A share investor, not a share trader

The AAT has affirmed a decision of the Commissioner that a taxpayer was a share investor and was not carrying on a business of share trading, and therefore denied deductions that had been claimed on the premise that a business existed for the relevant years.

Background

The taxpayer was during relevant times a full-time council employee. According to the taxpayer, he had been actively involved in the share market for many years, which occupied about 15 hours of his time per week. He also claimed he had an arrangement with his employer where he could trade during business hours and then make up any time after hours. For the relevant tax years (the income years ended 30 June 2010 and 30 June 2011), the taxpayer lodged tax returns claiming significant deductions on the basis that he was carrying on a business of share trading. After an audit, the Commissioner determined that the taxpayer was a share investor and issued assessments refusing the deductions.

Decision

The AAT considered each of the relevant factors established in case law (in particular, the factors listed in AAT Case 6,297 (1990) 21 ATR 3747) in determining whether or not the taxpayer was engaged in a business of share trading. Although noting the "matter was finely balanced", the AAT was of the view that the factors pointing against the existence of a share trading business were more significant than those pointing in favour of the existence of a share trading business.

The AAT made the following points in relation to the "general factors":

• Nature of the activities and profit-making purpose – The AAT was satisfied that the nature of the taxpayer's activities was "something more than a mere academic pursuit or a hobby". It was also satisfied that there was an intention to make a profit. It said this factor supported the view that the taxpayer was conducting a share trading business.

• Complexity and magnitude of the undertaking – The AAT was not convinced that restricting one's activities to mainly "blue chip" companies makes the activity less complex; however, it found that the factor of complexity went against the taxpayer. The AAT noted the taxpayer had utilised the services of CommSec and a number of other brokers and advisory institutions to assist in his research and decision-making. However, it did find that the magnitude of the transactions was "reasonably substantial" and therefore, in this respect, it held that the factor of magnitude was in favour of the taxpayer. The AAT noted that the taxpayer turned over in excess of $900,000 in the 2010 year and almost $400,000 in 2011. It also noted that some 40 transactions took place in 2010 and 25 transactions in 2011.

• Intention to engage in trade regularly, routinely or systematically – The AAT found there was a lack of regular or routine trading during the relevant years, which it said pointed to the taxpayer being involved in a series of individual transactions on a speculative basis rather than as a share trader. It noted that the taxpayer did not purchase any shares at all in seven of the 12 months in the 2010 year and that no share sales took place in five of those months. Further, it noted that in the 2011 year, only eight purchases appear to have been made in a three-month period. The AAT noted that there was, in a sense, a system in which the taxpayer purchased and sold shares, which was partly explained by a "business plan" (although "belatedly" prepared); however, it said that "while this was a plan of sorts it was neither particularly sophisticated nor intricate, and for the most part appeared to be as much in the head of the [taxpayer] as it was writing".

• Operating in a business-like manner and the degree of sophistication involved – While noting that there were some elements suggesting business-like activities (eg a dedicated office at home), the AAT was of the view that the operation was "very simple, lacked any real sophistication and overall was not consistent with the operation of a business".

• Profits/losses arise from a discernible pattern of trading – The AAT did not accept that the business plan incorporated a pattern of trading. Although questioning the relevancy of this factor, the AAT said this factor pointed against the taxpayer having conducted a share trading business.

• The volume of the taxpayer's operations and the amount of capital employed by him – The AAT was satisfied, noting the volume of the operations and the amount of capital employed by the taxpayer, that in relation to this factor there was a share trading activity.

In relation to “specific” share trading factors, the AAT said that factors in favour of the taxpayer included the following:

• turnover in gross terms was quite large, particularly having regard to the taxpayer's salary (being below $200,000 a year);

• the taxpayer maintained an office specifically for the purpose of conducting his share purchase and sale activities; and

• records of transactions were kept for the purposes of doing accounting and tax calculations (although not necessarily on the gross receipts basis).

However, the AAT was of the view that, overall, the specific share trading factors in favour of the Commissioner’s position pointed against the conduct of a share trading business. The factors in favour of the Commissioner’s position identified by the AAT included the following:

• the buying and selling of shares was not regular or routine;

• there appeared to have been very little in the way of a plan, although a written plan was produced belatedly; the AAT added that very little appeared to have been done in terms of setting budgets and targets, and that the trading and the background research was simple and unsophisticated; and

• the taxpayer was engaged in another full-time profession as a council employee. In particular, the AAT expressed the view that "the employment of the [taxpayer] on a full-time basis is hardly consistent with the conduct of an on-going business".

Re Hartley and FCT [2013] AATA 601, www.austlii.edu.au/au/cases/cth/AATA/2013/601.html.