ATO tough on ‘professional trader’ definition

Those who claim share trading as their profession rather than just being an investor must convince the Australian Taxation Office before they can claim trading losses as tax deductions. The ATO warns there are criteria to be met for someone to be classed as a share trader following confusion amongst investors who have incurred losses and then tried to offset these against their other income.

The ATO says that ordinary shareholders can only offset realised capital losses on their shares against realised capital gains in the same year or future years.

Whether a person is a shareholder or a trader is determined on a case-by-case basis by the ATO. But a universal rule is that a share trader is classed as someone who is undertaking "business activities for the purpose of earning income from buying and selling shares". The volume and frequency of transactions are important determining factors – not necessarily the amount of capital invested. Other important determinants are evidence of a business plan and the keeping of records in a "business-like manner".

Traders can declare receipts from share sales as income, declare purchased shares as trading stock, have allowable deductions for costs incurred in buying and selling, and include dividends in their assessable income. For the ordinary shareholder, the cost of purchasing shares is not an allowable deduction, receipts from sales are not assessable income and losses from share sales can't be offset against income but against future capital gains from the sale of the shares.

Published: 11 September 2004