If you dabble regularly in share investment, the question might arise as to whether you have moved beyond being a passive investor in shares to someone who actively trades shares.
This scenario creates an important question worthy of consideration by taxpayers because it will determine how you’re taxed on any profits or losses you make on your share portfolio.
Difference between a share investor and share trader
A share investor is generally an individual who buys shares with the intention of holding them long term to generate profit through growth in value and income through dividends.
Most people who buy and sell shares are regarded as investors by the ATO.
For a share investor, any profits or losses accrued from selling shares follow the capital gains tax rules. Profits and losses will only arise when shares are physically disposed of.
A share trader is one in the business of dealing in shares. They are individuals who buy and sell shares purely for short term profits and will show some or all of these hallmarks.
- A substantial volume of transactions
- A clear profit making intent
- A substantial commitment to running activities in a business-like manner
Someone who buys and sells shares as part of a business will treat those assets as trading stock. Gains or losses on them will be treated as ordinary income rather than capital gains.
Tax advantage of a share trader arises if they make losses, which are offset against other income. Each share is brought into account at either cost, market value or replacement value.
Where market value is less than original cost, an immediate trading loss is crystallised and deducted. Unrealised losses can be booked immediately but unrealised gains held back.
Semantics in valuing shares as an investor or trader
The choice of the method prefered for use to value year-end portfolio calls for consistency.
Valuing shares in A Pty Ltd at market value in year one, requires use of a consistent basis in year two, avoiding changes in valuation methods to suit particular circumstances annually.
For individuals being taxed as a share investor, this means that any losses will be treated on capital account which consequently makes it more difficult to get the full benefit.
Capital losses can only be offset against capital gains in the same or a future year.
By contrast in this instance, the key advantage for a share investor is experienced when the taxpayer is showing a profit, which will therefore attract a tax as a capital gain.
The 50% CGT discount will apply to all shares sold that you have held on to for more than a year – the effect of which is to reduce the tax you pay on your capital gains by half.
Those unsure whether they are investors or traders apply to the ATO for a Private Ruling.
Deductions available
Both share investors and share traders are legally required to pay income tax on any dividends that they receive whilst they hold the shares, against which they can offset,
- Interest on borrowed funds where they have financed the portfolio using those funds
- Borrowing costs in arranging finance, such as legal expenses, loan establishment fees
- Bank charges for bank accounts to manage your investment income and expenses
- Management fees or retainers paid to a financial planner
- The cost of running a home office to manage your share portfolio
- The cost of investment-related journals and subscriptions
- Costs incurred in obtaining tax advice
- Travel costs associated with your share porfolio, such as trips to attend AGMs
Claim depreciation on any assets used to manage the portfolio, such as computers with the deductions apportioned between private or domestic use and use in managing the shares.
Immediate deductions can be claimed for depreciating assets that cost less than $300. Calculating capital gains is often complex but H&R Block makes it simple and accurate.
Mark Chapman has over 25 years experience as a tax professional in both the UK and Australia, specialising in tax for individuals and SMEs. He is a fellow of the Institute of Chartered Accountants in England and Wales and CPA Australia and a member of the Chartered Institute of Taxation.
