The distinction between being a Share Trader and Share Investor for tax purposes can have significant tax implications and has always been a grey area. A recent case before the Administrative Appeals Tribunal (Devi AATA 67) demonstrates that it is the overall weighting of evidence that will ultimately determine your status as a trader or investor. As Denis Denuto from the iconic movie “The Castle” would say “It’s just the vibe of the thing…”.
In Devi, the taxpayer earned a part time wage in Childcare of $40,000 and funded the share purchases with $60,000 of her and her husbands savings and a $40,000 margin loan. She had a portfolio of large bank and mining companies and small company shares on the ASX. There were 71 buys ($380,000) and 37 sales ($215,000), but the majority of the transactions were in the first half of the year. She contended that 15 – 25 hours per week were spent on the share trading activities, although the Tribunal did not accept this. Ultimately, the taxpayer sought to claim a loss of $20,000 from her share activities in the financial year, believing that her activities amounted to a share trading business.
The Tribunal favored the following aspects of her activities as being of a trading business;
Turnover was substantial, particularly in comparison to her wages;
a home office was maintained for the activities.
However, the Tribunal favored the following factors as her activities being of an investor;
Transactions were not conducted on a regular or systematic basis;
The activities lacked sophistication;
There was no pattern of trading;
The taxpayer had no skills, interest or expertise in share trading, and the Tribunal felt that it was actually her husband who managed the investments.
The ultimate denial of the loss as a trader means that the loss would be ordinarily treated as a capital loss, and so could only be offset against other capital gains in that year or future years. The tax savings that were denied upon this Tribunal decision would have been approximately $3,700, although eventually this would be less if any future capital gain was reduced by the capital loss.
The ATO have good information about what they look for in determining your share activity status:
If you are unsure about your own circumstances, please consult us or apply to the ATO for a Private Tax Ruling on your own specific situation. Whether you are treated as a Share Investor or Trader there may be other strategies that we can recommend to improve the tax effectiveness of your activities.