Income and Deductions - Securities and Commodities Trading

Are losses incurred in securities and commodities trading, necessarily incurred in carrying on a business for the purposes of producing assessable income and therefore allowable income tax deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Yes. Losses incurred are allowable deductions under section 8-1 of the ITAA 1997 as the taxpayer is carrying on a business as a securities and commodities trader.

Since resigning from full time employment the taxpayer, an individual, has repeatedly traded in securities and commodities as well as completing an intensive share trading course. The taxpayer has a trading plan and conducts extensive research and analysis using a variety of resources including the internet, libraries, computer software programs, and screening techniques. The taxpayer keeps monthly summaries of the trades, annual financial reports and all buy and sell contracts have been retained. The trades are accounted for on a gross receipts basis. Whilst the trading activities have not resulted in any profits, sufficient funds are available to the taxpayer to keep the activity on going for an indefinite period.

For losses incurred to be allowable deductions the activities of the taxpayer must amount to the carrying on of a business. Once it has been established that the taxpayer's activities do amount to the carrying on of a business, any losses, for which a deduction is sought, must have been necessarily incurred in carrying on that business activity.

Whether the trading activities of the taxpayer amounts to the carrying on of a business is dependent on the facts provided ( Federal Commissioner of Taxation v. Radnor Pty Ltd (1991) 22 ATR 344; 91 ATC 4689).

Whilst the existence of a business or otherwise is a question of fact, a number of factors/indicators have emerged from case law which are considered relevant in considering this question. In Taxation Ruling TR 97/11 the Commissioner has discussed the relevance of these factors in considering whether an activity amounts to the carrying on of a business. These factors were brought together and relied upon by the Administrative Appeals Tribunal when reaching a decision in Case X86 90 ATC 621; (1990) 21 ATR 3747, and subsequently applied in Shields v. Deputy Federal Commissioner of Taxation 99 ATC 2037 at 2043-2044; (1999) 41 ATR 1042 at 1047-1048 (the Shields Case ).

The relevant indicators include but are not necessarily limited to: (a) the nature of the activities and whether they have the purpose of profit-making; (b) the complexity and magnitude of the undertaking; (c) an intention to engage in trade regularly, routinely or systematically; (d) operating in a business like-manner and the degree of sophistication involved; (e) whether any profit or loss is regarded as arising from a discernible pattern of trading; (f) the volume of the taxpayer's operation and the amount of capital employed by him; and more particularly in respect of share traders: (g) repetition and regularity in the buying and selling of shares; (h) turnover; (i) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records; (j) maintenance of an office; (k) accounting for the share transactions on a gross receipts basis; and (l) whether the taxpayer is engaged in another full time occupation.

The tests of whether a securities and commodities trading business is being carried on is based on the subjective purposes and the objective evidence provided. It is made by regarding the nature of the activities and the purposes for engaging in them. A determination is made on the general impression gain from various indicators of carrying on a business and the individual circumstances of the taxpayer ( Martin v. FC of T (1952) 10 ATD 37).

The circumstances of the taxpayer are similar to those in the Shields Case where the activity was conducted in a business like manner. The taxpayer's system of trading is complex and requires a degree of knowledge and skill. The system involves the use of scientific calculations and trading models using skills and knowledge gained from an intensive training course. Other influencing factors include the capital invested, the availability of funds to continue trading and the business records maintained.