Edited version of private advice

Authorisation Number: 1052117335754

Date of advice: 2 June 2023

Ruling

Subject: Am I in business? - 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 2022

The scheme commenced on:

30 January 2021

Relevant facts and circumstances

You have commenced buying and selling shares during the 20XX financial year.

You listed your gains as assessable foreign income. When calculating this figure, you treated your trades as capital gain events.

You began trading with guidance from education provider beginning on in 20XX within a personal account.

You created a family trust for the purpose of asset protection, and you are in the process of transferring assets held in your name to the trust.

You proceeded to move all funds into a trust structure in 20XX.

You now trade using the family trust.

You fund your existing and former investments in-part though an investment loan.

You initially traded 10 hours a week in the year 2020 and since mid-2021 you have been trading on average 15-20 hours a week.

You buy shares on the US securities market.

You use 'covered calls' and 'collared covered calls' in your strategy to buy and sell shares.

You describe it as a 'low risk, long term' strategy with an aim of a 1-4% per yield per month.

You have a set of conditions that following before buying a stock.

You utilise "puts" to offset risks of your strategy.

You will hold shares if they have suffered a loss until the point in which they are able to make a profit. You will not sell stock for a realized loss.

You provided a business plan showing your investment objectives.

You signed up to a service which provides education and guidance around investing in the stock market.

You paid a membership fee.

You received educational resources which include an introduction to the stock market and provided you details on how to execute your strategy for trading.

You received recommendations on stock to buy from the service, these recommendations are given if they meet the trading conditions and it is optional to follow these.

You have a personal mentor but, consider all coaches to be mentors.

You received guidance from your mentor around the strategy you employ.

You are provided with coaching over the phone and though skype which is available 5 days a week from the educational service.

The service advises on their website they are 'authorised to provided general advice - education only'.

You have received no tertiary qualification from the service.

You have not sought professional advice regarding share trading.

You have not done any research into share trading outside of material from the service.

You listen to podcasts and follow Facebook groups who discuss the topic of 'cover calls'. This is solely for entertainment purposes.

You subscribe to live data on a trading platform from the service.

You provided records of your trades.

You traded shares on the US securities market for thirteen different entities.

You had an average portfolio of over $XX AUD.

You provided record showing you unrealised losses and your realised gains.

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

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.

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.

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 provided a business plan which showed your goals and investment strategy but, provided no details as to how you were to achieve these goals

•         You only traded in 13 different shares on the US securities market

•         You have not sought any expert advice, instead your only source of insight is though a single education provider

•         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 is an average of over $XX AUD.

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.

From 2020 onwards you spent on average 10 hours a week, 1-2 nights on share activities not trading on weekends. Midway though the year you went up to 15-20 hours a week, sometimes on weekends. You conducted the activity thought out the whole year. There was no discernible pattern to your trading. Furthermore, you only made small amounts of buys and sell, and calls and puts.

You proceeded to move funds into a trust structure and have shifted to trading under an ABN. These trades are not considered in this ruling as they were made in the trust which is a separate entity.

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 $XXX invested in trading activities., you only made small amounts of buys and sell, and calls and puts. You have stated that you hold shares for both short and long term trades. When the size and number of trades are considered, it 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 time you hold a stock for varies, there is no pattern to the length you hold shares,

•         you had a low turnover of shares during the year and are holding shares due to your strategy of not selling at a loss but, holding until you can break even,

•         you have a limited share trading strategy,

•         you have a share trading business plan that is simple and unsophisticated, 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.

A share traders business operates independently of any third-party having developed their own strategy based on knowledge gain though a combination of experience, tertiary studies, or technical literature. You utilise a strategy taught to you by a single education service provider which is the basis of your trades. You utilise a criteria developed from the educational material provided by service provider to formulate your trades. You also trade utilising the server providers Investor app. You receive mentoring from the service provider and can get coaching when needed.

You do not display the sophistication that may be expected of a share trading business. Your business plan is a set of goals with no plan in place of how you intend to achieve them.

A business of share trading operates on a short-term basis where they pursue profitable activities and discontinuing unprofitable activities, holding trades long term to recover from the losses is the behaviour of a share investor. An individual with a business with a strategy of calls and puts requires constant trading. It is accepted in share trading that a loss can occur in doing business and as a result they utilise contingencies plans to mitigate these losses. The records you provided showed an unrealised capital loss in shares of exceeding the realised gains from trading stock and making calls. The records show no contingency action was taken to mitigate the loss due to drop in share value outside of a very small 'put' well after the share had dropped in price. Furthermore, you have stated you will not sell at a loss and will hold the shares until you can bring them back to profit though exercising options or the eventually sale.

Overall, 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 training from an educational service provider. 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 year were not trading stock for the purposes of Division 70 of the ITAA 1997.

Any gains made from the activity are considered capital in nature.