Attention share traders! The importance of being on top of tax requirements

taxtraderJust as someone who runs a business should know the tax rules that applies to their particular activity, so should share traders and investors understand the income tax rules that apply to shares.

 

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Just as someone who runs a business should know the tax rules that applies to their particular activity, so should share traders and investors understand the income tax rules that apply to shares.

taxtrader

Though not clearly defined by the Australian Tax Office, being classified a ‘trader’ means you 

are carrying out ‘business like activities’ for the purpose of earning income from buying and selling shares. A business, according to the tax office, includes any money making activity where you are not working as an employee. The fact that share trading is regarded as a business means it should be approached in this manner.

Without the various inputs that allow your trading to be treated as a business, it is difficult to be taken seriously, including by the taxman who won’t allow you to utilise what can be very important tax entitlements that are available only to those who satisfy a business definition.

 

You are a trading business for instance if:*

  • Your primary purpose for trading to make income on which you will pay tax.  

  • You trade more than just occasionally and not just randomly on a whim. In other words you trade frequently using a strategy and according to plan which you can describe if required.

  • You have identifiable capital that you set aside for trading.

  • Your trading utilises computer systems but you can also show some skill that suggests more than gambling on the market is involved.

  • You keep books of accounts and records of trading stock. Records from a broker can be useful support material.

 

Tax requirements for traders:

For anyone wishing to be a serious trader, the income tax requirements are actually quite basic. You pay tax on income after expenses which includes any losses at your personal tax rate. The principal rule to be aware of is that any gain from trading is regarded as ordinary taxable income, while any losses can be claimed as tax deductions.

This contrasts with the treatment of gains and losses under the capital gains tax rules which apply to long term investments. Under the CGT rules, investments that are sold are subject to capital gains tax. If the asset is owned by an individual investor for more than 12 months then they are entitled to a 50 per cent discount against capital gains made. You then pay tax at your personal tax rate after losses have been deducted.

While an emphasis on paying tax on income may not appear to be a benefit, the realities of trading are such that it is often wiser to share a trading gain with the taxman than keep a loss to yourself.

Let’s look at an example of potential outcomes for a share trader compared to an investor. Let’s assume two people earn an annual income of $100,000 in their day job, but also invest in the share market. Both people also made a $5,000 loss including brokerage costs from their investments. While the share trader can claim that loss as an immediate tax deduction, the investor can only carry forward these losses to be used against capital gains in future years and hence has a higher taxable income for the year.

 

Share Trader

 

Investor

     

Income from day job

$100,000

 

Income from day job

$100,000

Less: Deductible losses

($5,000)

     

Taxable income

$95,000

 

Taxable income

$100,000

         

Less: Income tax

($24,296)

 

Less: Income tax

($26,546)

     

Less: Non-deductible losses

($5,000)

Disposable income

$70,704

 

Disposable income

$68,454

 

 

When it comes to being classified a trader or investor by the tax office can have big implications on your overall tax position. It is important that you look beyond single examples and focus on your regular pattern of activity to see which suits you best.

If you wish to learn more about being a share trader and whether relative to your tax situation it is beneficial to you, then seek appropriate advice from a licensed practitioner.

 

 

*The Australian Taxation Office also has some very specific information about trading.

For details on how the ATO defines trading see https://www.ato.gov.au/Business/Investments,-shares-and-options/In-detail/Carrying-on-a-business-of-share-trading/Carrying-on-a-business-of-share-trading/ .  

 

 

 

Elio D’Amato is CEO of Lincoln Indicators. Lincoln Indicators is a boutique fund manager, fundamental research house and the creators of Stock Doctor. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln). AFSL 237740. You can find out more at www.lincolnindicators.com.au  

Important:Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln). AFSL 237740. This communication may contain general financial product advice. Our advice has been prepared without taking account of your personal circumstances. You should therefore consider its appropriateness, in light of your objectives, financial situation and needs, before acting on it.

This information is current as at 18 May 2015.

Lincoln Indicators Pty Ltd, its director, its employees and/or its associates may hold interests in companies mentioned in this article. This position could change at any time without notice.

 

This article was sponsored by ANZ E*TRADE.  The article has been written for information purposes only and has not taken into account your objectives, financial situation or personal circumstances. You should consider whether it is appropriate for you. Before making any investment decision, you should seek independent advice.  The opinions in the article are the personal opinions of the author and not of ANZ E*TRADE. To the extent permitted by law, ANZ E*TRADE does not accept any liability or responsibility in connection with the use or reliance on the information in the above article. ETRADE Australia Securities Limited (trading as E*TRADE Australia) (ABN 93 078 174 973, AFSL No.238277) is the provider of the ANZ E*TRADE online investing service.  E*TRADE Australia is a subsidiary of Australia and New Zealand Banking Group Limited (ANZ) but is not an authorised deposit-taking institution under the Banking Act. When you become a customer of E*TRADE Australia, it will open an E*TRADE ANZ Cash Investment Account (Cash Account) on your behalf. ANZ is the issuer of the Cash Account. Apart from any deposits in the Cash Account, the obligations of E*TRADE Australia do not represent deposits or other liabilities of ANZ. ANZ does not guarantee the obligations of E*TRADE Australia. © ETRADE Australia Securities Limited 2014.  E*TRADE and the E*TRADE logo are registered trademarks of E*TRADE Financial Corporation (E*TRADE Financial).  E*TRADE Financial has granted E*TRADE Australia the right to use certain registered trademarks. E*TRADE Australia is not an affiliate of E*TRADE Financial.

 

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