Tax Definition of a Trader

Interested in any ones opinion of what they think the ATO accepts as the requirements to be taxed as a trader.

My own advice is frequency or trade a position larger than $20K

Any accountants out there?

IFocus said:

Interested in any ones opinion of what they think the ATO accepts as the requirements to be taxed as a trader.

My own advice is frequency or trade a position larger than $20K

Any accountants out there?

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Even the ATO doesn't know for sure.

It's a case by case basis. Very simplistically, what they are looking for is that you are intending to focus on P/L through turnover, volume, consistency, administrated in a business-like manner, etc.

http://www.ato.gov.au/businesses/content.asp?doc=/content/21749.htm

If you ring the ATO you will get conflicting answers each time. If you are seriously carrying on a business my advice would be find a very good accountant who is not just a bean-counter. They will advise you and bat for you if need be.

I'll have paid $6k in accountancy fees before this year is over and they'll have been worth every cent.

Do you mean that your proceeds from trading will be taxed as ordinary income as opposed to capital gains?

MS+Tradesim said:

I'll have paid $6k in accountancy fees before this year is over and they'll have been worth every cent.

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Really? You must have been carrying on a business with a very serious tax structure.

My accountant charged me $250.00 for share p/l, divs, self-employment income and i think i had a group certificate or two thrown in there. I calculated all my expenses vs revenue myself and gave it to her in a ss. If you'd like her number, i'd be more than happy to pass it on to you. She's based in Melbourne.

PM me if you like. Six grand sounds a lot

Krusty the Klown said:

Do you mean that your proceeds from trading will be taxed as ordinary income as opposed to capital gains?

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Yes. And the delightful thing about that is that you can claim a lot of expenses through your ABN. Eg, internet costs, depreciation on your computer/laptop, utilities, education materials, stationary, interest incurred and all other trading fees.

this is from the same link......
the $20,000 stated is a fairy tale
not all accountants are tax accountants, some do audit or other specialist areas...you just need a Tax Agent....even H&R Block should be able to handle these simple transactions....its not really complicated at all..
you should probably have sorted this out before you commenced trading....

Oh and just as a matter of interest...I find the people who want to be called a trader for tax...want to claim their losses, to offset against the other salary income...not profits...when they make a profit they want to claim the 50% CGT discount and be an investor.....I am not saying this is applicable to you....just going by the bloggers questions over the years
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Example 1 – Share trader

Molly is an electrical engineer. After seeing a television program, Molly decides to become involved in share trading activities.

Molly 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.

Molly conducts daily analysis and assessment of developments in equity markets. The resources she uses include 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 2001, Molly conducted 60 share transactions: 35 buying and 25 selling. The average buying transaction involved 500 shares and the average cost was $1,000. The average selling transaction involved 750 shares and the average selling price was $1,800. All the transactions were conducted through stockbroking facilities on the internet. The average time that Molly held shares before selling them was twelve weeks. Molly's activities resulted in a loss of $5,000 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. Molly’s activities are regular and repetitive, and they 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.

kincella said:

when they make a profit they want to claim the 50% CGT discount and be an investor.....

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To my knowledge, you can only claim the 50% capital gains discount if you have held the shares for > 12 months.

kincella said:

Molly's activities resulted in a loss of $5,000 after expenses.

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Poor Molly

thats correct...
friend earning 200k's pa on income in a superfund...an investor ..long term buy and hold approach...bought cba at 6.00, nab at 10, bhp 10 etc
tips in 100k a year from business, was sitting on unrealised profits last year of 500k's....basically only buys...never sells...a lot of stock has been the subject of takeovers and returned some nice big fat profits..the last couple of years...holds about 40 stocks out of the top 50....
been out buying again recently....its just retirement money
it averages about net return of 5% pa in income...
it used to be 33% in each asset class...shares, cash and property...of course the stocks and property have outperformed.... over the years....cash has been a lousy return until last year...and fallen away quickly since Oct 08
they probably need to hold some more property to get the mix right again
they believe they need 200k pa income for retirement...so its tracking that way now..

