Edited version of private advice

Authorisation Number: 1052197890172

Date of advice: 9 January 2024

Ruling

Subject: Business of share trading or profits on isolated transactions

Question 1

Was the Applicant carrying on a business of share trading in the 20XX income year?

Answer

No.

Question 2

If the answer to Question (1) is no, are the Applicant's:

(a)    profits from disposing of the 20XX shares assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); and

(b)    losses from disposing of the 20XX shares deductible under section 8-1 ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The taxpayer has been undertaking share trading activities.

The Commissioner issued a private ruling confirming that the taxpayer was carrying on a share trading business in the YYYY and YYYY income years.

The taxpayer is a XXXX manager. The taxpayer did not receive any share trading advice and did his own research and analysis.

For all share purchases, the taxpayer's focus was to make a short term trading profit from the sale of shares.

After significant losses in the YYYY income year, the taxpayer began taking steps to wind down his share trading activities and significantly reduced the number of transactions.

The taxpayer continues to own certain shares which were purchased as part of earlier trading.

The taxpayer purchased parcels of shares with the intention of making a profit from the sale of those shares.

In YYYY the taxpayer purchased and sold additional shares with the intention of making profits that would offset the losses he had incurred.

Some of the shares purchased in the YYYY income year have been held for more than 12 months.

Relevant legislative provisions

Income tax Assessment Act 1997 section 6-5

Income tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Summary

Your share trading activities in the 20XX income year do no constitute the carrying on of a business.

Detailed reasoning

Whether or not a person is carrying on a business is a question of fact and degree and is determined on a year-to-year basis. If a taxpayer's activities do not amount to the carrying on of a business in one income year that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable the activity may no longer constitute the carrying on of a business.

Taxation Ruling TR 97/11 income tax: am I carrying on a business of primary production? (TR 97/11) lists the following indicators as relevant in determining if a business is being carried on:

•           Whether the activity has a significant commercial purpose or character,

•           Whether the taxpayer has more than 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 that is carried on in a similar manner to that of the ordinary trade in that line of business,

•           Whether the activity is planned, organised and carried out in a business like manner,

•           The size, scale and permanency of the activity,

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

The following is the application of these indicators to your circumstances:

Whether the activity has a significant commercial purpose or character

The activity of buying and selling shares is a commercial activity, particularly where shares are held in the short term for resale at a profit and no dividends are received.

In your case, the activity declined significantly in YYYY and continues to remain at a lower level for the YYYY income year. You have continued to invest in additional shares from time to time with the stated intention of making a profit.

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

You did buy and sell shares on a number of occasions during the income year ended 30 June YYYY, but not at the same level as previously undertaken.

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

You had both a profit purpose as well as a prospect of profit.

Whether there is repetition and regularity of the activity

The repetition of activities by the same person over a period on a regular basis helps to determine whether there is the 'carrying on' of a business. Repetition refers to the frequency of transactions or the number of similar transactions.

As noted above you purchased shares on XX occasions and, sold shares on XX occasions during the income period ended 30 June YYYY indicating a degree of repetition and regularity in your share trading transactions, but not at a level that would indicate that a business was being carried on. The pattern of the trade showed less short holding periods for shares and more long-term holding periods than previous years.

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

An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. In your case, you had no formal business plan and did not utilise additional resources or decision-making tools in conducting your share transactions. You also had outside employment unrelated to the industry, working full-time in a retail business which may have limited your time and effort that could be committed into the activity. In the YYYY year your activities were not carried out in a way similar to carrying on a business as a share trader.

Whether the activity is planned, organised and carried out in a business like manner,

A business is characteristically carried on in a systematic and organised manner. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business. It could be reasonably expected this would include the study of trends, market analysis or seeking advice from experts.

In your case, your background is in retail business, you did not have prior experience with trading, nor did you seek expert advice prior to conducting your activity. You do not have a business plan in place. While you have kept records of your trading you do not have an ABN for your activities. Your activity is not organised and carried out in a business-like manner.

The size, scale and permanency of the activity

As noted above you purchased shares on a number of occasions and sold shares on a number of occasions during the income period ended 30 June YYYY.

The frequency and the size of your share transactions reduced significantly from the previous income years in size and scale and does not exhibit the size and scale that would be expected of a business of share trading.

You have realised some short- term gains and losses during the year with a move towards longer term holding periods than in previous years.

