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In recent years the Australian share market has enjoyed period of growth, with prices at historically high levels and solid dividends being paid. It has also experienced decline rarely observed in one lifetime.

Whether profits are made or losses accumulated, taxpayers who have bought or sold shares will need to estabish their tax status in order to determine their tax consequences – that is, are you a share trader (income tax consequences) or a share investor (Capital Gains Tax consequences).

While the Tax Office considers each case on its individual features, in summary, a share trader is someone who carries out business activities for the purpose of earning income from buying and selling shares. A share investor, on the other hand, is someone who holds shares for the purpose of earning income from dividends and similar receipts.

Relevant issues in determining your tax status include the nature, regularity, volume and repetition of the share activity; the amount of capital employed; and the extent to which there is organisation in a business-like manner, through the keeping of books or records and the use of a systems.

For a share trader:- ie purpose of earning income from buying and selling shares and trading operations are in the form of a business with consideration to volume, regularity of trades, how the operation is conducted and amount of capital invested.

  •  receipts from the sale of shares are income
  •  share holdings at 30 June would be regarded as trading stock
  •  costs incurred in buying or selling shares are an allowable deduction in the year in which they are incurred, and
  •  dividends and other similar receipts are included in assessable income.

In the case of a share investor:- ie. purpose of earning income from dividends.

  • the cost of purchase of shares is not an allowable deduction – it is a capital cost
  •  receipts from the sale of shares are not assessable income and subject to capital gains tax provisions
  •  a net loss from sale of shares may not be offset against income from other sources, but may be carried forward to offset against future capital gains made from the sale of shares
  •  costs incurred in buying or selling shares are not an allowable deduction in the year in which they are incurred, but are taken into account in determining the amount of any capital gain
  •  dividends and other similar receipts are included in assessable income, and
  •  costs incurred in earning dividend income – such as interest on borrowed money – are an allowable deduction at the time they are incurred.

Example – Share trader (source ATO):
Molly is an electrical engineer. After seeing a television program, Molly decides to start share trading. She sets up an office in one of the rooms in her house. She has a computer and access to the Internet.

Molly has $100,000 of her own funds available to purchase shares and, in addition, she has access to a $50,000 borrowing facility through her bank.

She conducts daily analysis and assessment of developments in equity markets, using financial newspapers, investment magazines and stock market reports. Molly’s objective is to identify stocks that will increase in value in the short term to enable her to sell at a profit after holding them for a brief period.

In the year ended 30 June 2006, Molly conducted 60 share transactions: 35 buying and 25 selling. The average buying transaction involved 500 shares and the average cost was $1000. The average selling transaction involved 750 shares and the average selling price was $1800. All the transactions were conducted through stockbroking facilities on the Internet. The average time that shares were held before selling was twelve weeks. Molly’s activities resulted in a loss of $5000 after expenses.

Molly’s activities show all the factors that would be expected from a person carrying on a business. Her share trading operation demonstrates a profit making intention even though a loss has resulted. There is a repetition and regularity to her activities. Her activities are organised in a business-like manner. The volume of shares turned over is high and Molly has injected a large amount of capital into the operation.

Example – Share investor:
George is an accountant. He has bought 200,000 shares in twenty ‘blue chip’ companies over several years. His total portfolio cost $1.5 million. George bought the shares because of consistently high dividends. He would not consider selling shares unless their price appreciated markedly before selling them. In the year ended 30 June 2006, he sold 20,000 shares over the year for a gain of $50,000.

Although George has made a large gain on the sale of shares, he would not be considered to be carrying on a business of share trading. He has purchased his shares for the purpose of gaining dividend income rather than making a profit.

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