# What is a share 'trader'?



## Mika (5 January 2007)

G'day

I was just browsing the ATO website looking at what criteria they use in determing if someone is a share 'trader'.  Below is from the website:

Nature of activity and purpose of profit making 
Repetition 
Organisation in a business-like manner and the keeping of records 
Volume of trading 
Amount of capital injected 

What 'volume of trading' and 'repetition' do you think would meet this criteria? The website does not specify.

Thanks!


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## barney (5 January 2007)

Mika said:
			
		

> G'day
> 
> I was just browsing the ATO website looking at what criteria they use in determing if someone is a share 'trader'.  Below is from the website:
> 
> ...




Howdy Mika,  I'll have  stab at that. 

Volume of trading would be irrelevent Imo  ...........  I reckon the "volume"/amount  of money invested relative to how much they own is what determines whether someone is a "real" trader or not, because then money management becomes part of the equation.  If you are a billionaire, then "punting" a few thou. makes very little difference to your bottom line, but if you have limited funds, then investing a few hundred might  give you the same "stress" , which has to be managed.  

Re repetition:-  I would guess the best traders might "trade less" than the average punter  ........so repetition might be a sign of "immaturity" as a trader

PS At this point in time by my own definition I am no trader!!   

Cheers, Barney.


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## Sir Burr (5 January 2007)

Yes, I've wondered if there are any tax advantages of being a "trader".

I believe you don't get the 50% 12 month tax concession but being a trader I guess a 12 month trade wouldn't happen anyway!   

SB


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## pacer (5 January 2007)

I saw something a while ago that was in the .gov sites somewhere that was a court judgement on what constitutes a 'trader' trading as a job (it was from this forum too I think....do a search and you may find it, both here and .gov sites).

It stated, from my hazy new years 'bourbon memory', that you must have done trading courses and run it like a business with good account keeping, and not have worked in another job for a priod of time, a year I think, among other things.

Suits me fine.....as I haven't worked in over 3 years thanks to trading the markets and other dodgy black money deals.....and I never intend to have a real job ever again......I'm seriously having too much fun, and I like sleeping in, and going fishing, whenever I damn well please......I don't own gold worry-beads yet, but I'm getting there.

Enjoy the game and have a prosperous new year.


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## theasxgorilla (5 January 2007)

I think that many of us on this board (under the ATO's defination) could be traders.  The reason they differentiate is actually to our benefit.  As a trader your profits are an income source, and can therefore be offset against expenses and other sources of income.

The reason the two definitions exist (I believe) is to prevent punters or mums and dads having a dabble, losing money on say T2 or AMP demute, and then trying to offset the loss and lower their income tax liability.


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## Sir Burr (5 January 2007)

theasxgorilla said:
			
		

> trying to offset the loss and lower their income tax liability.




So is there any tax benefit if you make make money as a trader?   

SB


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## barney (5 January 2007)

pacer said:
			
		

> I saw something a while ago that was in the .gov sites somewhere that was a court judgement on what constitutes a 'trader' trading as a job (it was from this forum too I think....do a search and you may find it, both here and .gov sites).
> 
> It stated, from my hazy new years 'bourbon memory', that you must have done trading courses and run it like a business with good account keeping, and not have worked in another job for a priod of time , a year I think, among other things.
> 
> ...




Good onya Pace I am jealous, envious, and bow down in humility b4 you .......... You are indeed a trader  Cheers, Barney.


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## theasxgorilla (5 January 2007)

Sir Burr said:
			
		

> So is there any tax benefit if you make make money as a trader?
> 
> SB




There could be.  As the disclaimer always goes, it depends on your circumstances.  I'm an expat and would rather capital gains as they're CGT free for non-residents, so I don't operate as a "share trader".

They key difference as I see it is that as a trader you can have a net losing year and offset that loss against other income earned in the same year.

If you're a shareholder and one year you get a bite taken out of your account, all you can do is offset your capital loss against future capital gains.

Would be good if someone who operates as a "share trader" and understands tax could confirm or elaborate on this.


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## Sir Burr (5 January 2007)

theasxgorilla said:
			
		

> They key difference as I see it is that as a trader you can have a net losing year and offset that loss against other income earned in the same year.



If your a trader (as Pacer mentioned) and have to:

"run it like a business with good account keeping, and not have worked in another job for a period of time , a year I think, among other things"

Then, you wouldn't have "other" income to offset it against?

SB


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## moses (5 January 2007)

Sir Burr said:
			
		

> So is there any tax benefit if you make make money as a trader?
> 
> SB



your computer would be tax deductable, and your trading expenses, and if you're doing it from home then there will be some fraction of your domestic expenses that could be claimed, like, say, 5% of your electricity bill.

As usual, see your accountant for professional advice, don't quote me as I'm just giving you an idea of what to expect.


