# Can we be both a 'trader' and an 'investor' for tax purposes?



## village idiot (8 May 2012)

below are some notes I typed up for a query to my accountant, thought i might as well share them here as well....


Can we be both a ‘trader’ and an ‘investor’ for purposes of tax on options and shares?

There isn’t much literature available on this. The ATO website and the Deloitte paper linked from ithe ASX website ;http://www.asx.com.au/documents/products/taxation_of_exchange_traded_options_may_2011.pdf
just explains the difference between the two, without considering the case where he same person does both eg an option trader (who actively trades options short term in conjunction with shares) might also keep some long term shares (which he writes the occasional call on) which he treats completely differently from his short term positions. This would not be an uncommon situation, for a share ‘trader’ as well as an option trader. 

 If the intention of the law was a person were to be wholly one or the other, which side would then determine how the other was treated?  It would be perverse if the fact he trades some options meant that all his other transactions automatically were revenue rather than capital. He could just as well argue that the fact that he had some long term investments  meant he was an ‘investor’ and that all his option trades were therefore capital. 

The only thing that makes sense is that each individual trade or position should be assessed on it’s merits. If this was the case, one could be both an ‘investor’ and a ‘trader’ on different transactions, even within the same account, depending on the nature and intent at the start of the trade. Clearly though it would make things a lot clearer, though I don’t think it would be essential, if he operated two different accounts for the two streams.  The next step, if required, would be to use a different entity to hold the long term stuff 

 To further muddy the waters, it is not really clear at all whether calls written on what would be obviously long term ‘capital’ shareholdings, are necessarily on the capital account. If the shareholder writes (covered) calls systematically, and with the expectation of profit (rightly or wrongly) from the short option rather than just a hedge, the writing of options in isolation would be closer to ‘trading’ (and therefore on the revenue account) as defined by the Deloitte paper, than hedging. 

 Generally though, the investor would not regard the written call as a trade in isolation, rather he would, or should, regard it as part of his overall strategy, and be interested only in the return from the overall portfolio rather than just that call. 


However , the same paper makes it clear that where a written option results in assignment, the option premium shall form part of the base cost or sale proceeds of the underlying . That is, the whole transaction is viewed as one. If the shares were held on Capital account, therefore the option premium has to be on capital account if the option is assigned. It would be strange (if not impossible to account for) if an option premium could be for the revenue account if not assigned (the option expired worthless or was closed out), but on capital account if assigned. Therefore this taxpayer is going to adopt the stance that if the underlying share was on Capital account, any option position relating to that share is also to be treated as a Capital transaction.


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## Trembling Hand (8 May 2012)

*Re: Can we be both a ‘trader’ and an ‘investor’ for purposes of tax on options and sh*

Has to be in separate accounts to start with. Same as any business activity. They have to be isolated.


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## village idiot (8 May 2012)

*Re: Can we be both a ‘trader’ and an ‘investor’ for purposes of tax on options and sh*



Trembling Hand said:


> Has to be in separate accounts to start with. Same as any business activity. They have to be isolated.




source?


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## Trembling Hand (8 May 2012)

When I got audited last fin year. Man from the tax office said "its good you have them isolated in separate accounts"


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## village idiot (8 May 2012)

ok, source approved, thanks


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## Nutmeg (11 May 2012)

Have you ever thought of incorporating a company such as "_XYZ Investments Pty Ltd_", opening a share trading account with CommSec or someone similar under that name and conducting your trades that way?  

Whether your trades be in shares or derivatives, so long as XYZ Investments trades with sufficient regularity, the company's business will be for tax purposes "shares and derivatives trading".  Consequently, it will mean that not only will XYZ Investments pay a company tax rate around 29% but there will be no capital gains tax incurred on selling out of positions because the business of XYZ Investments is shares and derivatives trading.

It will also mean that anything purchased in furtherance of the business - i.e. books, newspapers or websites - will be tax deductible.  I have recently done it after getting sick of seeing a bulk of the profit on my trades being lost to CGT.

For further information, see this link from the ATO: http://www.ato.gov.au/businesses/content.aspx?doc=/content/21749.htm


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## McLovin (11 May 2012)

Trembling Hand said:


> When I got audited last fin year. Man from the tax office said "its good you have them isolated in separate accounts"




Not to be pedantic, and I'm interested in the answer, but it doesn't sound like he was saying you need segregated accounts as much as it sounds like he was saying "my job is easier because you have segregated accounts". 



