# Day traders minimising tax



## farout

I guess most people here are aware that if you hold your shares for over 12 months you basically pay half the tax.

Question for the day traders....
What tips/advice do you have for regular traders to avoid paying a massive cheque to the taxation office?

I guess one answer would be to use your 'super' money for trading where possible. Any accountants lurking?


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## tech/a

Form a company.


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## farout

Yeah Timmy, having some big losses can save some nasty tax headaches 

However, contrary to the general market my shares are flying in the green and I am going to have some serious money to return to the government. 

Tech, do you know if it's possible to transfer the shares into the company after being bought by the individual, or do they initially need to be bought by the company before the profits were made?


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## CAFA1234

farout said:


> I guess most people here are aware that if you hold your shares for over 12 months you basically pay half the tax.
> 
> Question for the day traders....
> What tips/advice do you have for regular traders to avoid paying a massive cheque to the taxation office?
> 
> I guess one answer would be to use your 'super' money for trading where possible. Any accountants lurking?




Trading is not allowed within a Super Fund - it is against the rules and technically you could sacrifice all tax benefits of the Super fund. You can probably get away with it for a while, but eventually (assuming you keep making good profits) you run the risk of getting stuffed left right and centre.

And like any other business if you are making loads of money then just look big and pay your tax. Every hour spent doing what you are good at (trading) as opposed to trying to avoid tax is an hour well rewarded.


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## CAFA1234

farout said:


> Yeah Timmy, having some big losses can save some nasty tax headaches
> 
> However, contrary to the general market my shares are flying in the green and I am going to have some serious money to return to the government.
> 
> Tech, do you know if it's possible to transfer the shares into the company after being bought by the individual, or do they initially need to be bought by the company before the profits were made?




A) keep them for a year and reduce liability by 50%. If this worries you then use options to hedge your risks. This should be doable with the ASX 200 companies.

B) transfer them as an in-specie transfer, to for instance your SMSF or company or another individual. Use a dip in the market to date the transfer and sign it, then send the paperwork to the registry notifying them of the transfer of beneficial  ownership. I wouldn't be too clever and try backdating them 6 months as it will be difficult to establish if challenged by the ATO

I'm sure others will have better ideas, but thought I put these on the table.

C) be grateful and pay the tax  many would love to be in your position.


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## tech/a

> Trading is not allowed within a Super Fund




Where' you get that?

The shares would need to be owned by the company.
You could transfer ownership of the shares.
But would guess that the profit prior to transfer would have to have tax applied to the owner at that time.

Really need an accountant versed in this stuff.
I'm making logical guesses. Well I think they are logical.


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## farout

Cheers for the tips Cafa. 
Needing some cash in the short term so think I'll sell half my portfolio just before this financial year finishes (paying the hefty tax) and just keep the remainder for the 12 months. Half my money each way should do the trick.


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## farout

Yeah, I know plenty of people buying shares with their super, an accountant for one! If only I was still on talking terms with that accountant


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## CAFA1234

farout said:


> Cheers for the tips Cafa.
> Needing some cash in the short term so think I'll sell half my portfolio just before this financial year finishes (paying the hefty tax) and just keep the remainder for the 12 months. Half my money each way should do the trick.




Better to sell on 1st July and then not declarable on tax form until October 2009 

Can you sell options over the shares to cover your position?


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## disarray

claim your capital as a tax deduction. if you make stacks of cash this year then put it back into your account and claim it as a deduction.

i think its like this - put $10k of your own money into your trading account. don't claim it as anything so when you bring that $10k back into your general account you don't have to pay tax on it.

or put $10k into your account, label it trading capital (kinda like inventory) and claim it as a deduction against income from trading or other sources. but when you bring that original $10k back into your general account then its taxable because you've used it for a deduction.

so say you started with $30k, made $20k so your account is it $50k. if you want to cash in that $20k then you have to pay tax on it. but if you leave that $20k in the account then claim it as trading capital and yourself as a trader then it offsets itself for that year.

at some stage you are wanting to go and cash in your profits and when you do you'll have to pay tax on it, but you can time that to co-incide with other losses or capital expenditures you have to put in.

i'm not a financial advisor etc., i just harrass my accountant for information.


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## CAFA1234

tech/a said:


> Where' you get that?
> 
> The shares would need to be owned by the company.
> You could transfer ownership of the shares.
> But would guess that the profit prior to transfer would have to have tax applied to the owner at that time.
> 
> Really need an accountant versed in this stuff.
> I'm making logical guesses. Well I think they are logical.




Trading is not allowed with a superfund  - period. Trading is a business - you are not allowed to run a business from with a super find  - SIS rules.

I could be wrong, but I did DFP (Diploma of Financial Planning) modules 1-8 a couple of years back and unless they have amended this very important rule.....

Your are correct that upon transfer a capital gains event is triggered even with an in-specie transfer, but timing can be used to one's advantage particularly with volatile stocks.