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## theasxgorilla (5 January 2007)

Sir Burr said:
			
		

> If your a trader (as Pacer mentioned) and have to:
> 
> "run it like a business with good account keeping, and not have worked in another job for a period of time , a year I think, among other things"
> 
> ...




To be honest, I've never seen this.  In an example on the ATO's website it describes Molly the Electrical Engineer who gives share trading a go.  It describes the things Pacer refers to but it makes no mention about quiting her job.

http://www.ato.gov.au/corporate/content.asp?doc=/content/76071.htm


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## theasxgorilla (5 January 2007)

moses said:
			
		

> your computer would be tax deductable, and your trading expenses, and if you're doing it from home then there will be some fraction of your domestic expenses that could be claimed, like, say, 5% of your electricity bill.
> 
> As usual, see your accountant for professional advice, don't quote me as I'm just giving you an idea of what to expect.




I believe there could be a caveat on this.  If you use your primary place of residence to produce income and then want to claim a deduction for related expenses you may fore go a proportion of your primary residence capital gains tax exemption.

Once again, I don't operate this way, so you need to consult with a knowledgeable accountant.


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## jasoni (5 January 2007)

Also if the room you work in is being used as a study, ie the sole purpose of trading stocks for example, you can also get deductions for electricity to power the lights, heating etc as well as cleaning costs.

Tax accountants can work wonders


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## Dr Doom (5 January 2007)

Mika,
I have 3 trading hats - 

Personal share investor - portfolio with share transactions over the long term eg the 25% (is that the current rate??) capital gains tax applies if held for over 12 months etc & gains/losses can offset & be carried forward against other capital gains/losses.

Personal investor trader - for frequent trading of shares, derivatives etc - run like a business eg cost of sales less buys less expenses, opening stock etc at the end of the year any losses can be offset against other income at personal tax rate, gains at the higher rate also.

Company investor trader - mainly for company tax at 30% & frequent trading eg CFD's but is becoming less usefull with personal tax rates falling.

Basically, if you can show the tax office that you have routine transactions involving more than what could be considered a casual investing amount and the systems to support those transactions eg computer, subscriptions, etc  then they would most likely to class you as a trader as opposed to passive investor. It would help if you had a tax agent doing your tax also. As far as I'm aware, theres no requirement to give up your day job. The examples on the ATO site are pretty vague so it's a case by case basis I guess, or you could get a ruling???? or proffessional advise if you are serious.


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## coyotte (5 January 2007)

Was under the impression that expenses incurred for declared income was basically deductible for that income .
EG: Brokerage , Mag subscription , Service subscription, Internet etc etc

Be interesting to see what a Tax accountant had to say about -- If you became a " Sole Trader " --- Because you are doing exactly the same thing -- " Buying an Item with the intention of obtaining a Profit "  --- a lot of small retailers and market stall holders  are "Sole Traders" and most of these people have more than one source of income .



 Cheers


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## theasxgorilla (5 January 2007)

coyotte said:
			
		

> Be interesting to see what a Tax accountant had to say about -- If you became a " Sole Trader " --- Because you are doing exactly the same thing -- " Buying an Item with the intention of obtaining a Profit "  --- a lot of small retailers and market stall holders  are "Sole Traders" and most of these people have more than one source of income .




Thats what the ATO website seems to indicate.  If you are a "share trader" then your shares are "trading stock".  Buying and selling for profit is income, not a capital gain.


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## Prospector (5 January 2007)

Dr Doom said:
			
		

> Mika,
> I have 3 trading hats -
> 
> Personal share investor - portfolio with share transactions over the long term eg the 25% (is that the current rate??) capital gains tax applies if held for over 12 months etc & gains/losses can offset & be carried forward against other capital gains/losses.
> ...




Hey, another tri-hatted person!  I am deemed a trader in our company account according to our accountant but certainly do other work too.  The shares are regarded as 'stock' 

Because I also trade through a SMSF the records I keep are totally spotless and through a professional softwarepackage that uses access (portfolio planner)


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## Ted (6 January 2007)

Hi guys,

Another newbe with with no experience in shares (or forums) and wondering why I did not start years ago.

I also had a look at the ATO site and found it more confusing than helpful.

Your comments about long and short term trading stratagies and buying/selling for profit makes much more sense.

Thank you for all the other comments on the site which I find very helpful in understanding shares.


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## theasxgorilla (6 January 2007)

From December 04, a short article in the Age on this exact subject:

http://www.theage.com.au/business/money/tools/guides/investment/trader_def.html


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## Sir Burr (6 January 2007)

theasxgorilla said:
			
		

> From December 04, a short article in the Age on this exact subject:
> 
> http://www.theage.com.au/business/money/tools/guides/investment/trader_def.html



Thanks asxgorilla,

In my situation I can't see any benefit of being a "TRADER". You can claim the same stuff being a "SHAREHOLDER" and at the end of the financial year the shareholder may have lower tax due to the 50% rule and the trader, if lost money for the year can claim it on other income whereas the invester claims it on later capital gains.

