Q & A – Share Trading – Income vs Capital

Posted on 24th October 2016 by Christabelle Harris

Am I a Share Trader?

To be classed as a share trader, you may be asked to provide evidence that demonstrates you are carrying on a business of share trading.  A ‘business’ for tax purposes includes ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.

The question of whether a person is a share trader or a share investor is determined in each individual case. This is done by considering the following factors, which in the past have been used in court cases:

  1. Nature of activity and purpose of profit making
  2. Repetition
  3. Organisation in a business like manner
  4. Volume of trading

Nature of activity and purpose of profit making relates to the fact that Share Traders carry out their business activities for the purpose of earning income from buying and selling shares. A share investor on the other hand invests to earn income from dividends and receipts, but is not carrying on a business activity.

Repetition is a significant characteristic of business activities. To be classified as carrying on a business in this kind of scenario, there needs to be frequency of transactions and/or repetition of similar transactions.

If there are one off transactions then it is most likely they aren’t carrying on a business and therefore cannot be classified as a share trader.

It would be reasonable to expect a share-trading business to involve the study of daily and longer-term trends, analysis of a company’s prospectus and annual reports, and the seeking of advice from experts. Any qualifications, expertise, training, or skills you may have in this area would be relevant to determining whether your activities constituted a business.

To be classified as carrying on a business of share trading, the ATO will also look at the volume of trading. The higher the volume of your purchases and sales of shares, the more likely it is that you will be carrying on a business.

What are the Tax Consequences relating to Share Trading?

If you can demonstrate you are carrying on a share trading business, all share trading profits are subject to tax at your marginal tax rate.  Any losses you incur can be offset against your salary and wages, investment income and any other business profits you derive, subject to non commercial loss measures.

The fact that you may be a salary or wage earner, investor or someone carrying on business as a plumber, accountant, dentist etc, does not alter the fact that you may be treated as carrying on a share trading business. The classification is merely for the purposes of determining how your gains and losses will be taxed. You can’t however, take advantage of the 50% capital gains discount on shares held for more than 12 months. But as a share trader, you probably wouldn’t hold shares for this long anyway.

What if the factors of being a Share Trader don’t fit me?

If the factors of being a share trader don’t fit, you are a share investor. Investors report their activity different to share traders. A share investor invests in shares with the intention of earning income from dividends and capital growth, but does not carry on business activities. If you have been classified as a share investor then there are a few perks to take advantage of.  Profits made on shares are not classed as assessable income, but as a capital gain and are subject to capital gains tax. If the shares have been held for more than 12 months then they are eligible to receive the 50% capital gains discount.

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