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## YELNATS

CAFA1234 said:


> Trading is not allowed within a Super Fund - it is against the rules and technically you could sacrifice all tax benefits of the Super fund.




I doubt this is the case. Both retail funds and SMSF's legitimately use trading to augment the fund's value.



CAFA1234 said:


> B) transfer them as an in-specie transfer, to for instance your SMSF or company or another individual. Use a dip in the market to date the transfer and sign it, then send the paperwork to the registry notifying them of the transfer of beneficial  ownership. I wouldn't be too clever and try backdating them 6 months as it will be difficult to establish if challenged by the ATO




That's pretty-well right. 

I've transferred ownership of several shares from my own and family members names into our SMSF via the "off-market" sales process. 

You can get the forms from your accountant. If the shares are broker-sponsored at present you will firstly need to contact your broker to have them revert to issuer-sponsored. When that's done, send the completed forms to the company's share registry to complete the transfer. Finally get them broker-sponsored once again, if that's your preference.

Regarding back-dating to take advantage of a favourable transfer price, I think there is some flexibility in selecting a particular day, but the date chosen should be within the financial year for which you are reporting to the ATO. Obviously your data has to be internally consistent - for example, don't pick an acquisition date which falls after the date you have sold any/all of the shares.


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## Trembling Hand

CAFA1234 said:


> Trading is not allowed with a superfund  - period. Trading is a business - you are not allowed to run a business from with a super find  - SIS rules.
> 
> I could be wrong, but I did DFP (Diploma of Financial Planning) modules 1-8 a couple of years back and unless they have amended this very important rule.....




Nah! thats WRONG.

BUT DYOR


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## YELNATS

CAFA1234 said:


> Trading is not allowed with a superfund  - period. Trading is a business - you are not allowed to run a business from with a super find  - SIS rules.




Retail super funds trade shares and certainly they are "businesses".

In any case, how do you define "trading" - one a month, ten a month, 100 a month?


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## Trembling Hand

Don't transfer them to super. That can't be the answer, then your funds are locked away. 

You can be carrying on the "business" of trading without being a company. Your setup can be as simple as a sole trader like biz.

talk to a decent accountant about what you have to do to be classified as a trader in the ATO's eyes. You may already be there but still the company tax is more favorable if your really kick big ones.


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## CAFA1234

YELNATS said:


> I doubt this is the case. Both retail funds and SMSF's legitimately use trading to augment the fund's value.




Sorry for lengthy reply. Appears this is now a gray area under the SIS rules and the ATO are not sure. Proceed with caution.

Source Cleardocs an non-line legal mob. Part of Maddisons 
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 Trustees of a Self-Managed Superannuation Fund (SMSF) and their advisers should take great care (and seek legal advice) if the fund invests in a business -- or even if it is involved in active share trading. These activities may mean the SMSF is operating for more than the sole purpose of providing benefits to members etc.

Accordingly, there is a risk that the fund may lose its complying status -- and that the trustees may face penalties. Paul Ellis
What is the sole purpose test?

The sole purpose test sets the primary and ancillary purposes for which a superannuation fund must be operated, namely to provide benefits to, or in relation to, members after their retirement, on reaching retirement age, or on their death. The test is in section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA).
What are the problems of breaching the test?

Breaching the test may:

    * cause an SMSF to lose its complying fund status; and
    * involve the trustee being fined.

One of the trustee's key responsibilities is to invest the money paid into the fund. However, trustees must respect the restrictions that apply to these investment -- especially when making an investment that may constitute the carrying on of a business.
May SMSFs carry on business?

The ATO has always been concerned that an SMSF carrying on a businesses may be in breach of the sole purpose test. This is because conducting the business -- rather than providing retirement benefits -- may become the sole purpose of the fund.

This issue was raised at the National Tax Liaison Group Superannuation Sub Committee meetings on both 26 October 2005 and 8 February 2006. The minutes of the earlier meeting state:

    The Tax Office indicated that there is nothing in the legislation to prevent it. However, there are potentially a number of issues in carrying on a business that might lead to contraventions of the SIS Act and Regulations (such as the sole purpose test, or the borrowing of money). As each case must be considered on its own merits, the Tax Office cannot give a more definite answer.

The ATO's recent publication Self Managed Superannuation Funds - Roles and Responsibilities of Trustees states:

    A possible indication that the sole purpose test has been contravened is where a fund is running a business as part of its investment strategy. If a superannuation fund is conducting a business, it may not be administered for the sole purpose of providing benefits for the members and beneficiaries of the fund.

Another ATO publication DIY Super - It's your money?Ã„ ¶ but not yet! also discusses this issue, but is being reviewed.
Is share trading etc. "carrying on a business"?

