Edited version of private advice

Authorisation Number: 1052174124486

Date of advice: 27 September 2023

Ruling

Subject: Foreign resident share trading

Question

Is the income that you have received from the share transactions assessable as business income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question

Are the capital gains and losses you made from your share transactions disregarded under the provisions of Division 855 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You have not been a resident of Australia for taxation purposes at any time over the period of time which you were trading in Australian shares.

You began purchasing and reselling shares with an initial capital investment saved from your employment income. You did not know at that time if you could make a profit with this activity.

You did actually make a profit with this activity in two financial years.

You purchased or sold shares on 66 days in the first financial year and 75 days in the second financial year. On the days you did trade you made one to two transactions per day. You purchased or sold shares in 35 weeks in this period, making 2.5 transactions per week for these weeks. You made no transactions in the other 69 weeks in this period. You made purchase or sale transactions in 23 of the 24 months in the two financial years you were actively trading, averaging 11 transactions per month. On average you spent 8 to 10 hours a week on this activity.

You limited your share purchases to stocks in the industry sector of your profession on the Australian stock exchange. You had some professional experience in finance, and relied on this, along with experience in your field as a scientific professional to inform your choice of share purchases. You purchased and sold these shares online using software available through an online share trading platform supplied by an Australian bank on a personal computer from your home. You sought no other professional advice on which shares to purchase, or how to undertake this activity, and used no other sources of information or analytical tools. Your expenses included monthly and per trade fees for the use of the share trading platform.

You purchased junior stocks in the industry sector relevant to your profession on news given in company announcements and stock forums. Your purchases were based on your assessment of the quality of their developments, your estimation of the economic worth of these developments, and the extent to which you thought they were undervalued by the market at that time. You hoped to be able to resell those shares at a later date for a profit. Your average share purchase cost more than $XX, and on a couple of occasions you paid more than $XXX. You held your shares on average for 14 to 15 days and no dividends were payable on these shares. You managed risks by selling off shares of those companies reporting poor results and otherwise holding shares regardless of the downside risk or other economic factors.

You kept no records of this activity apart from the statements issued on your share transactions and used no other software or application to record or monitor your activity or expenses. You have supplied a spreadsheet showing your transaction history.

You performed all share trading activity as an individual and have no associates in relation to these activities.

You held less than 10% participation interest in any of the companies whose shares you traded.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 855

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-30

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

Reasons for decision

Question 1

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, and proceeds from carrying on a business.

Subsection 995-1(1) of the 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 lists activities that may be included as a business. It does not provide guidance on the nature, extent, and manner of undertaking of those activities that amount to the carrying on of a business.

In determining whether an activity is carried on as a business the facts of each case must be 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 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 the following indicators for determining whether an activity is being carried on as a business were set out as follows:

• 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 your share activity can be considered a business we have taken the following factors into account:

Whether the activity has a significant commercial purpose or character

Your plan and purpose in purchasing and selling shares was to profit from their resale. You thought it might be possible to purchase shares in new ventures while they were undervalued and then resell them for a profit when the market value for these shares increased to your estimation of their economic value. Your initial investment was less than $XX and you did not know if your plan would succeed. You sought no professional guidance on this activity or the stocks you were purchasing. You relied instead on your previous exposure to financial services through your employment, company reports, investment forums, and your experience as a professional in your field of science.

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

You were actively purchasing and selling shares over two financial years.

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

You had both a purpose of profit, and a prospect of profit on the resale of the shares you purchased. As this activity progressed you did make a profit in both financial years.

Whether there is repetition and regularity of the activity

There is some repetition and regularity of your activity but not enough to warrant consideration as a share trading business activity. You purchased or sold shares on 66 days in the first financial year and 75 days in the second financial year. On the days you did trade you averaged one to two transactions per day. You purchased or sold shares in 35 weeks in this period and did not buy or sell any shares for the other 69 weeks in this period. You bought and sold shares on average 2.5 times a week.

You made purchase or sale transactions in 23 of the 24 months in the two financial years, averaging 11 transactions per month. You spent 8 to 10 hours a week on this activity including time spent researching.

You held the parcels of shares for about 2 weeks on average. There was no system or strategy in place.

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

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 shares of new ventures with promising initial reports would be recognised by markets for their economic worth over time and that you could profit from the rise in their market value as this happened. Your purchase and sale transactions were limited to new stocks in your industry sector bought and sold through one share market, the ASX, using one trading platform supplied through an Australian bank, and made from your home on a personal computer. You based your research on company reports and investment forums. Your risk management was limited to selling shares of ventures that did not live up to their initial promise and holding all others until they achieved your estimation of their worth.

Your activity in buying and selling shares, based on your assessment of the intrinsic value of those shares, was more in the nature of share investing than trading, and the manner in which you undertook this activity more suited to that purpose.

Whether the activity is organised in a businesslike manner

Beyond the regular purchase or sale statements you kept and the spreadsheet forwarded based on your share transaction history there seems to be little that is business-like in the management of your accounts or records for this activity.

Having kept no records beyond the statements and this spreadsheet the organisation of your activity could be characterised as more fit for personal investment than a share trading business activity. You have no method of systematically tracking costs or monitoring the performance of your investments.

The size or scale or permanency of the activity

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. Similarly, the larger the amount of capital employed in the activity, the more likely the taxpayer will be regarded as carrying on a business. However, neither is a determinative factor and must be considered in line with the other factors.

From your initial investment you were able to achieve some scale in your activity over the two financial years you were actively purchasing and selling shares. Of the shares that were sold in the two income years, the shares were held for an average of 14 days. Your average share purchase cost over $25,000, and on a couple of occasions you paid more than $250,000.

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

Your share purchase and resale 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 either of the financial years. Your stated intent of holding investments until they gained the market acceptance of the economic value you had estimated was by nature more closely related to investment than share trading as a business. The activity was not carried out in a systematic manner, and there was not a business-like strategy in place. Your conduct of this activity was also more like that of an investor than someone carrying on a share trading business.

You should note that you can change from being a share investor to a share trader or vice-versa over time as your level of activity changes. You should evaluate your level of activity on a regular basis to see whether you are a share trader or a share investor.

Question 2

Detailed reasoning

Division 855 applies to foreign residents to disregard a capital gain or loss from a CGT event if the event happens to an asset that is not taxable Australian property (non-TAP). Taxable Australian property (TAP) can include:

•         taxable Australian real property, such as real property situated in Australia; or

•         indirect Australian real property interest.

Shares in a resident company do not satisfy the definition of taxable Australian real property, however they may be an indirect Australian real property interest if the shares pass two tests:

•         the non-portfolio interest test; and

•         the principal asset test.

A membership interest you hold in an entity (the test entity) passes the non-portfolio interest test if the sum of the direct participation interests you and your associates hold in the test entity is 10% or more (section 960-195 of the ITAA 1997). A membership interest you hold in an entity (also the test entity) passes the principal asset test if the total market value of the test entity's assets that are taxable Australian real property (TARP) exceeds the total market value of the test entity's assets that are not TARP (section 855-30 of the ITAA 1997).

Application to your circumstances

You have been a foreign resident over the entire duration of your share trading activity. As you have made all purchases and sales of shares as an individual you have no associates, and you have not held more than 10% participation interest in any of the entities through your shareholdings.

As your shareholdings do not pass the non-portfolio interest test, they are not an indirect Australian real property interest and you can disregard capital gains and losses under section 855-10 of the ITAA 1997.