There has been continuous debate on how to treat a taxpayer who buys and sells shares. Is he a share trader or a share investor (share holder)? The distinction is crucial for tax purposes; in particular, how to account for losses arising from share trading activities.
If you are engaged in the buying and selling of shares as a share trader (i.e. carrying on a business of share trading) then the shares are recognised as trading stock and any losses are deductible. This reduces your overall tax liability for the income year.
On the other hand, a share investor holds shares on long term basis and shareholder losses can only be offset against capital gains or carried forward as shares are treated as capital. The different treatment of shares may encourage a taxpayer to characterise their share activities as a business when losses are incurred and as an investment in profitable years in order to access capital gains tax concessions and discount.
The question of whether a person is a share trader or a shareholder (i.e. share investor) is determined in each individual case. This is done by considering the following factors that have been used in court cases:
- the nature of the activities, particularly whether they have the purpose of profit making;
- the repetition, volume and regularity of the activities, and the similarity to other businesses in your industry;
- the keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number;
- the volume of the operations;
- the amount of capital employed;
- the relevance of having a full-time job.
To be classed as a share trader, the ATO may ask you to provide evidence that demonstrates you are carrying on a business of share trading, for example:
- the purchase of shares on a regular basis through a regular or routine method;
- a trading plan;
- use of share trading techniques in managing your share acquisitions, such as decisions based on thorough analysis of relevant market information;
- a contingency plan in the event of a major shift in the market.