Edited version of private advice

Authorisation Number: 1052195337743

Date of advice: 6 December 2023

Ruling

Subject: Am I in business? - share trading

Question

Are the losses 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 work as a financial manager

You possess a dual degree in finance and are chartered account with CPA

You have been buying and selling shares as an investor for the previous 5 years which you commenced in a specified year

In a specified year you decided to expand your share trading activities because you believe the market would see a post COVID rise which would result in opportunities for profits

You increased the time you spent trading to a specified number of hours a week

You provided us with details on the value you invested using your personal savings and a bank loan for the purpose of buying and selling shares

You provided us with details on the average number of hours you spent per day on your share trading activities, along with the amount of time spent on trading and on researching companies

You have a home office which you use for your share trading activities

You utilised CommSec and Plus500 to facilitate your trades

You provided us with details on the number of trades you made in the relevant financial year

You provided us with details on the value for the buy volume and the sell value on CommSec

You traded in CFD's consisting of commodities, stock index futures and on the foreign exchange (Forex)

You utilise books for trading strategies and CommSec services for detail analysis on industries including a company's historical performance

You utilised reports from CommSec which provided company announcements, interactive charts and recommendation from leading brokerage houses around share trading activity

You picked stock based on your research which you believed would result in a raise in prices

You provided us with details on your business model

You believe you could generate a profit because you observed significant increase in commodity prices, including iron ore, lithium and gold, as well as an increase in construction and financial stocks due to a real estate demand

You stated part of your business model was to place stop losses based on technical chart analysis

You decided to when sell based stock movement showed by candle stick patterns

You had stop loss points based on your analysis but, you didn't sell at these points due to the volume of trades involved

You stated this was a mistake which resulted in the loss was the biggest reason for the overall loss

You continued to place money into the same investments which were incurring losses

You provide records of your trades throughout the year

You would often Buy and Sell a share on the same day, sometimes performing multiple buys or sells

You would also hold shares for longer, usually completely the Buy and Sell within 7 days

You provided us with details on the break you took from conducting trades and why you took the break

You provided us with details on your total loss value, which was mainly due to not executing the stop losses

You have put the business on hold because of losses and provided us with details of when it was put on hold and that you are still working on creating a new business model

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Where a person trades in shares as a business, the associated income is assessable as business income under subsection 6-5(2) of the ITAA 1997 and the expenses would be deductible under section 8-1 of the ITAA 1997. However, where a person is not in business, the shares will be capital assets and any gains would under 102-5 of the ITAA 1997 and any losses would be deductible under 102-10 of the ITAA 1997.

Where a person trades in contract for difference (CFD's) as a business, the income will be assessable under section 6-5. Otherwise, paragraphs 34 and 35 of TR 2005/15 Income tax: consequences of financial contracts for difference states that the trading activities will be regarded as a profit-making undertaking and a net gain or loss from trading will be accounted for under either sections 15-15 or 25-40 of the ITAA 1997.

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 (TR 97/11) 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.

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 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.

The existence of a period of dormancy, where trading activity ceases, often raises an issue as to whether a business is truly still in existence, though greatly reduced in scale or has actually ceased altogether.

In a decision handed down by the AAT on 5 August 2010, Smith v FC of T 2010 ATC 10-146, it was found that Mr Smith was not in the business of share trading during the financial year ended 30 June 2007 or 30 June 2008. The Tribunal found that the applicant could not demonstrate to its satisfaction that the nature of his activities had the purpose of profit-making because he held his shares for periods longer than a share trader generally would, and his activities did not demonstrate, to the Tribunal's satisfaction, repetition and regularity in the buying and selling of shares in order to demonstrate that he was in business. To summarize, it was found that Mr Smith invested in shares and other securities, albeit at increased amount of capital investment because he had the funds available; and that all the transactions were on capital account.

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 AAT Case 6,297 (1990) 21 ATR 3747) 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; and

•         the taxpayer was engaged in another full-time profession as a council employee. In particular, the AAT expressed the view that 'the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an ongoing-business'.

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.

You have displayed the following characteristics:

•         You had no business plan

•         Your investment strategy was simple and unsophisticated

•         You did not follow your own investment strategy by holding off on stop losses

•         Purchasing shares which had already resulted in a lose

•         A gap in trading as well as the final month of the year consisting of few trades

•         You worked full-time though out this whole period

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 invested a specified amount into your share trading activity.

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.

You spent over a specified number of hours a day on share activities and an additional specified number of hours on research. You also stated that you spent on average a specified number of hours a week on the business. You conducted the activity thought out the whole year with a break due a specified world event and a large drop off in trades for the specified month.

You also worked full-time during this period.

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 a specified amount invested in trading activities from person and borrowed funds. You purchased shares worth a specified amount and sold shares worth a specified amount for the relevant financial year on buy and sell transactions. You had a specified number of buy and sell transactions for the year. You consider a buy and sell action to be a trade.

You had a break due to a specified world event and a large drop off in trades for the specified month.

You have since suspended trading while you're developing a new business plan. As a result, you have had very few trades since the relevant financial year.

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:

•         you did not set a base level for placing stop losses and when you did utilise stop losses you would not execute them,

•         You had a high turn over of shares except for a specified number of months of the year,

•         you had a share trading strategy based around speculation around companies and global products alongside the use of charts without any target profits or losses levels,

•         no formal share trading business plan was in place, and

•         you had high repetition and regularity of share activity except for a specified number of months of the year.

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.

You conducted research on the financial information of the companies you trade in through use of Commsec tools to view financials of a company and its and performance. Furthermore, you also received company announcements, interactive charts and recommendation though Commsec. You were able to provide a record of your trades.

However, your share strategy did not display the sophistication that may be expected of a share trading business, and you stated that your plan was based on speculation from other traders and knock-on effects from booms in related industries. You do not have a business plan in place to outline goals like profit targets, no budgets and failed to follow your stop loss limits for your share trading activities. You pursued unprofitable activities and would buy shares after a price drop. You stated charts were only provided hints but, based you decision to invest in loses based on chart signals. Furthermore, you worked full-time throughout this period.

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.

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.

Your lack of business plan and failure to use stop losses in your trading strategy is not the behaviour of someone who is in business. Your lack of business means your activity lacked the forward planning that would be expected of a share trader such as a budget, profit targets and contingencies. Further your failure to utilise stop losses and your speculator trading strategy is more in line with the behaviour of an investor.

There, your losses are capital in nature and will be a capital loss under section 102-10 of the ITAA 1997 and can be offset against future capital gains. The losses that you incurred for your CFD's will be deductible under section 25-40 of the ITAA 1997.