What’s the difference?
The importance of correctly classifying a taxpayer as a share trader or a share investor has been affirmed by the Administrative Appeal Tribunal in the 2010 case of Smith v FCT. The distinction hinges on whether the taxpayer’s share trading activities constitute carrying on a business (ie: a share trader) or whether the taxpayer is merely passively holding shares as part of a long term investment (ie: a share investor).
Why does it matter?
The distinction results in one of two possible sets of tax treatments consisting of one consequence for the income earned and a corresponding consequence for the losses incurred. An individual share investor who realises a profit on the sale of their shares will be taxed under the Capital Gains Tax regime and may utilise the 50% discount available to taxpayers who have made capital gains. However, any losses incurred from the sale of the shares should be treated as a capital loss which can only be offset against future capital gains, as opposed to from your income.
On the other hand, a share trader who is in the business of trading in shares will not fall within the capital gains tax regime and any income produced from the sale of shares will be assessed on revenue account as part of the business’ taxable income. Share traders are provided with a more advantageous tax treatment for their tax losses as any losses incurred on the sale of shares will be deductible against other income, given these were incurred in the course of carrying on a business.
Since the global financial crisis, it has come to the ATO’s attention that an increasing number of taxpayers who previously considered themselves a share investor (when their shares sold for a profit to access the CGT discount), are now classifying themselves as share traders (so they may deduct losses from the sale of shares against other income). Consequently, the ATO issued a Taxpayer Alert in 2009 to highlight this issue as one which is under their risk assessment, and they have clearly taken a substance over form stance.
Share traders will need to ensure they are able to establish that their share trading activities legitimately constitute a business which involves more than artificially adopting practices merely designed to give the appearance of share trading. Some indicators of a share trading business may include:
– the nature of the activities and whether the taxpayer has a profit making motive
– the repetition, volume and regularity of the trading activities
– the level of record keeping and accounts; and
– the volume of the operations
With regards to your shares, it is essential to get the professional advice. Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your financial needs. For advice about the investment product mix that is right for you, contact us by submitting an online enquiry or calling us on 1300 QUINNS (784 667) to book an appointment.