Tax - From Trader to Investor

[Pommiegranite]

Hi all, I'd appreciate any input from someone who knows about my situation...thanks:

The last time I sold any stock was around December 2007. Prior to this I had been trading on almost a daily basis.

I now have a portolio which I would like to hold for a couple of more years as an investment. I will not be selling any of this stock for a while, and when I do sell, I wish to pay CGT and not income tax.

So my question is - When will the ATO begin to view me as an investor as opposed to a trader?

Is one judged on activity in that particular year to decide if that person is a trader or investor - eg. I could be a trader in 07-08, then investor in 08-09 and then back to trader in 09-10.

 

[storchyman]

this is my understanding,
if you have held youre position in stock XYZ for min of 12 months, then you pay CGT.

if you have held under 1yr then it is taxable income.

each stock is case by case scenario

 

[nioka]

In my experience there is no simple answer. According to my accountant the tax department makes a ruling which has no definite limits and may differ from case to case. I used to be an investor. I did not have to hold each individual stock for more than a year but remained an investor. However when the majority of my stocks were often traded I was deemed to be trading by the tax dept. I have been told that even if some stocks were held for more than one year their profit could still be classed as a trading gain and fully taxed as a trading profit. I was told that the best way to get reclassified was to do no trades for more than one year. That didn't mean that I could not buy or sell, rather it meant how, why and when I sold must be able to be interpreted as investing. I could sell if the funds realised were not reinvested of buy if the funds did not come from trading.

It appears the tax office makes the rules around "loose" regulations. The best thing is to ask the tax office for a ruling but for 07/08 you are probably in a spot.

This info should only be taken as a story of my situation only and is not advice.

 

[Pommiegranite]

In my experience there is no simple answer. According to my accountant the tax department makes a ruling which has no definite limits and may differ from case to case. I used to be an investor. I did not have to hold each individual stock for more than a year but remained an investor. However when the majority of my stocks were often traded I was deemed to be trading by the tax dept. I have been told that even if some stocks were held for more than one year their profit could still be classed as a trading gain and fully taxed as a trading profit. I was told that the best way to get reclassified was to do no trades for more than one year. That didn't mean that I could not buy or sell, rather it meant how, why and when I sold must be able to be interpreted as investing. I could sell if the funds realised were not reinvested of buy if the funds did not come from trading.

It appears the tax office makes the rules around "loose" regulations. The best thing is to ask the tax office for a ruling but for 07/08 you are probably in a spot.

This info should only be taken as a story of my situation only and is not advice.

Thanks Nioka. What I have bolded is what I plan to do. I may add to my holdings over the whole of this tax year, but certainly won't be selling.

 

[AlterEgo]

Can someone explain why the ATO has 2 different classifications? What difference does it make? (besides the 12 month rule for CGT obviously)

I mean, if you never hold stocks for more than 12 months, what difference does it make to the ATO whether you’re classed as a trader or investor?

Eg. Say you are on the 30% tax rate and make a $20K return on shares for the year – all shares held for less than 12 months. If regarded as an investor you’d pay 30% GCT on the $20K, ie. $6K. And if regarded as a trader you’d pay 30% income tax on $20K, ie. $6K. – same thing! So why would the ATO give a rat’s ---- what classification you’re under (in this case)? This is something that has puzzled me for a long time....

 

[reece55]

Can someone explain why the ATO has 2 different classifications? What difference does it make? (besides the 12 month rule for CGT obviously)

I mean, if you never hold stocks for more than 12 months, what difference does it make to the ATO whether you’re classed as a trader or investor?

Eg. Say you are on the 30% tax rate and make a $20K return on shares for the year – all shares held for less than 12 months. If regarded as an investor you’d pay 30% GCT on the $20K, ie. $6K. And if regarded as a trader you’d pay 30% income tax on $20K, ie. $6K. – same thing! So why would the ATO give a rat’s ---- what classification you’re under (in this case)? This is something that has puzzled me for a long time....

It makes a lot of difference.....

Primarily, as a trader you hold stocks on a revenue account and as an investor, you hold them on a capital account. Both have advantages and disadvantages. For example, a trader, provided he/she satisfies the non commercial loss provisions, can claim a deduction for a loss. Investors obviously have their losses retained to offset against future capital gains. Traders also can use their portfolio as trading stock.

As someone else has said, there really is no quatatitive levels that triggers the change. It's a qualatative test, so read your ruilings, seek advice and prepare an arguable position paper - FUN!!!.......

Cheers

 

[AlterEgo]

It makes a lot of difference.....

Primarily, as a trader you hold stocks on a revenue account and as an investor, you hold them on a capital account. Both have advantages and disadvantages. For example, a trader, provided he/she satisfies the non commercial loss provisions, can claim a deduction for a loss. Investors obviously have their losses retained to offset against future capital gains.

