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There’s a saying that many share market investors may have already heard: Don’t let the tax tail wag the investment dog. In other words, the best advice for your share portfolio is to base your decisions on investment merit, not on trying to save tax.
Even so, there are taxation consequences for everyone with an investment portfolio, so when a “grass is greener” tax option seems possible, it can be very tempting to chase after it.
Where a share trader has an advantage is that they are afforded the ability to deduct any share losses from assessable income — an immediate benefit not available to the passive share investor.
In times of better financial fortune, both trader and investor may enjoy occasional income-boosting dividends. But in a cooling economy the passive equities investor may find that selling shares results in a capital loss. This can only be offset against a capital gain, not against income, although if there is no capital gain in the current income year, the loss can be carried forward and used later.
The ability to deduct losses against other income sources would appear inviting to the passive investor. The trouble is, the tax treatment in these circumstances is one of those “either-or” situations. An investor who attempts to access better tax treatment when the economy cools down by claiming status as a share trader (without any discernible change in their pattern of buying and selling shares) will raise a big red flag for the taxman.
What the Tax Office looks for
The Tax Office’s definition of a share trader is someone who undertakes “business activities for the purpose of earning income from buying and selling shares”.
Relevant issues in determining the tax status of a taxpayer include the use or not of trading systems, the volume of transactions, the existence of a business plan,a profit motive, and records being kept in a “business-like manner”.
The Tax Office says that it will keep an active eye on people who “re-characterize” their activities from being a share investor to a share trader. Typically, it says, the people with that red flag hanging over their names will have claimed a CGT discount in previous returns but, now realizing losses, want to be able to claim an immediate deduction on revenue account.
This is not to say that such a thing is impossible; provided that a bona fide business of share trading is being conducted. Many passive share investors may have indeed found some financial success from their forays into the share market and begin to conduct a share trading business alongside
other activities. But the Tax Office warns that it is carefully scrutinizing these sort of claims to make sure they are a genuine business activity.
Whether or not a taxpayer is carrying on a business of share trading will always be determined on the basis of individual facts and circumstances, however important factors will typically include:
An important consideration for the Tax Office is the “intention” of the:
and how these intentions can be evidenced down the track when it comes time to sell. This evidence of intention may include the factors mentioned above.
Implications of your tax status
The tax treatment of transactions entered into by share investors and share traders is quite different.
In the case of a share investor:
For a share trader:
A taxpayer may be characterized as an investor for particular parcels of shares and as a trader for other parcels of shares. So even if they are carrying out a bona fide business of trading in relation to most of the share portfolio, if they have been treating one parcel of shares as a long-term investment (no trading, no routine research and monitoring, no frequent records of market
movements) then the expectation from the Tax Office will be that this parcel of shares should be taxed as an investment asset when sold.
Conversely, a capital investor who spies a great opportunity and buys and sells one specific parcel of shares with a definite profit motive should be taxed as a trader in relation to that parcel of shares but as an investor in relation to all other shares.
In all situations, taxpayers should seek to maximize the material available which evidences their intentions when shares are acquired. See this office if you require further information on whether you are a share investor or share trader.
DISCLAIMER:All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The article is produced by Property Way (ABN 57 141 982 934)