Edited version of private advice

Authorisation Number: 1052163915682

Date of advice: 28 September 2023

Ruling

Subject: Am I in business isolated transactions capital gains share trading

Question 1

Is the income that you have received from your share transactions in the 2021-22 and 2022-23 financial years assessable as business income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the income that you have received from your share transactions in the 2021-22 and 2022-23 financial years assessable as profit arising from the carrying on of a profit-making undertaking under section 15-15 of the ITAA 1997?

Answer

No.

Question 3

Are proceeds from share transactions in the 2021-22 and 2022-23 financial years considered assessable income as a capital gain under section 102-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You returned to Australia from overseas prior to commencing your share market activity. You live and work in Australia and are a resident for taxation purposes. On returning to Australia you continued working for your previous employer but began looking for work more suitable to your current location.

As you were uncertain about your future employment you began looking to diversify your income streams and began purchasing and reselling shares on overseas markets in the months prior to the relevant period.

You used a publicly available share trading platform for your share purchases and sales. The terms of your agreement to use this platform allowed you to download a copy of their proprietary share trading software to one computer for personal and non-commercial use. You conducted your share purchase and resale activity from your home using this software on your laptop. Your orders were automatically directed to whichever markets were automatically chosen by the share trading platform.

Your share related activity involved buying shares in several dozen high profile public companies and attempting to profit on their sale during the periodic short term upward market movement in the price of those shares. You made a significant initial investment in this activity and leveraged your purchasing power using margin loans provided through the share trading platform. Your share activities involved various instruments (stocks and options), various tickers and the use of long and short positions.

Your share related activity was limited as you were also working full time and trying to access overseas stock markets during their opening hours in a different time zone. On average you made a small number of transactions on the days you were active and this happened on an irregular basis.

While many of the stocks you invested in did not have dividend rights attached you were paid small amounts of dividends in both financial years.

You ceased purchasing and selling shares as you had taken on a new work role, felt secure and financially stable in that role, and you were not making a profit on this activity.

You intended to make a profit with this share related activity but had no intention of going into business. You had no business plan or structure, kept no records beyond the account balances and trading history provided by the share trading platform, and did not apply for an ABN. The spreadsheet supplied with your application reported gains and losses in net terms.

You had no prior experience with this activity, did not seek expert advice, and relied on google searches and articles on business news platforms for your research.

Your annual income from your full-time employment is over $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-5(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 118-20

Reasons for decision

Question 1

Is the income that you have received from your share transactions in the 2021-22 and 2022-23 financial years assessable as business income under section 6-5 of the ITAA 1997?

Summary

Any income that you received from your share market activity in the 2020-22 and 2022-23 financial years is not assessable as business income under section 6-5 of the ITAA 1997.

Detailed reasoning

Under section 6-5 of the ITAA 1997 assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, allowances received as an employee, dividends, and proceeds from carrying on a business.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer is carrying on a business;

•                     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 permanence of the activity

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

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

In Williams v Federal Commissioner Taxation [1972] HCA 48 regarding profits gained from the purchase and resale of mining shares, a clear distinction was made between the business of trading in shares and speculative investment. In this case it was held that the transactions of a share trader who acquires shares as a dealer can be characterised as an ongoing business enterprise, and those of a speculative investor can be characterised as forays into particular stocks with a view to profit on the resale of those stocks.

In this case the taxpayer invested $100,000 in mining shares at the time of the mining boom in Australia in the late 1960s. While he was involved in quite considerable stock market investment with remarkable success the High Court found that the taxpayer was a speculator in those shares. Deciding factors in reaching this decision were the taxpayer's reliance on his own knowledge and estimation of the ventures he was investing in, and the lack of any system or method of carrying on a business.

A review of a share trading case in Case X86 [1990] AATA 249 (Case X86) affirmed this distinction in this decision and set out the following indicators for determining whether an activity is being carried on as 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/loss is regarded as arising from a discernible pattern of trading;

•                     the volume of the taxpayer's operations 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 profession.

These factors are included in the indicators listed in TR 97/11 for determining whether a business is being carried on.

In Case X86 the taxpayer decided to invest $100,000 in the stock market for the purpose of making quick profits by generally buying and selling shares in speculative mining companies. In deciding whether to buy or sell, the taxpayer relied on radio reports, advice from other individuals in a share-trading discussion group, investment journals, and he consulted his accountant at least once a week. He also telephoned the stock exchange several times a day whenever there were significant upward or downward movements in share prices and, if he was contemplating selling his shares because of a rising market, he would telephone the Telecom information line for its half-hourly stock market updates.

The Administrative Appeals Tribunal held that the taxpayer was a speculator. The reasons for this decision included the absence of any plan apart from maximising his gains, a contingency plan should conditions deteriorate, or sophisticated share trading techniques, and the taxpayer's preference for holding on to his shares indefinitely rather than accepting small percentage losses. In the circumstances the Tribunal found it difficult to conclude that the taxpayer's activities could objectively be described as a system of operations for a share trading business.

In assessing whether the income from your share activity can be considered business proceeds assessable under section 6-5 of the ITAA 1997 we have considered your case taking the indicators set out in TR 97/11 into account as shown below:

Whether the activity has a significant commercial purpose or character

On seeing an opportunity to profit from the periodic short term upward movement of share prices in a foreign stock market you began purchasing shares for resale on those upward movements several months before the relevant period. There was some commercial purpose or character to your share purchase and resale activity in your desire to profit, the capital you sourced to begin this activity, and some scale to the turnover you achieved with this capital. You had however no intention of going into business, did not have a business plan, and did not have an ABN. You had no experience in this activity, sought no expert advice on this activity or the shares you purchased and relied on google searches, online forums, and articles in business news platforms for your research.

