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Share trading as business

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My accountant has always classified me as a share trader as opposed to share investor, based on the number of transactions made and the amount of capital invested in a year.

 

2 questions:

1. For shares that is held over 12 months, am I still eligble for the 50% discount or not?

2. I read some of the ATO documentnation which says shares as a trader is considered stock in a business. Does that mean I treat my shares owned as stock and do an annual stocktake?

 

for example if I bought 1000 shares of company ABC in August at $1 and at 30 June they are worth $2, do I list in my P&L statement as having a $1000 gain even though I have not sold the stock? and the next financial year I list the opening stock of ABC in my next P&L as $2000.

 

and the same example if at 30 June they are worth $0.5 instead, do I list a loss of $500 even though I have not sold? and next financial year P&L start at $500

 

or does simply nothing happen unless I actually sell ABC?

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ATO Certified

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Hi @sharetrader,

 

Thanks for your patience whilst we received specialist advice regarding your question.

 

If you are in business as a share trader the shares that you hold are considered to be trading stock assets and not capital gains tax assets. This means that the capital gains tax rules do not apply, and you cannot use the discount method that applies using capital gains tax rules to calculate assessable income.

 

You do need to work out your opening stock and closing stock values for your shares to work out the ‘cost of goods sold’ of trading stock for the income year. Your opening value is the closing value from the previous year. As your shares are trading stock assets you can choose a valuation method for your shares at the end of each year and then value your shares using that method. An increase in share value from opening to closing value during the income year is assessable income, while a decrease is an allowable deduction. 

 

You can use one of the following three methods to value your stock at the end of the income year:

  • The cost price
  • The market value
  • The replacement value

 

The examples that you have put forward use the market value method in valuing the stock at the end of the income period.  Your first example shows a gain in value of $1,000 that would be included in your assessable income, while your second example shows a decrease in value of $500 which would be an allowable deduction. 

 

More information on stock valuation is available on our website here.  

 

Hope this helps.

 

10 REPLIES 10

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Hi @sharetrader,

 

Thanks for asking your question to our Community!

 

We're working with a specialist area to answer your question and we are planning on getting back to you shortly.

 

Thanks.

Enthusiast

Replies 0

Hi sharetrader,

 

I can't answer Q2 (your accountant should), but I understand the answer to Q1 is no, you are not eligible for the 50% CGT discount on disposal of your shares if you are a share trader, because it is not a capital gain/loss but a revenue gain/loss.  The difference between share investors and share traders is that the investor holds their shares on capital account (and hence makes capital gains or losses) and the trader holds the shares on revenue account.

I assume that you have read the ATO's views about whether someone is a share trader or a share investor, if not you should do so again rather than just taking your accountant's word for it, because at the end of the day you are responsible for getting it right.  The ATO has some useful stuff here:

https://www.ato.gov.au/General/Capital-gains-tax/Shares,-units-and-similar-investments/Shareholding-...

 

Best answer

ATO Certified

Community Support

Replies 5

Hi @sharetrader,

 

Thanks for your patience whilst we received specialist advice regarding your question.

 

If you are in business as a share trader the shares that you hold are considered to be trading stock assets and not capital gains tax assets. This means that the capital gains tax rules do not apply, and you cannot use the discount method that applies using capital gains tax rules to calculate assessable income.

 

You do need to work out your opening stock and closing stock values for your shares to work out the ‘cost of goods sold’ of trading stock for the income year. Your opening value is the closing value from the previous year. As your shares are trading stock assets you can choose a valuation method for your shares at the end of each year and then value your shares using that method. An increase in share value from opening to closing value during the income year is assessable income, while a decrease is an allowable deduction. 

 

You can use one of the following three methods to value your stock at the end of the income year:

  • The cost price
  • The market value
  • The replacement value

 

The examples that you have put forward use the market value method in valuing the stock at the end of the income period.  Your first example shows a gain in value of $1,000 that would be included in your assessable income, while your second example shows a decrease in value of $500 which would be an allowable deduction. 

 

More information on stock valuation is available on our website here.  

 

Hope this helps.

 

Megastar Registered Tax Practitioner

Replies 1

Hi sharetrader

 

Just to emphasise that the number of transactions made and the amount of capital invested in a year are not sufficient to rule out if you are a share trader or an investor.

 

The question of whether a person is a share trader or a shareholder is determined by considering the following factors that have been taken into account in court cases:

For more information on whether you're carrying on a business of share trading go to:

https://www.ato.gov.au/General/Capital-gains-tax/Shares,-units-and-similar-investments/Shareholding-...

 

One Stop tax
Tax Return and Taxback Specialist
www.onestoptax.com.au

 

 

 

 

Initiate

Replies 0

Thank you onestoptax,

 

From that link I'm pretty much as described in the ATO example, except making a profit.

 

thanks!

Initiate

Replies 0

Really helpful JodieH!

CP1
Newbie

Replies 3

Hi Jodie

Small query in relation to your reply.

If someone is a share trader, as you mentioned dividend will be assessable income - but will this be classified as business income or simply assessable income in a individual tax return. 

 

Community Support

Replies 2

Hi @CP1

 

Thanks for getting in touch!

 

Although dividends will form part of your business income as a share trader you will need to put dividends at item 11 of your tax return. The reason for this is that they need to be treated as franked or unfranked dividends and any credits allocated accordingly.

 

You can find information in the instruction guide for business taxpayer returns at ‘Item P8 –Income’: Instructions lodging a tax return for carrying on a business.

 

Thanks, JodieH. 

CP1
Newbie

Replies 1

Hi @JodieH 

Thank you for your reply.

I understand dividends need to be entered into item 11, however as a share trader, if i enter dividend income in item 11 - this will affect my business loss calculations on the business schedule. As such my business loss will be overstated.

I thought of entering the imputation credits in item 11 (as there is no place to enter them in the business schedule) and then enter the franked portion of dividend as business income - is this correct? If not could you kindly advise of another method?

Thanks

CP

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