Aussiest said:

Really? You must have been carrying on a business with a very serious tax structure.

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If all I needed was a bean counter to charge me $250 to plug numbers into a tax return, I would forego them altogether and just use e-tax.

Multiple tax entities = multiple returns plus advice and strategy. As I said, worth every cent. This is my livelihood and it is run as a business.

kincella said:

friend earning 200k's pa on income in a superfund...an investor ..long term buy and hold approach...bought cba at 6.00, nab at 10, bhp 10 etc

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Niiice!

So what's the benefit to be classes as a share trader for tax purposes?

Based on this article it's two fold:

1 Share traders can offset any trading losses incurred over the financial year against other assessable income.

2 Costs incurred in buying or selling shares are an allowable deduction in the year in which they are incurred.

Point 1, since we intend to make a profit any losses can be offset by gains made in that financial year or for up to 3 later years(IIRC)...........so this benifit is only good if you loose more than you gain every year, in which case why do you continue trading

Point 2, does this mean that as an individual I cannot include my brokerage for each trade in my total profit/loss figures for CGT? Or can I still deduct them but only when I sell the shares?

Another thing that has a bearing on this is that being classed as a share trader means you don't get the 50% discount if you hold for 12 months.

What other benefits are there?
I guess you'd have to weigh up everything and decide which is the best approach for your situation. Personally I plan to keep some stocks for more than 12 months, while trading others much more frequently

cheers

If you are classed as a share-trader, what is the advantage of registering as a company?

MACCA350 said:

Point 2, does this mean that as an individual I cannot include my brokerage for each trade in my total profit/loss figures for CGT? Or can I still deduct them but only when I sell the shares?

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The brokerage is deductable from your profit - it's a legitimate expense, as is the interest on your margin loan.

If you haven't paid the brokerage yet (haven't sold), then obviously you can't claim it.

scanspeak said:

If you are classed as a share-trader, what is the advantage of registering as a company?

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Tax rate

to further confuse the issue

It is my belief, that conditions apply to the carry forward of a business loss, offset against other income.

Accountants can you comment?

To do with amount of loss, and other factors, cant remember.

My understanding ATO wont allow you to claim continual losses either

And what about someone like myself, that have held some stocks for years, but also done numerous medium term, and day trades as well?

As I trade mainly from within SMSF pension, I cannot claim costs or losses, so am treated as an investor, which I have been told is ok, and the only way that I can be assessed.

( income is taxed personally at concessional rate)

but it is confusing, especially if I decide to trade more outside my super.

Of course, it is possible to submit a request for a binding ruling, which I previously did re another tax matter, and I am reluctant to do again, unless I have to.

Aussiest said:

To my knowledge, you can only claim the 50% capital gains discount if you have held the shares for > 12 months.
Poor Molly

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If you are classed as a share trader, your trades do not come under the CGT system period. So even if you hold the shares for > 12 months, you do not get the discount.

Essentially, your profit or loss from trading gets added/subtracted to/from your other income for the year and you are taxed accordingly.

What the poster is referring to is that some people want to be classed as a trader when they make losses (so they can claim those losses in the current year), but if they make a profit from trading and its from shares held for more than 1 year, they want to be classed as a investor, not trader, so they can get the 50% CGT discount.

The ATO will be particularly looking into this this year as many people who have been making profits from their share investments for the last several years and claiming CGT discount where applicable may be tempted to claim they are a share trader this year, as like many people, they are under water due to the GFC.

scanspeak said:

The brokerage is deductable from your profit - it's a legitimate expense, as is the interest on your margin loan.

If you haven't paid the brokerage yet (haven't sold), then obviously you can't claim it.

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I meant both buy and sell brokerage.......what about the brokerage when you buy? is that only claimable when you sell as an individual?

