Current as of October 2015
Taxpayers are subject to different tax treatment for gains and losses on shares depending on whether they are considered to be a “share trader” or a “share investor”. Some of the key differences in the tax consequences include:
- Share investors are eligible for the 50% general CGT discount when they sell shares that they have held for more than 12 months, while share traders are not.
- Share traders are entitled to claim their share trading losses as a deduction against their other ordinary income, such as their salary (subject to the non-commercial loss provisions which can result in the losses being deferred), while share investors can only use their capital losses to offset current or future capital gains.
- Share traders are able to claim a deduction for a reduction in the market value of their shares held at 30 June each year (subject to the non-commercial loss rules as referred to in Point 2), while share investors are only allowed to claim a capital loss on realisation.
With the recent falls in share prices, the advantages in 2 and 3 above may make it attractive for many share investors to seek to be treated instead as share traders.
So what do you have to be able to do to demonstrate that you are a trader? Below are the main indicators that the ATO will look for to determine whether you are carrying on a business of share trading. You don’t need to be able to satisfy them all, but on balance the indicators would need to indicate that you are carrying on a business.
Nature of activity and purpose of profit making – a share trader is looking to profit from buying and selling shares, while a share investor intends to earn income from dividends. A share trader should be able to show their intention with a business plan that might show how investments are analysed and the basis of decisions you will make as to when to buy, hold or sell your shares.
Repetition and volume – the more frequently you trade and the higher the volume, the more likely you are carrying on a business.
Business like manner and recordkeeping – like any business, you would need to be keeping records of decisions made and how you arrived at them, as well as records of purchases and sales, and regular reporting of performance. Qualifications, training and skills in the area would also help establish your business case.
Needless to say, if you’ve been holding shares for a number of years as a share investor and nothing about your investing activities has changed significantly, it would be very difficult to argue that you are now a share trader. Based on past share market movements over recent years the ATO will be likely to look closely at this area when reviewing returns.
If you need clarification on any of these areas don’t hesitate to contact your client manager.
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.