Nutmeg said:


> Have you ever thought of incorporating a company such as "_XYZ Investments Pty Ltd_", opening a share trading account with CommSec or someone similar under that name and conducting your trades that way?  Whether your trades be in shares or derivatives, so long as XYZ Investments trades with sufficient regularity, the company's business will be for tax purposes "shares and derivatives trading".  Consequently, it will mean that not only will XYZ Investments pay a company tax around 29% rate but there will be no capital gains tax incurred on selling out of positions because the business of XYZ Investments is shares and derivatives trading.




The capital gain from trading will be considered ordinary income and taxed at 30%. No different from an individual.


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## Nutmeg (11 May 2012)

McLovin said:


> Not to be pedantic, and I'm interested in the answer, but it doesn't sound like he was saying you need segregated accounts as much as it sounds like he was saying "my job is easier because you have segregated accounts".
> 
> 
> 
> The capital gain from trading will be considered ordinary income and taxed at 30%. No different from an individual.




If you're an individual in a high tax bracket selling an asset held for less than 12 months, there is a difference.


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## McLovin (11 May 2012)

Nutmeg said:


> If you're an individual in a high tax bracket selling an asset held for less than 12 months, there is a difference.




I meant trading assets is no different if you are an individual or a company. Both are not CGT events.


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## skc (11 May 2012)

McLovin said:


> Not to be pedantic, and I'm interested in the answer, but it doesn't sound like he was saying you need segregated accounts as much as it sounds like he was saying "my job is easier because you have segregated accounts".




I have separated out trading vs investment income from the same broker account. My accountant just told me that make sure I am able to justify how I made the separation between trading vs investment if I ever get audited.

And I do actually keep a separate file and notes on all "investment" decisions.


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## Nutmeg (11 May 2012)

McLovin said:


> I meant trading assets is no different if you are an individual or a company. Both are not CGT events.




Right.  The advantages with trading in assets under a company structure, however, is that no matter how much the company makes from its trades each tax year it will only ever pay the company tax rate of 30% (likely to go down to 29% if the coalition wins government next year).  The same is not true of an individual.  Should an individual make, say, $180K as a result of full-time trading, they will pay 45% of that in tax (not counting any deductions that they may be entitled to).


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## McLovin (11 May 2012)

Nutmeg said:


> Right.  The advantages with trading in assets under a company structure, however, is that no matter how much the company makes from its trades each tax year it will only ever pay the company tax rate.  The same is not true of an individual.  Should an individual make, say, $180K as a result of full-time trading, they will pay 45% of that in tax (not counting any deductions that they may be entitled to).




On $180k an individual will pay less tax than a company would, about $6k less before any deductions. You can of course pay yourself a wage through the company which creates a tax shield, upto a certain amount.

Discretionary trust with a corporate bene is still probably the best way to lower your tax bill, assuming your making enough to warrant the cost etc.


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## McLovin (11 May 2012)

skc said:


> I have separated out trading vs investment income from the same broker account. My accountant just told me that make sure I am able to justify how I made the separation between trading vs investment if I ever get audited.
> 
> And I do actually keep a separate file and notes on all "investment" decisions.




Thanks for that. I actually put everything through a company, so it's never something I've thought too much about (no tax advantage). Good to know though.


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## McLovin (11 May 2012)

Nutmeg said:


> How do you work that out? Current tax bracket for individuals earning $180K is 45c on $1.  For a company it is 30% of taxable income.




Tax for an individual is marginal, tax for a company is flat.


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## Nutmeg (11 May 2012)

McLovin said:


> Tax for an individual is marginal, tax for a company is flat.




Correct.  I guess the example should have been at around the $200K mark where the corporate tax rate is more advantageous.


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## qldfrog (12 May 2012)

And if it helps:
my wife and I created two separate online accounts under separate names, one is a pure trading account and the other a more investor long term focus
Might not be the most beneficial tax $ wise but it has the merit  to be simple and neat should we be audited;
The only disadvantage I found is that when splitting the previously join account between the two new ones, we incurred capital loss at the time and I can not easily offset my share of the loss anymore as I am now the owner of the trading only account .
But if you start from scratch get two accounts...


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