The ATO also has concerns that some investment activities by SMSF trustees -- such as share trading and making certain 'tax effective' investments -- may amount to carrying on a business. If those activities are carrying on a business, then` -- again -- the SMSF may lose its complying status and the trustee may face penalties.

What investment rules must an SMSF trustee comply with?

The ATO's concerns outlined above reflect its regulatory imperatives in ensuring SMSF trustees comply with:

    * the sole purpose test: and
    * investment rules generally.

It is important that trustees are aware of, and comply with, the investment rules set out in the SISA.

The key things to remember are:
Trustees must:

    * develop an investment strategy and stick to it; and
    * make and maintain investments on a commercial arm's length basis. This can be determined by asking whether a prudent person acting with due regard to his or her own commercial interests would have made such an investment;

Trustees must NOT:

    * acquire assets from related parties (although there are certain exceptions)
    * lend to, or provide financial assistance to, other members of the SMSF or to their relatives.

If you are uncertain about whether an SMSF is complying with these rules, you should seek legal advice as early as possible.


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## Trembling Hand

From the ATO



> The question of whether a person is a share trader or a share holder is determined in each individual case. This is done by considering the following factors that have been used in court cases:
> 
> the nature of the activities, particularly whether they have the purpose of profit making
> the repetition, volume and regularity of the activities, similarity to other businesses in your industry
> the keeping of books of accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number.
> the volume of the operations, and
> the amount of capital employed.




read all about it here


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## CAFA1234

Trembling Hand said:


> From the ATO
> read all about it here




Yes, correct. However the subject is Day Trader - this suggests someone who make a living from trading - right?

If the person is not trading but just got lucky then that is different - my responses have been predicated of TRADING as defined by the ATO. This was questioned, and I've tired to answer best that I can. 

This is probably not cut and dry, but please dont think you can make a good living out of trading shares within a SMSF if the trading represents a large proportion of the fund. Previous comments about large super funds trading have been associated  with trading on the margin e.g. probably less than 5% of assets.


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## Tom Ronalds

Day trading is a business by definition - you can't day trade if you hold a full time job. Unless of course you can do without any sleep!

On the upside, you can claim the cost of software/computers/data as a tax deduction.

It is not allowed for a SMSF to run a business. As CAFA1234 has said, this is a clear breach of the SIS rules. Therefore day trading within a SMSF is not allowed; full stop.

"Saving tax" by establishing a company is too often a fallacy. Accountants like their clients establishing companies, because it provides them with the additional income from doing tax returns for another entity. Other than that, companies tend to be more useful as a form of asset protection rather than a tax shelter.

While the fact companies never get any CGT discount may not be relevant in this case, because day traders are involved in running a business and therefore will not get a CGT discount on any long term gains anyhow (should they happen to keep any securities for that long for some reason), you still have the problem of accessing the company profits. 

Unless you have a low income spouse as a shareholder or want to wait until /expect to have a year where you yourself have low earnings which put you in a sub-30% marginal tax rate, your profits will remain locked inside the company. When you pay them out, you will gain not much outside maybe saving the Medicare levy.

And the income splitting part is better achieved via a family trust anyway.


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## mrkmr

i thought you can trade in a superfund your superfund cant have a margin loan though...so your trading with 100% your cash, this law is being changed to allow margin loans soon.


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## CAFA1234

mrkmr; said:
			
		

> i thought you can trade in a superfund your superfund cant have a margin loan though...so your trading with 100% your cash, this law is being changed to allow margin loans soon.




Please see my previous post regarding the ATO and SIS. If the post is too technical or difficult to understand then Please Please get good legal advice before using your SMSF as a Day Trading platform. Yes you can trade shares e.g. buy them and even sell them, as part of a strategic process but you can't turn them over every other day.

This area is a minefield and as you can see from other posts there is some disagreement  and confusion about this assertion. The SIS training courses for Financial Planning make it very clear that 'trading' within a SMSF is not allowed.

As with many areas, time can change these views, but I would be getting a written authorization from the ATO if you want to do this.

If running a business from within a SMSF is OK, why don't I run my contracting business via the SMSF? I can still pay myself a salary and keep leftover profits in the fund and taxed at only 15%. You can see the problem from the ATO point of view? If anyone out there thinks this can be done then please, please send referencing material quickly and I'll eat tons of humble pie.


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## Tom Ronalds

mrkmr said:


> i thought you can trade in a superfund your superfund cant have a margin loan though...so your trading with 100% your cash, this law is being changed to allow margin loans soon.




Nonsense. Super funds cannot have margin loans in any shape or form. They can't even allow for example a property that they may own as tenants in common with an individual to be used as a guarantee/equity for the loan against it.

You are confusing the recent change of rules on instalment warrants with ordinary loans. Even with the warrants, there is plenty of gossip in the industry that the current government will be forced to soon modify the law, as these arrangements are now in some cases being used in ways that are clearly not consistent with the nature/intention of the SIS regulations.


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