buy and sell transactions for the year. You consider a buy and sell action to be a trade. Of these trades XX were sold in the month of June 20XX. When the size and number of trades are considered equates to a smaller than average level of activity.

The figures provided indicate that you are trading in shares as a capital investment and not as a share trading business.

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

Activities are more likely to be carrying on a business where they are carried on in a similar manner to other businesses in the industry.

Transaction patterns in buying and selling shares that would generally support that a business of share trading was being carried on would be:

•         mitigation of risk through short holding periods and strict adherence to taking gains at a certain level and cutting losses at a certain level,

•         a high turnover of shares,

•         a share trading strategy in place,

•         substantial levels of repetition and regularity of share sales,

•         high value of share transactions to take advantage of small movements in price.

In your case:

•         the mean value of your trades was a buy price of $x and sale price of $x per trade,

•         you had a low turnover of shares during most of the income year with a spike in the last month of the financial year

•         you had a limited share trading strategy,

•         no risk mitigation measures in place,

•         no share trading business plan in place, and

•         you had low repetition and regularity of share activity.

From this information it indicates that you are not carrying out your activities in a similar manner to others in this industry.

Whether the activity is planned, organised, and carried out in a businesslike 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 use annexments and statistics provided by corporate and government sources. You conducted research on the financial information of the companies you trade in and follow message board that other share traders make use of. You utilise trading apps to generate information charts although no evidence of this was provided. You maintain a record of your trades.

However, your share strategy did not display the sophistication that may be expected of a share trading business, and you stated that your plan was based on speculation from other traders and knock-on effects from booms in related industries. You do not have a plan to take into account market fluctuations and did not have a stop loss limit for your share trading activities. You do not have a business plan. You have no trend in your share activities and when ask to explain you simply stated you use multiple strategies with no further information provided.

Based on the information provided, it is not considered that your share activities are carried out in a manner that supports that a business of share trading is being carried on.

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

You started your share activity with the intention to make a profit based on research conduct by yourself in relation to the shares. This indicates that the share transactions were speculative. The majority of the losses were from speculative transactions and speculative losses are accounted for on capital account.

Your share transactions would not be better described as a hobby, recreation, or a sporting activity. They are considered investment income.

Conclusion

In weighing up the relevant factors it is considered that you were not carrying on a business in share trading in the relevant income year. You were an investor rather than a trader.

The shares you held at the end of the 20XX financial 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 future capital gains.