This is a perennial question. If you are a share investor, your shares are held on capital account and, provided you meet the CGT conditions (eg holding an asset for more than twelve months), you are subject to tax on only 50% of the gains.
However, if you are a share trader, you can claim up-front deductions for any paper losses you might incur because your shares are treated as trading stock and you can value the shares you hold at the end of a financial year at either their cost or market value.
So, if you want to get the benefit of the CGT 50% discount, it’s best to be a share investor. If you are holding a substantial portfolio where their values have dropped substantially at 30 June, you might want to treat yourself as a share trader and get a tax deduction for those losses even though you want to retain the shares in the hope that they will pick up in value.
The problem is that most people only want to be treated as share traders when they are claiming substantial losses. The Tax Office will naturally look at this claim very carefully and insist that you justify your claim.
In a recent case, the Administrative Appeals Tribunal (Tribunal) made a decision against the taxpayer and his claim to be a share trader. This could very well have been decided differently had it been heard by the Federal Court. It’s often said, and in this case evident, that the Tribunal has a tendency to lean towards Tax Office views.
The Tribunal referred to the factors which must be looked at to determine whether or not you are actually operating a business, these were:
Nature of activities and whether there is a profit making purpose. The Tribunal agreed that this requirement was met and supported the view that the taxpayer was conducting a share trading business.
Complexity and magnitude of the undertaking. While not convinced that there was great complexity in the taxpayer’s operations because they were mainly “blue chip” investments, the Tribunal did agree that the operations were substantial with turnover in excess of $900,000 in 2009/10 and $400,000 in 2010/11.
Intention to engage in trade regularly, routinely or systematically. While the Tribunal agreed that there were 40 transactions in 2009/10 and 25 transactions in 2010/11, it held that these were made on a speculative basis rather than as a share trader and there were considerable periods when no share sales or purchases took place. Also, the business plan provided was thought to be neither sophisticated nor intricate. (In our view, a Court would have come to a different conclusion.)
Operating in a business-like and sophisticated manner. While agreeing that the taxpayer had a dedicated office at home, it held that the operations were simple and “lacked any real sophistication and overall was not consistent with the operation of a business.” (Again, we are of the view that a Court would have come to a different conclusion. Many businesses can be quite successfully run along quite simple lines.)
Profit/Losses arise from a discernible pattern of trading. In spite of questioning the relevancy of this factor, the Tribunal held that there was no discernible pattern of trading and this pointed against the taxpayer conducting a business.
Volume of operations and amount of capital employed. The Tribunal agreed that the volume and capital indicated that there was a share trading activity.
In the end, although agreeing that there was a large turnover, that there was a specific office maintained, and that proper records of transactions were kept, the Tribunal held that:
- The buying and selling of shares was not regular or routine;
- The business plan was not adequate;
- Budgets and targets had not been set;
- Research was simple and unsophisticated;
- The taxpayer had another full time profession as a Council employee.
The operations could not be regarded as a share trading business and the taxpayer’s claim was rejected.
In a further comment, at odds with numerous previous Court decisions, the Tribunal expressed a view that “the employment of the taxpayer on a full time basis is hardly consistent with the conduct of an ongoing business”.
AATA601, re Hartley and FCT
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