Am I A Share Trader or Share Investor?

This question am I a share trader or share investor, is one that has always been a contentious one.  Considering the use of the terms “investing” and “trading” are often interchangeably used but when it comes to how each of these are seen under the Taxation Laws, they are very different.

Let us first go through what is a share trader and a share investor, to highlight how they differ, and the different way income, expenses, profits and losses are dealt with under the Taxation Laws.

SHARE INVESTOR

A share investor is a person whom purchases shares to be held for the long term looking for either capital growth, dividend payments or both.

Treatment of income, expenses, profits and losses are as follows:

Dividends – Treated separately from share purchases and sales as assessable income in the financial year that the dividend is paid.

Profits – Calculated as net capital gain after deducting the cost of the share from the amount received from the sale.  This is captured under Capital Gains Tax which is separate from your normal assessable income.  For individuals who have held shares for longer than 12 months will receive a 50% discount on the gross capital gain, which is then included in your Tax Return as income in the year in which the share was sold.

Losses – As previously stated, the sale of shares fall under Capital Gains Tax, therefore a loss incurred on the sale of the shares become Capital Losses.  These are only available to offset current year gains or carried forward to future years if the year in which the loss occurred hasn’t been offset.

Expenses – Brokerage fees that are incurred upon purchasing or selling shares are not deductible against your other assessable income.  They form a part of the cost base of the share when purchasing and are subtracted against the proceeds from sale of a share.  Other expenses like interest on loans used to purchase shares or subscriptions can be deducted against your normal assessable income in the year in which they are incurred.

SHARE TRADER

A share trader is a person whom operates in the business of purchasing and selling shares for a profit, this is with a view of only holding shares for the short term.

Treatment of income, expenses, profits and losses are as follows:

Dividends – If a trader happens to hold a particular share for the required time frame and is paid a dividend, it is treated the same way as a share investor.  The dividend income will be separated and included in assessable income in the financial year that it is paid.

PROFITS

• There are two elements to calculating profits, the purchase of shares and the sale of shares:
• Purchase of Shares is seen as the purchase of trading stock as a share trader.  This means that if the share trader is still holding the stock at the end of the year, it needs to be accounted for as trading stock on hand and therefore no deduction of the cost is claimed.  Depending on how the trading stock is valued, a deduction can be possible for the unrealised loss of share where the market value at year-end is lower than purchased cost.
• Sale of shares are included in assessable income in the year in which they are sold, the gross sale receipt is included.  The cost of the shares will be claimed as a deduction in the same year, if a share has been carried over from the previous year then the cost or value of the share as per the inventory method chosen will be deducted.

LOSSES

If a loss is made on the sale of a share unlike the share investor who can only offset it against other capital gains, a trader can possibly offset their other ordinary assessable income with the loss.  This is subject to the Non-Commercial Losses Rules.

EXPENSES

Brokerage, whether purchasing or selling shares can be claimed as a deduction in the year in which it is incurred.  As for other expenses such as Interest on Loans or Subscriptions, these can be deducted in the year in which they are incurred as well.

INVESTOR OR TRADER?

The key here is the intention of the person conducting the activities, if you are purchasing shares for the long term for capital growth and/or dividend income – it is clear that you are an investor.  To classify as a Trader is not quite as simple, here we need to establish if you are operating a business of buying and selling shares for a profit.

To assist in making this determination, we look to the indicators presented in Tax Ruling 97/11 which states:

● Whether the activity has a significant commercial purpose or character,

● Whether the taxpayer has more than an intention to engage in business,

● Whether a taxpayer has a purpose of profit as well as a prospect of profit from the activity,

● Whether there is repetition and regularity of the activity,

● Whether the activity is of the same kind that is carried on in a similar manner to that of the ordinary trade in that line of business,

● Whether the activity is planned, organised and carried out in a business-like manner,

● The size, scale and permanency of the activity,

● Can the activity be better described as a hobby, a form of recreation or sporting activity?

To be classified as operating a business, a number of these indicators must be present as only relying on one will not be enough to satisfy the criteria.

A final note to be made is that it is also possible for you to be a Share Trader and Share Investor at the same time.  This is where a Share Trader purchases some shares for the long term for capital growth and/or dividends.  The person is required to determine by the end of the financial year as to whether the share should be classified as Trading Stock or as an Investment, this should then be reflected in the records of the business.

If you are unsure of how your activities are classified, please contact us for a consultation.

Christopher Coco – Director & Founder

Please note: due to the nature of the topic of this article where there is not a simple rule applied and the classification relies on the circumstances of each individuals case, this article does not provide advice for your specific situation.