Tax questions

Hi all. I am new to this forum so apologies if this has been covered before.
I am also new to share trading, in fact I havent started yet, still reading and learning.

I am bit puzzled about the tax situation. Obviously we have to pay CGT on profit. Which is calculated at our normal tax rate, which for me would be twenty-something percent.

But the ATO would like share traders to be businesses. (see the example of Molly the engineer on the ATO website). But the ATO are a bit vague on exactly how frequent and how big trades have to be to make a trader a business. I would have thought my modest starting capital ($5000) would put me well and truly in the hobbyist catagory. But maybe the ATO think different?

If I become a business trader, do I have to get an ABN and go the whole hog? Or would I just be taxed as a business and get a few "tax right off" benefits? Which is better, CGT or income tax with benefits?

Also, if I was a business, what would the tax rate be? As I have a day job, would it be a second income and therefore taxed at 50%?

Excuse the dumb questions. I am still learning
Thanks heaps.
Jack

vk2cjc said:

... But the ATO are a bit vague on exactly how frequent and how big trades have to be to make a trader a business. ...

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In my opinion, the ATO has deliberately left this vague.
I seriously doubt you would fall into the category.

You pay taxes on profits, best you set about making profits.

vk2cjc said:

Hi all. I am new to this forum so apologies if this has been covered before.
I am also new to share trading, in fact I havent started yet, still reading and learning.

I am bit puzzled about the tax situation. Obviously we have to pay CGT on profit. Which is calculated at our normal tax rate, which for me would be twenty-something percent.

But the ATO would like share traders to be businesses. (see the example of Molly the engineer on the ATO website). But the ATO are a bit vague on exactly how frequent and how big trades have to be to make a trader a business. I would have thought my modest starting capital ($5000) would put me well and truly in the hobbyist catagory. But maybe the ATO think different?

If I become a business trader, do I have to get an ABN and go the whole hog? Or would I just be taxed as a business and get a few "tax right off" benefits? Which is better, CGT or income tax with benefits?

Also, if I was a business, what would the tax rate be? As I have a day job, would it be a second income and therefore taxed at 50%?

Excuse the dumb questions. I am still learning
Thanks heaps.
Jack

Click to expand...

Hi Jack,
if you buy and sell shares over the years while maintaining full-time employment in your normal 9-to-5 environment, you might as well keep that status. No need to worry about 50% taxation: any profits made from selling a parcel of shares for more than you bought them is added to your wage/ salary income and taxed at the marginal rate. Any losses made by selling shares for less than they cost you, come off the profits; but they are usually NOT deducted off your salary/ wages income. If you incur trading losses, all you can do is carry them forward and hope you one day turn in a profit.

If you hold shares for longer than 12 months, Capital Gains are Taxed at only half the rate; say you bought 1000 ANZ shares at $21.50 in February 2010 and sold them today at $23.50, you apply only $1,000 profit as CGTaxable income in this FY's tax return.

Setting up a Trading Company can make sense if you trade more frequently; setting it up as a Discretionary Family Trust can also make sense because the latter will enable you to distribute any profits among the beneficiaries of the Trust.
Maybe there is a stay-at-home Mum or some kids? If your Trading results in $15,000 profit, you can - "at your discretion" - distribute those $15,000 in such a way that all members with low or no income get their tax-free threshold (about $6,000 each) filled before any tax falls due. Under a Company umbrella, you may also have advantages as to what expenses can be offset, whether computer equipment can be written down, etc.

Sorry, I can't be more specific in this general reply. You must talk to a good Accountant, who will know your family situation and be able to advise what's best in your circumstances.

Hey Pixel

Thanks for the reply.

I was more concered, after reading the ATO website, that I may end up being forced to declare myself a business. And that might officially become a second job with higher tax rates.

Although it may be some time before my profits cause the ATO to notice me

Good advice on sharing profits around, but I am the lowest tax bracket in this house.

cheers
Jack

not an expert in this area but did check this carefully and have two trading account: one as a trader and one as an investor based on ATO definition:
The trader has nothing to do with abn or ipenning a business, etc:
you are deemed a trader if you do not keep shares long enought (ie years and not month or days/weeks)
if you are demed a trader: you are taxed at the difference in value of your portfolio between end and start of year and do not get the CGT discount:
which may or not be good for you based on situation: if you make a loss, is straight of your other income even if not realised yet (shares still kept)

hope it helps but please do check with accountants or better qualified person

just my understanding of the ATO rules; and you can ask for a private ruling if in doubt
Cheers

vk2cjc said:

I was more concered, after reading the ATO website, that I may end up being forced to declare myself a business. And that might officially become a second job with higher tax rates.

Click to expand...

You won't be forced to do anything, so just forget about it. It's not going to affect you. There's no way you'd possibly be doing any serious amount of trading with only a $5000 account!

qldfrog said:

not an expert in this area but did check this carefully and have two trading account: one as a trader and one as an investor based on ATO definition:
The trader has nothing to do with abn or ipenning a business, etc:
you are deemed a trader if you do not keep shares long enought (ie years and not month or days/weeks)
if you are demed a trader: you are taxed at the difference in value of your portfolio between end and start of year and do not get the CGT discount:
which may or not be good for you based on situation: if you make a loss, is straight of your other income even if not realised yet (shares still kept)

hope it helps but please do check with accountants or better qualified person

just my understanding of the ATO rules; and you can ask for a private ruling if in doubt
Cheers

Click to expand...

As I understand it, the ATO can deem you an investor and not a trader if you do not meet the vague criteria they use to define a trader. But if you DO meet those criteria but want to be taxed as an investor, they will not deem you a trader. In other words, they will not insist you be taxed as a trader if you do not want to be, but they may insist you be taxed as an investor even though you may wish to be taxed as a trader.

The ATO made a point of saying in about 2008 that they were going to be a lot stricter as to who qualified as a trader.

bellenuit said:

As I understand it, the ATO can deem you an investor and not a trader if you do not meet the vague criteria they use to define a trader. But if you DO meet those criteria but want to be taxed as an investor, they will not deem you a trader. In other words, they will not insist you be taxed as a trader if you do not want to be, but they may insist you be taxed as an investor even though you may wish to be taxed as a trader.

Click to expand...

I read somewhere it was the amount of trades that you do can also clasify you as a Trader.

Hope this link helps.

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