Edited version of private advice

Authorisation Number: 1052358323912

Date of advice: 06 February 2025

Ruling

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

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 1

No

Question 2

Is the expenses incurred from the training and mentorship course from XX undertaken deductible under section 8-1 of the Income Tax Assessment Act 1997?

Answer 2

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You started share trading in the 20XX and 20XX financial year, where you incurred a loss.

You ceased share trading in 20XX.

You started share trading again in 20XX by buying and selling small amounts of X and X.

You incurred further losses between 20XX and 20XX.

You started to expand your share trading in 20XX to more regulated markets and different platforms.

Your share trading acts as a secondary income alongside your full-time.

Your long-term goal is to turn share trading into your full-time income.

You completed courses to assist with your knowledge in developing a trading plan, market psychology, volume profile, discipline and knowing when to cut your losses.

The courses are a professional trading training and mentorship program that offers personal guidance and support reaching competency in the suite of professional trading skills via one-on-one mentoring and real-time trading immersion. The course replicates the professional trading firm environment, cultivating the skills, knowledge and confidence needed to succeed as a share trader.

The courses commenced on XX April 20XX. You receive training weekly over a X-month period.

The courses cost $XX, XXX total.

You made X sell transaction in the 20XX financial year.

You made X buy transactions in the 20XX financial year.

Most of the transactions occur months apart. There are some transactions that do occur within the same month and a few days apart.

In the 20XX financial year to date, you have traded using various platforms.

You spend every weeknight looking at charts and watching some form of training videos.

You review the markets and decide which instruments to trade.

You write your plan and use technical bar charts to review volume, support and resistance levels. Apart from this, you do not have a formal business plan.

You occasionally trade on weekends, depending on your family commitments.

You made a total profit of $XX, XXX in the 20XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 102-5

Reasons for decision

Question 1

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.

Investment income

In this situation share trading activities would be regarded as investing. 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 shares would be a capital loss. The income would be statutory income under section 6-10 and assessable under section 102-5 of the ITAA 1997, while a loss would be deductible under section 102-10 of the ITAA 1997, but only against capital gains.

Business income

In this scenario share trading activities would be considered to constitute the carrying on of a business. Shares would be regarded as trading stock and any gains or losses would be included as assessable income. The income would be ordinary income and assessable under section 6-5 of the ITAA 1997, while 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 Income Tax: Am I carrying on a business of primary production? (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 following indicators are relevant:

•                     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 in that line of business.

•                     Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit.

•                     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.

These factors are considered in combination, no one factor is decisive. Whether a business is being carried on depends on the large or general impression gained.

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:

•                     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 them

More particularly the case looked at specific indicators 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 receipt's basis

•                     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 were 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.

Application to your circumstances

Whether the activity has a significant commercial purpose or character

This indicator requires that you be able to show that the activity is carried on for commercial reasons and in a commercially viable manner. You need 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.

The low level of transactions that you have completed during the financial year indicates that your share trading activity lacks a commercial purpose. In the 20XX-XX financial year you made less then X transactions, whilst some transactions occurred within a few months the volume was not significant enough to be for a commercial purpose.

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

The mere intention to carry on a business is not enough there must be activity.

You had an intention to engage in share trading activities and have completed share purchases and sales.

Whether there is a purpose of profit as well as a prospect of profit from the activity

The carrying on of a business is usually such that the activities are engaged in for the purpose of profit on a continuous and repetitive basis. The taxpayer must be able to show how the activity can make a profit.

In your circumstances, you have conducted research and received advice and mentoring on share trading through the trading courses.

Since you started share trading activities you have made several losses. You have only recently made a profit in the 20XX financial year.

Whether there is a repetition and regularity of the activity

One of the key factors to consider whether a business of share trading is being carried on is the repetition and regularity of the share trading activities. The higher the volume of trades, the more likely it is that a business of share trading is being carried on.

You are not considered to have a high level of share transactions and is not in line with the sales that would be expected of a person conducting a share trading business.

When looking at the holding pattern for these transactions there is no distinct holding pattern and most of the transactions occur months apart. There are some transactions that do occur within the same month and a few days apart. You do not have a distinct holding pattern that occurs regularly or repeatedly.

The size, scale and permanency of the activity

Your share trading is being conducted on a small scale and is more likely to be considered investing.

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.

The following information indicates that you are not carrying out your share trading activities in a similar manner to others in this industry:

•                     You do not have a formal business plan

•                     Your transaction volume was low and not significant enough compared to others in this industry.

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 form of forward planning such as 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 have completed training courses to assist with your share trading activity and conduct some research to review volume, support and resistance levels. However, your share strategy did not display the sophistication that may be expected of a share trading business. You are engaged in another full-time occupation.

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

A hobby is an activity that is conducted to gain personal enjoyment and satisfaction with no view to make a profit.

You started the share activity with the intention to make a profit based on courses and personal research undertaken. Your activities are not considered to be a hobby.

Conclusion

You have a view to make a profit as your long-term goal is to turn share investing into your full-time income. You have not established a pattern of trading in shares and your share purchases are not performed in a systematic manner. Although you spend each week on share activities your situation is not indicative of a share trading business. Your trading activities were not repetitive or regular.

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 20XX-XX financial year. You are regarded as a share investor rather than a trader.

As you are regarded as a share investor, your capital gains are included as statutory income under section 6-10 of the ITAA 1997. As you were not in business of share trading the income is not assessable under section 6-5 of the ITAA 1997. As any losses are 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.

Question 2

Section 8-1 of the ITAA 1997 allows a deduction for all expenses to the extent they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to earning of exempt income or a provision prevents you from deducting it. '

For expenditure to form an allowable deduction, the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income. There must be a sufficient connection between the expenses and the operations or activities which gain or produce the assessable income (refer to Federal Commissioner of Taxation v Cooper (1991) FCR 177; 91 ATC 4396; (1991) 21 ATR 1616).

Taxation Ruling TR 2024/3 Income Tax: deductibility of self-education expenses incurred by an individual discusses circumstances where self-education expenses are an allowable deduction. A deduction is allowable if a taxpayer's current income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self-education enables the taxpayer to maintain or improve that skill or knowledge.

A deduction is also allowable if the self-education objectively leads to, or is likely to lead to, an increase in income from the income earning activities in the future.

Alternatively, self-education expenses are not deductible if the study is designed to enable a taxpayer to open up a new income-earning activity whether in business or your current employment. This includes studies relating to a particular profession in which you are not yet engaged in. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income (refer Federal Commissioner of Taxation v Maddelena 2 ATR 541 (Maddelena) at [549] and Ting at [35].)

In your case, the course fees were incurred to enable you to gain skills as a professional share trader, an activity that you are not yet carrying on (refer to question 1 reasoning). It is accepted that the knowledge gained during, and at the completion of your course may be of some benefit to you as a share investor in that you may be able to exercise your knowledge and skills when selecting investments for capital growth. However, the course expenses were incurred at a point too soon to be regarded as incurred in the course of earning assessable income and as such are capital in nature.

To be deductible, the expenses must be relevant to the income-earning activities at the time the expense is incurred. The share trading course provides personal guidance and support to reach competency in skills required to be a share trader. It is designed to enable you to open up a new income earning activity, that is, to be a share trader, of which there is no connection to your current income earning activity as a share investor. As such, the course costs are not an allowable deduction under section 8-1 of the ITAA 1997.