Edited version of private advice

Authorisation Number: 1052211753187

Date of advice: 18 January 2024

Ruling

Subject: Am I in business - share trader or share investor

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.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

In the 202YY-YY financial year you and your spouse joined together to start trading in buying and selling shares mainly in the Australian stock market, sometimes in the US market, on a part time basis.

You started the venture to act as a secondary income alongside your employment income. Your goal was to beat the banks savings interest rate and developing a passive income stream.

To start trading you have used your personal savings. You have withdrawn on occasion from the share account to assist with personal requirements.

You have two trading strategies in place with most of the capital used for a buy-write strategy or 'lower risk lower return'. The remaining is used for advanced options strategies such as debit spread, credit spread, calendar spread, straddle. These strategies provide a 'higher-risk higher-return' ratio. There is also a 'set and forget' strategy in place that does not require active monitoring.

When trading on the ASX as a joint account you made less than 35 transactions in total or approximately 4 per week. When trading on the US market when trading under a joint account you made less than 10 transactions or approximately 1 per week while active during the 20YY-YY financial year.

When looking at the holding pattern for these transactions it can be noted from the information provided that while some transactions did occur within the same month and a few days apart, there are also transactions that have been held for a few months or more.

You have used an online broking platform as your main platform for trading. You have also kept record of your transactions for your own personal records with an excel spreadsheet. However, apart from these records there is no formal business plan in place.

You joined an options trading course program that was aimed at creating an income stream from the share market you undertook this course prior starting trading upskill and teach both yourself and your spouse.

On average between yourself and your spouse you spent around one to two hours per day conducting research on potential shares/options to buy and current hold or sell position. This time was spent looking at articles, other share platforms for insight, analyse charts and keep transaction records organised on a spreadsheet alongside with electronical recorded on the trading platform you use.

To assist in minimising losses the trading platform you use provides the ability to 'close and sell' that will start if the share price drops below a certain value. It also provides an alert function that notifies when a share price drops below a certain limit. There is also an 'insurance' option which allows the buying of a 'Put' option to protect the position and allow for the right to sell at the agreed strike price.

You have an intention to continue to trade in the 20YY-YY financial year with the same strategies and a low amount of transactions over the year.

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

Summary

The income you have received from share transactions is not consider assessable as business income. Any income or losses would be considered under the capital gains provisions.

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 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 Commissioners 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. This matter has been addressed in a number of court cases. In 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 them

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 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 20YY-YY financial year you made less than 50 transactions during the active timeframe. While transactions occurred within each month, on average there was less than 25 transactions per month.

Upon looking at the data provided outlining the transactions over the timeframe. 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.

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. You have also advised that you use a spreadsheet. These methods of recording transactions are the only details that you keep and there is no formal business plan in place.

When you started trading you had signed up to a course to learn how to earn an income stream through the share market, along with research that you had personally undertaken. Apart from these services there has been no additional guidance from a third-party professional to assist in providing knowledge or advice.

You have advised that for the 20YY-YY financial year on average you have spent between one to two hours per day reviewing your potential shares/options to buy and current hold or sell position. You have also maintained your employment.

Your trading strategy in which you have split the invested capital to a majority for 'low risk, low return' known as a buy-write strategy and the remaining has been invested for a 'high risk, high return' strategy. Along with another strategy that is around the idea of 'set and forget' that is also 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 approximately 7 hours each week on share activities and keep records of your transactions, your situation is not indicative of a share trading business. 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 20YY-YY financial year. Your trading activities were not repetitive or regular. You are 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 and 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.