Edited version of private advice

Authorisation Number: 1052191892450

Date of advice: 13 November 2023

Ruling

Subject: Share trading - investment income

Question 1

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.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You have been trading in the stock market for a considerable time starting with blue-chip stocks.

You started trading as a way of generating a secondary income outside of your full-time employment.

You have stated that to fund your share market transactions you have used savings from your previous investment funds and personal savings that have been built through your employment.

There were several transactions within the 2021-22 financial year.

The type of shares that you invest in are generally in the sectors you have an understanding in through your work.

Your trading strategy was based on short term speculation with analyses of trends and realising capital preservation that have sufficient activity. Your strategy is also specific stock dependent and the likelihood of additional growth and ability to reinvest. Along with this, there is no stop loss in place.

Using the information provided it was reviewed to identify a pattern of the buying and selling of shares. It has been identified that the shortest time for holding a parcel of shares was less than a week and up to over half a year within the 2021-22 financial year. It was also identified that some parcels of shares had been purchases only or sales only using shares that had been purchased previously. Also, it has been advised that dividends have been paid out routinely.

In relation to the time spent on the trading activity you have advised that you spend a little bit of time checking the market before going to work.

When you first started in the stock market you attended the trading floor to observe and acquired stock. You have also used third party subscriptions (paid and unpaid) along with general internet searching. You also gained information through your broking platform.

You have also stated that your professional background where you are required to analyse and complete forward projections of behaviour/growth has assisted in your ability.

The only professional guidance you have/use is from the broking platform you use. This provides research on the financial data on the stocks that you completed research on.

You have not undergone any additional training or course during the 2021-22 financial year.

To maintain records about the transactions that are made during the year you used the broking platform that provides details on trading activities and contact notes. You also used another share trading aimed program which is linked with your broking platform.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Reasons for decision

Tax treatment of gains and losses resulting from share transactions

There are two possible scenarios as to how gains and losses from share trading activities can be treated for income tax purposes. These scenarios and their consequences are as follows:

1. Investment Income

In this situation your share trading activities would be regarded as investing. Your shares would be considered capital gains tax (CGT) assets. Any gains resulting from the disposal of shares would be income as a capital gain. Any losses sustained on the disposal of your shares would be a capital loss. Your income would be statutory income and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10 of the ITAA 1997.

2. Business Income

In this scenario your share trading activities would be considered to constitute the carrying on of a business. Your shares would be regarded as trading stock and any gains or losses would be included in your assessable income. Your income would be ordinary income and assessable under section 6-5 of the ITAA 1997, while your expenses would be deductible under section 8-1 of the ITAA 1997.

To determine which of these treatments applies to your situation it is necessary to make a determination of whether or not your share trading activities amount to the carrying on of a business.

The Commissioner's view on carrying on a business is set out in Taxation Ruling TR 97/11. Whilst TR 97/11 considers the carrying on of a business of primary production, the principles applied in it have been applied by the courts in determining whether a business of share trading is carried on.

The question of whether you were engaged in share trading is essentially based on the facts of your situation. In AAT Case 6297 (1990) 21 ATR 3747 (Case X86), 90 ATC 621 (Case 6297), the following specific indicators of carrying on a business for someone carrying on a share market activity were listed as:

(a) the nature of the activities and whether they have the purpose of profit-making

(b) the complexity and magnitude of the undertaking

(c) an intention to engage in trade regularly, routinely, or systematically

(d) operating in a business-like manner and the degree of sophistication involved

(e) whether any profit or loss is regarded as arising from a discernible pattern of trading

(f) the volume of the taxpayer's operation and the amount of capital employed by him

and more particularly in respect of share traders

(a) repetition and regularity in the buying and selling of shares

(b) turnover

(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records

(d) maintenance of an office

(e) accounting for the share transactions on a gross receipts' basis

(f) whether the taxpayer is engaged in another full-time occupation.

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 Case 6297) 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.

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, in the 2021-22 financial year you made several transactions with the majority of transactions being the purchase of more shares during the year. When reviewing the information, it has been identified that a considerable amount of these purchases have no counter of the shares being sold and remain active in the portfolio. While transactions occurred within each month, on average there was less than 15 transactions per month.

Upon looking at the data provided outlining the transactions over the year, there is no identifiable pattern in the buying or selling of shares. Looking at the holding pattern for your shares there is also no followed pattern to the time in which the shares are held before selling as shares have been held between less than a week to over 6 months before selling. Also, in some cases you have received dividends paid out to you which would be reflective of a share investor.

Although you had a number of transactions per month which is suggestive that a business of share trading was being carried on, the repetition and regularity of your trading falls short of what would be expected of a share trading business.

The specific requirement of a share trader 'whether the taxpayer is operating to a plan, setting budgets and targets, keeping records' has been considered. You have advised that to record your transactions you use an online broking platform to maintain the details of the shares. This online platform is the only method you actively use to keep records. You have advised that minimal records have been maintained relating to costs and expenses that may be related to running a share trading business.

When you started trading you attended the stock market floor to observe and used subscription services to aid in decision making and general interest-based research. You no longer use outside subscription services but the one that is built into the broking system used along with the internet research. Apart from these services there has been no additional guidance from a third-party professional to assist in providing knowledge or advice and no education courses undertaken to improve knowledge.

You have advised that for the 2021-22 financial year you spend a short time to review your portfolio before going to your full-time employment.

Your trading strategy was based on short term speculation with analyses of trends and realising capital preservation that have sufficient activity. Your strategy is also specific stock dependent and the likelihood of additional growth and ability to reinvest. Along with this, there is no stop loss in place.

The funding for the venture into the stock market was from personal savings with no outside loan obtained.

You have not established a pattern of trading in shares and your share purchases are not performed in a systematic manner. Although you spend a small amount of time each week on share activities and keep records of your transactions, your situation is not indicative of a share trading business. You generally hold your shares for more than six months. After considering the above factors and your specific circumstances, it is considered that you were not carrying on a business as a share trader during the 2021-22 income year. Your trading activities were not repetitive or regular. You would be regarded more as a share investor rather than a trader. As you were not in the business of share trading, the income is not assessable under section 6-5 of the ITAA 1997. The shares you held at the end of the relevant income year were not trading stock for the purposes of Division 70 of the ITAA 1997. As any losses were 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 capital gains made that year or in future years.

You should note that being a share investor or a share trader is a 'status'. 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.