Edited version of private advice

Authorisation Number: 1052125946976

Date of advice: 31 August 2023

Ruling

Subject: Share trading

Question 1

Are you considered to be a share trader for the 20XX-XX financial year?

Answer

No.

Question 2

Is the profit/loss from the Share A assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Is the profit/loss from Shares B you disposed of assessable ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Question 4

Are the remainder of your Shares B virtually disposed of on the day that you departed Australia?

Answer

Yes.

Question 5

Is the profit/loss from the remainder of your Shares B that you virtually disposed of assessable ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You provided details on your fulltime employment including the name of your employer, the length of employment and your position. You also ran a cryptocurrency trading business.

You provided details on the profit and revenue that the cryptocurrency business had in the relevant financial year.

You commenced investigating and educating yourself about the stock market in the prior financial year and made purchases in the relevant financial year.

In the relevant financial year, you spent a specified number of hours each day investigating, reading and taking courses to advance your knowledge regarding the stock market.

You chose to apply a specific strategy and trade Shares A.

You plan to add foreign exchange and commodities in a future financial year.

You made a specified number of purchases during the relevant financial year with each purchase of a specified number of shares on each occasion.

You provided the purchase price for these shares.

You did not draw on any credit or use any loans to purchase these shares.

You were gifted shares from Shares B through an Employee Share Scheme. You provided the dates and the market value of these shares at the time.

You provided the date and sell price that you sold a specified number of Shares A.

You have expenses for the year from subscriptions trading courses. You provided the total figure of these expenses.

You sold half of your Shares B on a specified date.

Your profits are deposited into a personal trading account with Bank C.

You self-educated by reading books and joined a specific trading community.

You have a specified number of years' experience in programming and software architecture.

You have a preferred platform to write your scripts and use historical data to back test your ideas.

You do not have a business plan as you do not plan to look for investors or to bring a third party into your trading.

You do not have a dedicated office space to conduct your trading, it is conducted in your living room.

The remainder of the shares were kept with the intention of making more profit.

You departed Australia on a specified date, ceasing to be an Australian tax resident.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-1

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 104-10

Income Tax Assessment Act 1997 section 104-65

Reasons for decision

Am I in business?

Determining if you are a share trader is the same as determining whether your activities are considered to be carrying on a business for tax purposes.

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'.

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 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, and

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

The above factors must be considered in light of one another, with no single factor being determinative of whether the taxpayer is engaged in carrying on a business. Even where any one factor is not present, this will not necessarily mean that a business is not carried on: Evans v. Federal Commissioner of Taxation (1989) 20 ATR 922.

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.

Applying the relevant indicators to your circumstances

Whether the activity has a significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need 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 low level of transactions that you have completed during the financial year indicates that your share trading activity lacks a commercial purpose.

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

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

Whether there is purpose of profit as well as a prospect of profit from the activity

You researched and applied a specific strategy in buying and selling of shares with a goal of making profit.

Whether there is repetition and regularity of the activity

One of the key factors to consider whether a business of share trading is being carried on is the repetition and regularity of the share trading activities. The higher the volume of trades, the more likely it is that a business of share trading is being carried on.

In your case, you had a specified number of buy transactions within the financial year, all conducted between July and November in the same financial year. You had a specified number of sell transactions conducted in February of the relevant financial. This is not considered a high level of share transactions and is not in keeping with the sales that would be expected of a person conducting a share trading business.

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 a specified amount invested in trading activities in the relevant financial year from a low number of buy transactions. You were gifted a specified number of shares on two separate occasions of large value. The scale of your transactions and initial investment value were not substantial and the limited number of transactions completed for the relevant financial year has limited the size and scale of the share trading activity.

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.

The following information indicates that you are not carrying out your share trading activities in a similar manner to others in this industry:

•         You do not have a formal business plan

•         The share Trading for the financial year was based on two stocks

•         You have not borrowed any additional funds to maximise any potential gains / returns and rely on personal funding.