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

While you had no intention of being in business you did actively purchase and sell shares throughout the relevant financial years.

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

Your purpose in engaging in this share related activity was to make a profit and diversify your income streams through a period of employment uncertainty. Through your initial investment, access to margin loans and use of the share trading platform you sourced the finance and means to provide some prospect of profit.

Whether there is repetition and regularity of the activity

There was repeated and regular activity in your share related activity. You were only able to devote a small number of hours a week to this activity because of your full-time work commitment and the inherent difficulty of trading across time zones.

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

Your activity was conducted in a more limited market, with more limited scope, and in a more limited manner than could be expected in the ordinary carriage of a share trading business. You worked on the premise that you could profit from purchasing shares and then reselling them as the price rose with short term market movements. Your purchase and sale transactions were limited to shares in 25 high profile public companies bought and sold through one trading platform using a single copy of the trading platform software on a personal and non-commercial use license. You leveraged the scale of your operations and bought and sold both shares and options. Your orders were automatically directed to whichever markets were automatically chosen by the trading platform. You purchased some shares without dividend rights but were paid small amounts of dividends in both financial years.

Your activity in buying and reselling shares based on your assessment of the possible gain as the price rose on short term and periodic market movements was more in the nature of speculative investing than trading, and the manner in which you undertook this activity more suitable for that purpose.

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

Your share related activity had no business plan and was organised solely through the trading platform. Records maintained by that platform included your trading history, your trading position, your account balances, dividends paid, and interest due on your margin loans. You have no other system for tracking the performance of your activity or how to improve that performance and sought no expert help. The records you have supplied showing your share purchases and sales reports your gains and losses in net terms.

Having kept no records beyond the trading platform statements and the spreadsheet of you share related activity the organisation of your activity could be characterised as more fit for personal investment than a share trading business activity.

The size or scale or permanency of the activity

The size and scale of your initial investment was significant. On securing a new work role and acknowledging the losses you were making you ceased trading, rendering the activity impermanent.

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

Your share related activity is not better described as a hobby, recreation, or sporting activity.

Conclusion

Taken together an assessment against these indicators gives the impression that you were not in business with your share market activity in the relevant financial years. You did not intend to go into business and your stated intent of profiting on the resale of shares on upward market movements is more closely related to speculative investment than share trading as a business. Your conduct of this activity was also more like that of an investor than someone carrying on a share trading business. Your aims and methods in carrying on this activity lacked the scope and complexity of ordinary trade in this line of business, were not business-like, and the activity lacked commitment in terms of the hours spent on it. As you were not carrying on a business any profit from your share market activity would not be assessable under section 6-5 of the ITAA 1997.

Question 2

Is the income that you have received from your share transactions in the relevant financial years assessable as profit arising from the carrying on of a profit-making commercial undertaking under section 15-15 of the ITAA 1997?

Summary

The income arising from the purchase and sale of your shares cannot be considered income from a profit-making commercial undertaking and will not be assessable income under section 15-15 of the ITAA 1997.

Detailed reasoning

Income generated through isolated transactions outside the ordinary course of business may be assessable under section 15-15 of the ITAA 1997. To be considered as assessable income under this provision these transactions must be entered into for the purpose of making a profit while carrying out a business operation or commercial transaction. As noted in paragraph 49 of Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income:

A transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations.

In determining whether transaction proceeds are to be considered as profits from an isolated transaction TR 92/3 sets out the following factors for consideration;

•                     the nature of the entity undertaking the operation or transaction

•                     the nature and scale of other activities undertaken by the taxpayer

•                     the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

•                     the nature, scale and complexity of the operation or transaction

•                     the manner in which the operation or transaction was entered into or carried out

•                     the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

•                     if the transaction involves the acquisition and disposal of property, the nature of that property

•                     the timing of the transaction or the various steps in the transaction

You purchased and sold shares throughout the relevant financial years for the sole purpose of profiting on the sale of those shares.

The transactions you made in purchasing and selling your shares have been considered in light of the above factors in the process of determining if you are carrying on a business of share trading. As found in Question 1 the undertaking of these transactions as a whole could not be considered to be the carrying on of a business as your conduct was more like that of an investor than someone carrying on a share trading business. Your aims and methods lacked the scope and complexity of ordinary trade in this line of business and were not undertaken in a business-like manner. This conclusion will hold for each of these transactions as they do not differ significantly in these regards, and they will not constitute the carrying on of a business individually or as a whole.

The income arising from your share related activity cannot be considered income from isolated profit-making commercial transactions and will not be assessable income under section 15-15 of the ITAA 1997.

Question 3

Are proceeds from share transactions in the 2021-22 and 2022-23 financial years considered assessable income as a capital gain under section 102-5 of the ITAA 1997?

Summary

Any capital gain from your share transactions will be assessable under section 102-5(1) 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 as described in section 104-10 of the ITAA 1997. This event occurs when a person disposes of a CGT asset to someone else as under section 104-10 of the ITAA 1997. CGT assets include shares acquired on or after 20 September 1985.

As the disposal of your shares will be a CGT event A1 any gains you have made on the sale of those shares will be a capital gain and assessable under section 102-5(1) of the ITAA 1997.

Section 118-20 of the ITAA 1997 reduces a capital gain made from a CGT event by any amount that is assessable outside of the CGT provisions. As no part of the proceeds from you share transactions are assessable outside of the CGT provisions there will be no reduction of assessable capital gain.