The tax consequences for gains and losses on shares vary based on whether taxpayers are categorised as “share traders” or “share investors,” with distinct treatment for each. Seeking guidance from a tax advisor is recommended to fully understand the significant differences involved.
Some of the key differences in the tax consequences include:
- Share investors are eligible for the 50% general CGT discount when they sell shares they have held for over 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 can claim a deduction for a reduction in the market value of their shares held on 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 leading indicators the ATO will look for to determine whether you are carrying on a share trading business. 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 they will make as to when to buy, hold or sell their 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 keep 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 would also help establish your business case.
If you’ve been holding shares for several years as a share investor and nothing about your investing activities has changed significantly, it would be difficult to argue that you are now a share trader. Based on past share market movements over recent years, the ATO will likely 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.
*Correct as of October 2015
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.