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 some form of forward planning such as 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 completed research on the financial information of the companies you held shares in and used forums for self-education. However, your share strategy did not display the sophistication that may be expected of a share trading business. You do not have a dedicated home office and were engaged in another full-time occupation.

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.

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

Overall, it is considered that your share trading activities are not carried out in a manner that supports that a business of share trading is being undertaken.

As your activities lack scale, size, repetition and purpose of profit, the Shares A and Shares B will not be assessable as ordinary income. Although the Shares B were acquired through an employee share scheme, this does not change the nature of your activities. As such, your shares are assessable under the CGT provisions.

Ceasing residency and departing Australia

As a general rule, individuals who are residents of Australia are required to include in their assessable income any assessable gain or loss made from the disposal of any CGT asset. Foreign residents however are only required to include in their Australian assessable income any gain or loss made as a result of a CGT event happening to a CGT asset they own that is classified as 'taxable Australian property' under the CGT provisions.

Shares are not usually considered to be 'taxable Australian property' even though they are a CGT asset. However, shares may be taken to be 'taxable Australian property' in some cases when an individual ceases to be an Australian resident for taxation purposes.

When you cease to be an Australian resident for taxation purposes you are taken to have disposed of your CGT assets for their market value at the time you cease being a resident. This is known as CGT event I1 and will result in a capital gain or loss, depending on whether or not the market value of the CGT assets at the time is greater or less than the cost base/reduced cost base of those assets.

Normally, any gain or loss that results from CGT event I1 happening would be included in your Australian assessable income in the financial year you cease being a resident of Australia for taxation purposes. However, section 104-165 of the ITAA 1997 allows you to make a choice to disregard (and therefore exclude from your assessable income) any gain or loss made from the deemed disposal of CGT assets because of CGT event I1 happening at the time you cease being a resident. Subsection 104-165(3) of the ITAA 1997 provides that any assets for which you make this choice are thereafter taken to be 'taxable Australian property' until the earlier of:

•         a CGT event happening to the assets (for example, their subsequent sale or disposal), or

•         you again becoming an Australian resident.

CGT event I1 happened to your shares when you ceased to be resident of Australia for taxation purposes on a specified date. This means you were deemed to have disposed of those shares for their market value on that date and a capital gain or loss would have resulted, depending on whether or not the market value of the shares was greater or lesser than the cost base/reduced cost base of the shares.

At the time you ceased to be resident you may make the choice under section 104-165 of the ITAA 1997 to disregard any gain or loss made from the deemed disposal of your shares because of CGT event I1. If you make this choice, your shares will become 'taxable Australian property' and would remain so until the earlier of another CGT event happening to them, or you again becoming an Australian resident for taxation purposes.

It is considered that CGT event I1 occurred happened to you in relation to your remaining Shares B on the specified date. These remaining shares will not be assessable as ordinary income. Although you acquired the shares through an employee share scheme, this does change the nature of your activities. Your activities lack scale, size, repetition, and purpose of profit. CGT event I1 occurred at the time you departed Australia and ceased to be Australian tax resident. As such, you are assessable under the CGT provisions.

Conclusion

In weighing up the information provided, it is considered that you were not carrying on a business in share trading in the relevant financial year. You were an investor rather than a trader. It is expected a business conducting share trading activities would trade in a large quantity, on a regular basis and in a variety of stock with appropriate record keeping and a business plan.

Although you acquired a portion of your shares through an employee share scheme, this does change the nature of your activities.

Any gains from the disposal of Share A and Shares B prior to departing Australia are assessable income as a capital gain (section 102-5 of the ITAA 1997) and any losses sustained from the disposal would be capital losses (section 102-10 of the ITAA 1997).

Upon departing Australia, you are deemed to have disposed of your assets at the market value on the date that you departed, and this is a CGT Event I1.