SB


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## GreatPig (6 January 2007)

From my understanding, the main criteria is intention, but you need some sort of supporting evidence for your intention to be accepted. I don't believe any of the  conditions mentioned here are absolutely necessary, so long as overall it's clear that you're operating a trading business and not just trying to get a deduction for investment capital losses. All those things like business plans, sophisticated systems, trading volume, sufficient capital, etc. all help but I don't believe any are mandatory in themselves.

The advantages of being a business trader are the ability to deduct transaction costs in the year they are incurred, offset losses on sales against other forms of income (eg. dividends), and claim back GST (if registered). The loss of the 50% CGT discount would rarely be an issue as most positions would not be held for 12 months.

The disadvantages are the loss of the 50% discount if held for more than 12 months, the treating of the portfolio as trading stock (meaning you may pay tax on unrealised gains), and probably the higher management overhead (it takes time to work on all those business plans, records, and sophisticated trading systems!).

This is all just my personal opinion though. See your own tax specialist.

Cheers,
GP


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## Prospector (7 January 2007)

The CG is only 30% (ie company tax rate) too regardless of how long the shares are held!


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## rozella (7 January 2007)

A good explanation GreatPig.

It suits me to be a trader, my average holdings are 17.74 days to date this FY, so 50% cgt does not enter the equation.

I trade cum-dividend stocks & if I go the full cycle & collect the dividend, I may sell in tougher times before the stock rises back to my original buy price.  This means that I can offset the trading loss against the dividend.  If I was a shareholder, I would be paying more tax on the full dividend, yet the capital loss could not be offset & can be only offset against capital gains.

Also a trader can value their stock at cost or current value whichever suits, providing the same procedure is used for opening/closing stock.

As GP says check with your tax accountant.


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## GreatPig (7 January 2007)

Prospector said:
			
		

> The CG is only 30% (ie company tax rate) too regardless of how long the shares are held!



Only if trading in a company, or distributing from a trust to a company (of course a personal rate may also be 30%, but that's not always the case).

As always with companies though, you have to consider who the shareholders are and when the company will pay dividends to get the funds out for personal use. Ultimately profits could still be taxed at the top rate if the shareholders are all on the top rate. It does allow the deferring of that extra tax though by retaining the profits in the company.

But one thing to consider with retained company profits is the risk of the company tax rate being lowered in the future. Normally dividends can only be franked at the prevailing company rate, which means you may end up with excess franking credits locked in the company. And the top personal rate may not be lowered at the same time.

GP


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## Prospector (7 January 2007)

Yep GP, I agree with all that!  Actually, now you mention about the excess credits, I must check that I haven't got exactly that position now (locked in and not usable to us personally) , or in say five years time when we start to heavily salary sacrifice in preparation for retirement.  Except that will also be the time when we can release some of the previous years company profits as dividens as we start to wind up and wont need the cash for cash flow!

I havent heard of the current Govt lowering the Company rate, and I am betting that Rudd wouldnt either.  But you never know.

Also a trader can value their stock at cost or current value whichever suits, providing the same procedure is used for opening/closing stock.

Rozella this is a really valid point - I wonder which my accountant used, given that there was some very nice growth last year that was never realised!


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## yonnie (23 May 2007)

rozella said:


> Also a trader can value their stock at cost or current value whichever suits, providing the same procedure is used for opening/closing stock.





each trading stock can be valued at the trader`s choice
1. at cost
2. at market selling value
3. at the price at which it can be replaced

to minimise tax the trader can opt to value his trading stock at the end of the year differently:
all shares that have gone down at market
all shares that have gone up at cost

GST:
the share trader is into financial supplies.

he/she can claim the full input tax credit if under the financial acquisitions threshold

if above then 75% of the input tax credit

so if my sales are $ 6,000,000 per year I suppose I can claim only 75% of GST?


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## yonnie (23 June 2007)

apart from the threshold another condition applies:

the claimed input tax concerning financial supplies should not exceed 10% of the total input tax credit.

so I you`re a share trader only, you can claim 75% of your input tax credit.


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## reece55 (23 June 2007)

yonnie said:


> apart from the threshold another condition applies:
> 
> the claimed input tax concerning financial supplies should not exceed 10% of the total input tax credit.
> 
> so I you`re a share trader only, you can claim 75% of your input tax credit.




Yep.........

The GST regs allow you to claim 75% of your ITC on brokerage costs. This is because the transaction cost constitutes a financial supply, for which we have a Reduced Input Tax Credit Regime. So, assuming you fail either the:

1. 50K per annum financial supply credits; or
2. They exceed 10% of you GST credits 12 months forward and back

Then you can claim only 75% of the GST. I don't think you have to be a trader to take advantage of this - the key criteria is that you are carrying on an enterprise, and I am not going to get into to that kettle of fish because it would require far far too much room here.....

As usual, this is not financial advice, visit a licenced professional.....

Cheers


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