Understanding Share Investing vs Share Trading: A Guide to ATO Classifications
Key tax differences between share investors and traders explained
A commonly asked question we receive at Allan Hall is how the ATO classifies a share investor vs a share trader.
Typically clients make a profit and they want to be assessed as an ‘investor’ so that the capital gain is taxed with any applicable discounts. Conversely if they incur a loss we receive questions as to whether they are classified as a ‘trader’ so that the losses can be deducted against other income they have earned.
Tax treatment
If you hold shares as an investor:
- your shares are assets and are subject to capital gains tax when you sell them
- your costs are taken into account at the time you sell your shares
- if you have a capital loss you can use it to offset capital gains but not to offset income from other sources
- income is earned from dividends and similar receipts.
If you are a share trader:
- your shares are treated like trading stock in the ordinary course of a business
- your gains are treated as ordinary income
- your losses and costs are treated as deductible expenses in the year they are incurred.
How to determine if you are a share trader
Determining if you are a share trader is the same as determining whether your activities are considered to be carrying on a business for tax purposes.
Under tax law, a business includes ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
To determine whether you are a share trader or a business of trading shares, the following factors have been taken into account in court cases:
- the nature and purpose of your activities – typically the ATO wants to see a business plan that details the intention to make a profit and the ways this would be achieved
- the repetition, volume and regularity of your activities – the higher the volume the more likely you are carrying on a business
- whether your activities are organised in a business-like way – advice received, company analysis methodology, record keeping etc
- the amount of capital invested
The above is a brief overview of the issues involved. Should you require further advice please contact your Allan Hall advisor.