The facts and trading activity for YYYY don't suggest you constantly monitored share prices throughout the year, with only XX trades in total for the year.

Accordingly, the size and scale and permanency of your share transactions would not support that you were carrying on a business of share trading.

Whether the activity would be better described as a hobby, recreational or sporting activity

Given the commercial nature of share trading, your trading activity is not better described as a hobby, recreation, or sporting activity. Your activities did have some of the characteristics of a business as you had some degree of repetition and regularity, along with a profit motive. However, your activities lack size, scale and permanency and are more aligned with isolated share transactions than carrying on the business of share trading.

Conclusion

Whilst no single factor is necessarily determinative (see Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187 at 202 per Hill J), in weighing up these factors, including the volume and scale, the reduced activity, not having a business plan, and your reliance on your own market analysis to guide your decisions, you are not considered to be conducting a business of trading in shares.

Question 2

Summary

Profits from disposing of the shares are assessable under section 6-5 of the ITAA 1997 as isolated transactions and any losses from disposing of shares are deductible under 8-1 of the ITAA 1997 as isolated transactions.

Detailed reasoning

Subsection 6-5(1) of the ITAA 1997 states that:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Profits or gains arising from an isolated business or commercial transaction will generally be ordinary income if the taxpayer's purpose in entering into the transaction was to make a profit. This would be the case even if the transaction was not part of the taxpayer's ordinary course of business.

The High Court held in Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199 at 209-210; 18 ATR 693; 87 ATC 4363 (Myer), that:

The authorities establish that a profit or gain so made [in an isolated transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

The Commissioner has considered the principles outlined in the Myer decision in Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income (TR 92/3) and Taxation Ruling TR 92/4 Income Tax: whether losses on isolated transactions are deductible (TR 92/4) and provided guidance in determining whether profits from isolated transactions are assessable as ordinary income or losses on isolated transactions are deductible. TR 92/3 should be read in conjunction with TR 92/4.

The definition of 'isolated transactions' in paragraph 1 of TR 92/3 includes 'transactions entered into by non-business taxpayers.

Paragraph 16 of TR 92/3 states that:

If a taxpayer who is not carrying on a business makes a profit, that profit is income if:

(a) the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

(b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

The speculation on a financial risk can be characterised as being commercial, in that it increases the efficiency of the financial markets by adding to the depth and liquidity of the markets.

Further, TR 92/3 states at paragraph 12 and 13 that:

12. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character.

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

a.      the nature of the entity undertaking the operation or transaction;

b.      the nature and scale of other activities undertaken by the taxpayer;

c.      the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

d.      the nature, scale and complexity of the operation or transaction;

e.      the manner in which the operation or transaction was entered into or carried out;

f.       the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

g.      if the transaction involves the acquisition and disposal of property, the nature of that property; and

h.      the timing of the transaction or the various steps in the transaction.

TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

Paragraph 4 of TR 92/4 states that a loss from an isolated transaction is generally deductible under section 8-1 if:

(a) in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; and

(b) the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

When a transaction involves the sale of property (shares) as in the present case, for a profit or gain on the sale of the property to be characterised as ordinary income, it is usually necessary for a taxpayer to have a profit-making intention at the time the shares were acquired.

As outlined above, you were not carrying on a business in relation to your share transaction activities, however, your activities were inherently commercial in nature and had a profit making-intention.

In considering whether or not your share transactions should be accounted for on capital or revenue account weight has been given to the fact that you held your shares for short periods of time, and you have not received any dividend income from the shares. This demonstrates that your relevant purpose in purchasing shares is to gain a profit on the sale price, as opposed to gaining an income stream through dividends.

You entered into transactions with a trading pattern indicating a series of isolated trades that had a commercial character.

The commercial character of the share trading is supported by the short period of time that you held the shares and the number of transactions undertaken in the period you were trading shares.

In weighing up these factors including the speculative nature of the share trading undertaken, the volume of transactions and the short-term nature of your share holdings, they align with being isolated commercial transactions with a profit-making purpose.

As such your share transactions would be considered to be ordinary income. Your gains are therefore assessable under section 6-5 and your losses are deductible under 8-1.

Conclusion

Your trading activities indicate short-term investment directed at making an isolated profit. As you did have a profit-making purpose and the share trading was a commercial transaction, any profit in the YYYY income year is assessable on revenue account under section 6-5 and any losses in the YYYY year were deductible under section 8-1.