Are you a Share Trader or a Share Investor?

One of the importance’s in determining if your share activity is as a trader or investor, is the potential losses from the activity if, as a trader, can be offset against other income while losses as an investor can only be offset against future capital gain. 

Over the past few years one of the most contentious area in taxation, has been evaluating whether a client is a trader (where profit is taxed as normal income) or an investor (where profit is treated as capital gain and have discounts associated with it).
 
Below is a summary of guidelines on how the ATO will determine if the share activities is as a  trader or investor. As you can see, determining your status, isn’t always “black or white”, there are a number of grey areas as well. 

Factor to consider: 1 - Taxpayer's intention in buying shares

Share trader V share investor
share trader will normally buy shares with the intention of making a profit from their sale in the short-term. 

However, the existence of a profit motive/intention does not of itself mean the existence of a share trader. For example, in Case 1/94, although the taxpayer had purchased shares so they could be sold for a profit, the taxpayer was not a share trader because there was no evidence of any regular, routine or systematic trading in shares.

Furthermore, a taxpayer's initial short-term profit intention could 
later change, without affecting their status as a share trader. Refer to The Taxpayer's case (discussed above).

share investor will normally buy shares with the intention of 
holding them for the long-term and earning dividend income and/or enjoying any capital growth from those shares.

Factor to consider: 2 -  Business-like manner

Share trader V share investor
share trader will undertake their share activities in a businesslike manner. For example, the taxpayer may:

• operate to a particular pattern or system in selecting which shares to buy and sell (including the use of sophisticated techniques — e.g., charting shares);
• undertake extensive research of companies in which shares are bought (e.g., reading financial newspapers and magazines, studying daily and longer-term trends, and seeking advice from brokers and other experts); and/or
• maintain "books" and an office or fixed base. 

For example, in Case S33, one of the reasons the taxpayer was considered a share trader was because a system was applied in selecting which shares to buy (largely based on advice received from the taxpayer's husband). This involved a systematic analysis of a company's annual accounts and reports (including a financial ratio analysis — e.g., earnings per share and dividend yield).
In contrast, in Case X86, the taxpayer was not considered a share trader. Although the taxpayer sought advice from his accountant and read the papers, he did not operate to any particular plan or system (apart from maximising profits) and did not conduct extensive research into the companies in which he invested.

In The Taxpayer's case (discussed above), the Tribunal held the 
concept of "business-like manner" is becoming increasingly fluid in light of advances in technology. In this regard, the Tribunal accepted that a taxpayer relying on the use of a laptop computer and/or smart phone to undertake share activities, without keeping 'books' and without maintaining an office, can be a share trader.

In addition, the Tribunal accepted the taxpayer was a share trader 
even though his systematic strategy was not detailed, scientific or formal, and he did not appear to have a budget or formal targets.

Factor to consider: 3 -  Regularity and volume 
of share transactions 
(including turnover)


Share trader V share investor
A share trader is more likely to:

(a) buy and sell shares on a regular basis (i.e., there is a regular and
      systematic pattern of trading in shares);
(b) hold shares for only a short period of time; and
(c) have a high volume of transactions and turnover (from sales) in an
     income year.

For example, the following share transactions were held to be sufficiently regular, of sufficient volume and of sufficient turnover so as to render the taxpayer a share trader:

• Case S33 — over a four-year period, the taxpayer entered into 70 share transactions involving 17 companies, generating a turnover of $166,000 from sales (this was an average of 17 share transactions and a turnover of $40,000 per year).
 Case W8 — in one income year, the taxpayer bought shares on 15 occasions and sold shares on 21 occasions (this was an average of 3 share transactions per month).
• Shields' case — over the four-week period that the taxpayer was a share trader, he bought and sold shares on 6 occasions. His turnover from sales was just over $1 million.
 The Taxpayer's case (discussed above) despite only having sold two tranches of shares during the year (as a result of the GFC), the taxpayer was still considered a share trader.

On the other hand, a share investor is more likely to:

(a) buy shares on an ad hoc or spasmodic basis;
(b) hold shares for a longer period of time; and
(c) have a low volume of transactions in an income year.

For example:
• Case 9/94 — the taxpayer was not considered a share trader, partly because there was no evidence of any regular, routine or systematic trading in shares (i.e., his share purchases were spasmodic or ad hoc). Most of his share acquisitions were held for a number of years and were intended to be for retirement. After the taxpayer had previously burnt his fingers in the stock market, he abandoned any intention to deal in shares regularly, routinely and systematically.
• Case X86 (noted at 2. above) — the taxpayer's volume of share transactions was small (i.e., he only invested in 6 companies and only acquired one share parcel in five of those companies).

Factor to consider: 4 -  Amount of capital that 
is invested


Share trader V share investor
The amount of capital a taxpayer invests in buying shares is not necessarily determinative of whether they are a trader or investor.

It is possible to carry on a business of trading in shares with a relatively small amount of capital. For example, in Case W8, the taxpayer was considered a share trader, despite the total purchase cost of his shares (i.e., the amount invested) was only $19,665.

In contrast, a taxpayer may end up investing a substantial amount of capital and still be considered a share investor. For example, in Case X86, even though a total of $100,000 was invested by the taxpayer, he was not considered a share trader. This was mainly because the number (or volume) of share transactions was small and there was no regular pattern of trading in shares.

Factor to consider: 5 -  Business plan
 
Share trader V share investor
Although not compulsory, the existence of a business plan which outlines how a taxpayer's share activities will be conducted (e.g., what research is to be conducted and when to buy or sell shares), can assist in showing that the taxpayer is a share trader.

In The Taxpayer's case (discussed above), the taxpayer was considered to be a share trader even though there was no formal business plan to identify when shares would be bought and sold. That is, the taxpayer's strategy was to buy and sell shares relying on his "gut", which was influenced by information gathered from different sources and general business experience.

Factor to consider: 6 -  Amount of time spent 
on share activities


Share trader V share investor
A share trader would likely spend a lot more time researching their share activities as compared with a share investor. That is, a share trader is likely to spend time on their share activities each day, whereas a share investor may only spend an hour or so per week.

For example, in Shields' case, it was necessary for the taxpayer 
(who was a share trader) to pay close attention to share prices and volumes each day (i.e., by listening to the news each morning and calling his stockbroker on several occasions during the working day) in order to derive profits from his trading activities.


Factor to consider: 7 -  Full time or part time

Share trader V share investor
A taxpayer can be a share trader whilst employed full time in some other occupation. However, if a taxpayer has no other job or occupation and earns their living from share activities, this would indicate that the taxpayer is carrying on a share trading business.

Factor to consider: 8 -  Record keeping

Share trader V share investor
share trader is more likely to keep records of share purchases and sales, including profits and losses on the sale of shares. In the absence of these records, it would be more difficult to establish that a business of share trading was being carried on.

Note that on-line records can be sufficient, as was the situation in 
The Taxpayer's case (discussed above).

If you need any assistance in determining if you are a trader or investor please call our office today at (02) 9370 0400.

 We always value your feedback! 

Suites 101-104, 118 Great North Road, Five Dock, NSW, 2046
PO Box 725, Five Dock, NSW, 2046
P: (02) 9370 0400 | F: (02) 9370 0444 | E: simeonico@simeoni.com.au
 

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