Yes, if you have other income to deduct it from in that year. The same as if it was a capital loss - can only use it in that year if you have other capital gains to deduct it from. I can't see how there is any significant difference. I mean, sure, they may be the odd rare occasion where it may be beneficial to be in one category, or other, to be able to claim the loss in that particular year. But if you don't get to claim it that year, you'll be able to claim it the next, or whenever. You still get to claim it eventually, in either case. Either system may benefit you (marginally) in one year, and perhaps disadvantage you in other years. But over time surely it all evens out, and makes no discernible difference in the long run.

Traders also can use their portfolio as trading stock.

And what advantage/disadvantage is that? I can't see how that makes any significant difference either. It may enable you to claim a profit, or loss, on a particular share in one year rather than the next, but really.... it's not going to make any big difference in the long run that I can see. Or am I missing something???

As someone else has said, there really is no quatatitive levels that triggers the change. It's a qualatative test, so read your ruilings, seek advice and prepare an arguable position paper - FUN!!!.......

So when does a change get triggered? When you request a change? Or does the ATO make the changes whenever it likes, ie. whenever it suits them for you to be in a different category?

 

[AlterEgo]

Maybe is just don't 'get' it. Just answer me this then: if I never hold stocks over 12 months, which category am I better off to be in? And why?

 

[benn]

i rang the ato on this last week. i want to defined as a trader so i can offset my heavy losses against my other normal employement income.

i was told to print off some sections from their website ie am i operating a business and the non-commercial loss provisions section.

i was told that it is a self assessment system so if i feel i meet the criteria, i can call myself a trader and do my tax return as a trader. otherwise i can apply for a private ruling but can take a month or two.

for the non commercial loss provisions to kick in i have to make an income from my business of share trading of $20k. So this is fairly easy to get even tho this $20k is offset by zillions of losses. Anyway this is the way i interpret it.

So ill offset my $150k loss against my $50 employment income, get the tax back and carry forward a loss of $100k for next year to offset against next years employment income.

 

[korrupt_1]

So ill offset my $150k loss against my $50 employment income, get the tax back and carry forward a loss of $100k for next year to offset against next years employment income.

So have I've understood this correctly?

Traded atleast once a day for the entire financial year.
Nett loss for FY: $100K (with $20K gains and $120K loss)
Regular employment income: $50K
Tax paid: $10K


So by the ruling, I am a trader.

When I submit my tax return, I will get a tax refund of $10k?

Then in the following year (and assuming my income and tax is the same), I will get back another $10k?

 

[awg]

there is no way in the wide world that i would self assess big losses as trading loss, then offset my income (unless i was a carefree gambler)

reason: high chance of audit, up till 5 years later. Likely result, disallowance of offset, reassesment including backdated 20%pa interest rate!!!

get a private ruling!!

is reasonably straightforward.

you write up your case using ATO guidline material, print of your of your trade summaries for last 12 months, and submit to them ,takes about 28 days to get written answer.

You could have a problem though.

I never worked at ATO, but Centrelink....same traiing in legislative case decion making etc.

You will NEED to show trading pattern is dominate.

If your evidence shows you are a full time employee, who has some long term investments, and trades even regularly, but not DOMINANTLY, they may say no.

You do mention large amounts though, that would work in your favor, but is only one factor.

that is how we used to work...ie to determine whether someone was in a defacto relationship, each factor was considered, then an on balance decision was reached...decisions are appellable.

this is my opinion only, not advice

tony

 

[Pommiegranite]

So are we saying that if in doubt or can't prove, then treat gain/losses as capital, rather than income?

 

[benn]

I agree there is a high chance of an audit but i dont see a problem with an audit as it is all legit, and dont see why you should be fearful of an audit and not claim what you;re entitled to by law just because the losses are relatively large.

I am still in two minds about the private ruling. I mentioned it to the ATO over the phone numerous times and was told that if i wanted peace of mind by all means i should apply for one but they are just as comfortable with me self-assessing my individual situation against the criteria of their website information.

I will still be asking my accountant a couple of specific points im unsure of such as...
1. Do i tick Yes or No to the qu about whether i had a capital gains even during the year? I would think this would be No if held on revenue account
2. Do i put dividends received in the dividends column with imputation credits (i think i would do this) or does that go into the business income section and what to do with the imputaition credits then?
Or i might even ring the ATO about this too. They are quite helpful i found from my first call to them

Disclaimer: This is not advice in any way just my thought process at the moment

 

[benn]

So have I've understood this correctly?

Traded atleast once a day for the entire financial year.
Nett loss for FY: $100K (with $20K gains and $120K loss)
Regular employment income: $50K
Tax paid: $10K


So by the ruling, I am a trader.

