Share Trader or Share Investor?
There is always a question on whether I’m a share trader or a share investor.
The differences can result in very different tax outcomes. It all boils down to whether or not you are conducting share trading activities in a ‘business-like manner’.
The ATO consider the following factors in determining share trading businesses:
| Share Trader | Investor | |
|---|---|---|
| Nature of activities | Is your intention for short-term profit making? Generally, these intentions are documented by way of business plan using detail analysis for each stock and when the appropriate time would be to sell or hold the shares. | Shares are invested for investment purposes in hope to achieve of long term gains. |
| Repetition, volume and regularity | High volume regular buys and sells. | Large once off transactions |
| Organisation in a business-like manner | A business is required to have an ABN. However, GST registration is optional. Other factors to consider include:
|
Investments are made with view of capital growth over a period. |
| Amount of capital | Generally requires amounts of capital with high volume transactions. | One-off payments. |
So what are the tax implications? The key difference is a share trader reports share sales and purchases in the same manner as a business who buys and sells inventories, sales minus cost of goods sold. Cost of goods sold is the calculated as follows:
- Opening Stock
- Add Purchases
- Less Closing Stock
The closing stock is assessable and will be become the opening stock in the subsequent year. The ATO allow closing stock to be valued at either:
- Cost: Cost of share pus brokerage
- Market selling price: current market value at year end
- Replacement value: cost to replace the stock at year end, normally Market value
It is important to note that each stock can have a different stock valuation method and can be used to achieve a desired profit outcome.
In most cases, losses can be used to offset other assessable income. Tax is payable on profits of overall net position, irrespective on the amount of time you held the shares.
Share investors will report, profits and losses as capital gains. Tax is paid on the net difference between the sale and purchase on the particular share investment. Losses are used to offset gains and any losses remaining will be carried forward and can be used to offset future capital gains. After applying losses, both prior year of current year, individual tax papers are then able to reduce the capital gains by 50% if shares are held for more than 12 months.
Please feel free to ask our friendly team at Plant and Associates for further information on whether you are a share investor or share trader.