I'm guessing that the trader would claim deduction based on when the fee was payable(ie buy or sell dates separately)..........where as the individual only claims when the shares are sold and deducts from the CGT profit/loss

cheers

MACCA350 said:

I meant both buy and sell brokerage.......what about the brokerage when you buy? is that only claimable when you sell as an individual?

I'm guessing that the trader would claim deduction based on when the fee was payable(ie buy or sell dates separately)..........where as the individual only claims when the shares are sold and deducts from the CGT profit/loss

cheers

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It's a lot more complex than explained so far.

The brokerage and GST on buying gets added into the cost of those shares and the brokerage & GST when selling gets deducted from the sale value.

Your profit is worked out as follows:

Sales - Cost of Sales = Profit (or Loss)

Cost of Sales = Value of Opening Stock + Purchases - Value of Closing Stock

What makes it complex is that you can value your closing stock at Cost or at Market Value, whichever works out best for you. Additionally, you can value some of your shares at cost and some at market value AND you can change the method from year to year. In the above equation, Value of Opening Stock is ALWAYS the same as Value of Closing Stock of the previous year. Purchases in the above equation is the cost of buying the shares including brokerage and GST. Sales in the above equation is the net proceeds from selling the shares (e.g. after deducting brokerage and GST of the sale).

If you value you closing stock at market value, you could show a profit or loss for the year even if you bought or sold nothing in the year (the profit will be the increase in value of your closing stock over what it was valued as opening stock).

The best way to understand it is to play around with the formulae using a couple of hypothetical purchases/sales and see what the results yield.

bellenuit said:

It's a lot more complex than explained so far.

The brokerage and GST on buying gets added into the cost of those shares and the brokerage & GST when selling gets deducted from the sale value.

Your profit is worked out as follows:

Sales - Cost of Sales = Profit (or Loss)

Cost of Sales = Value of Opening Stock + Purchases - Value of Closing Stock

What makes it complex is that you can value your closing stock at Cost or at Market Value, whichever works out best for you. Additionally, you can value some of your shares at cost and some at market value AND you can change the method from year to year. In the above equation, Value of Opening Stock is ALWAYS the same as Value of Closing Stock of the previous year. Purchases in the above equation is the cost of buying the shares including brokerage and GST. Sales in the above equation is the net proceeds from selling the shares (e.g. after deducting brokerage and GST of the sale).

If you value you closing stock at market value, you could show a profit or loss for the year even if you bought or sold nothing in the year (the profit will be the increase in value of your closing stock over what it was valued as opening stock).

The best way to understand it is to play around with the formulae using a couple of hypothetical purchases/sales and see what the results yield.

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I'm lost... can any translate in more simpler terms

jono1887 said:

I'm lost... can any translate in more simpler terms

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What Bellenuit is saying is that the stocks or shares held and traded are treated as trading stock like a retail or wholesale business carries. The shares are being treated like inventory from an accounting perspective.

Going back to the original post, it doesn't really matter whether you call yourself a trader or not, as long as you declare profits as income.

Whether they are capital gains or not, it is still assessable income and are taxed the same way - at marginal rates. It does not matter if you have an ABN or not. If you form a company and quarantine all your trading inside it, then you will pay 30% company tax. If you take profits out of the company as a shareholder dividend you will be taxed at marginal rates, less franking credits. If the profit ends up in the hands of an individual in the wash it all comes out the same.

If in one tax year, you work out the cost base (purchase price + brokerage and disposal costs) of each trade and subtract from sale proceeds individually, or add all brokerage up and declare it as a deduction against all income it all adds up to the same amount, so therefore the result is the same.

If you want to claim the 50% CGT discount on holdings over 12 months, we live in a self reporting tax structure, so it is up to you what you claim. The 50% CGT discount is not available to companies however, only individuals, trusts and super funds. Why would the CGT discount not be available to an individual trader who holds shares for longer than 12 months?

A lot of accountants have different opinions and different ways to do things but it is the end result that matters, and if this is the same regardless of which way you calculate it -I don't know if it matters.