When I submit my tax return, I will get a tax refund of $10k?

Then in the following year (and assuming my income and tax is the same), I will get back another $10k?

Hey Korrupt, i come to the same conclusions as you have in your post. However, that is just my opinion and havnt done this before so not sure how it will pan out. You could give the ATO a call, they are quite helpful i believe. I believe it really all hinges on you being classified as a trader. A private ruling may be the shot for peace of mind and is binding on the tax office in an event of an audit. It also shows you have taken care in your tax affairs by applying for a ruling rather than willy nilly calling yourself a trader and you remove the ambiguity

 

[korrupt_1]

Well for this FY,.. I've decided to classify myself as a Trader and carrying out it like a business would.

This here helped me to decide that my actitivies were considered to be business like. The examples really helped.

http://www.ato.gov.au/businesses/content.asp?doc=/Content/21749.htm&page=1&H1

The advantage of doing this is that I now can claim a ton of stuff since I use my Study Room for my activities and get to claim what other Home Businesses get to claim.

 

[Doris]

It makes a lot of difference.....

Primarily, as a trader you hold stocks on a revenue account and as an investor, you hold them on a capital account. Both have advantages and disadvantages. For example, a trader, provided he/she satisfies the non commercial loss provisions, can claim a deduction for a loss. Investors obviously have their losses retained to offset against future capital gains. Traders also can use their portfolio as trading stock.

i rang the ato on this last week. i want to defined as a trader so i can offset my heavy losses against my other normal employment income.

for the non commercial loss provisions to kick in i have to make an income from my business of share trading of $20k. So this is fairly easy to get even tho this $20k is offset by zillions of losses. Anyway this is the way i interpret it.

Summary:

You can be a trader or an investor OR both a trader and an investor.

Trading:

You must make an INCOME (i.e. sales) of a minimum of $20k to claim your trading loss (at your marginal rate) against income tax paid from other income.

Investing:

You must claim your loss against capital gains or else defer this (carry loss forward) until a tax-year when you do make a capital gain.


You CAN have a trading portfolio and an investing portfolio at any one time.

Define which stocks are in each as you go or have a headache sorting at tax time.

You do not have to be one or the other in any one financial year.
.

 

[Doris]

Hi all, I'd appreciate any input from someone who knows about my situation...thanks:

The last time I sold any stock was around December 2007. Prior to this I had been trading on almost a daily basis.

I now have a portolio which I would like to hold for a couple of more years as an investment. I will not be selling any of this stock for a while, and when I do sell, I wish to pay CGT and not income tax.

So my question is - When will the ATO begin to view me as an investor as opposed to a trader?

Is one judged on activity in that particular year to decide if that person is a trader or investor - eg. I could be a trader in 07-08, then investor in 08-09 and then back to trader in 09-10.

As I explained in the previous post you can do your tax as an INVESTOR and as a TRADER.

The stocks you intend to hold for a few years as an investor will go into your investment portfolio. (Pay CGT on profits)

(Remember if you've held a stock for 12 months you pay CGT on 50% of your profit)
Losses are carried forward until you can offset a capital gain.


The stocks you decide were trades will go into your trading portfolio.

You must have SALES of over $20k to be classified by the ATO as a trader.
(You can claim any losses off 'other income'.)


But...

As a trader you are running a business (you are trying to make money out of trading).
You can claim expenses for your computer and 'office' etc...

To be a TRADER you MUST have an ABN.

If you don't have an ABN you can get one from the Australian Business Register. My accountant did this for me.

If you apply for one now this can be backdated to 1 July 2007.

You MUST quote your ABN in your tax return! (the TRADER section)


If your sales are over $75k then you must also register for GST.

If your sales are under $75k you don't have to register for or pay GST.

As an INVESTOR you do not need an ABN... no matter how much your sales are.

Cheers!

 

[Trembling Hand]

To be a TRADER you MUST have an ABN.

Not true at all!!!!!

You can claim expenses for your computer and 'office' etc...

Capital Equipment is not considered an expense. Be very careful with things like this. They most probably can be rapidly depreciated but most certainly purchased Equipment is not an Expense.

As always DYOR.

 

[korrupt_1]

I've heard that you can claim a % of your mortgage/rent, utilities, council rates, phone and insurance if you dedicate a room to do your trading. For example, my Study - where I trade from - is about 15% of my house, therefore I can claim 15% of the above as an expense? Is that true?

 

[Trembling Hand]

korrupt ATO.gov.au has guide lines on home biz.

It's a lot easier if you are renting. If you are paying a mortgage you may run into Capital gains tax problems on your principal residence.

But really this stuff is for a tax account. Have a look through the ATO website and make a list then trot off and ask them.

As the false points above show. As good as this forum is its not one that Tax advice should be sourced from. :homer: