2019-2021 was a period where an unprecedented number of Australians entered the share market. All shareholders, retail or institutional, have tax obligations based on their activity. With tax time looming ahead many may wonder where they stand on the taxing grounds. To figure that out the big question remains – are you an investor or trading business? You will be taxed very differently based on that response.
Investors – Who Are They?
An investor is an individual who purchases shares or securities with the intention of long-term financial returns. Unlike traders, investors focus on holding their stocks through changing markets in hopes of great financial return.
For example, Susan is a doctor. Over the years she has purchased $300,000 worth of shares in 30 pharmaceutical companies. In this scenario, it is unlikely Susan would sell unless it increases in value. Therefore, Susan’s main goal is to receive dividend income from the shares and not the buying and selling of shares. Thus, making Susan an investor.
How Taxation Applies to Investors
- The shares you own are assets. These are liable to capital gains tax if sold
- You are unable to offset your share purchase against your annual income and the share purchases acts as a capital cost
- You cannot offset your net capital loss against any other income except with any other capital gain
- The buying and selling of shares gets discounted as a deductible expense and becomes part of your capital gain
- Income earned comes from dividends
- Transaction costs and purchases shares are considered during the sale of shares
What is a Trading Business?
Trading, contrary to investing centers around making frequent, short-term transactions of shares according to market fluctuation. The ATO considers traders to have a business and usually possess common business traits such as:
- The goal to make a profit through buying and selling shares
- Maintain a high volume of business activities (purchasing and selling shares regularly)
- Traders often are up to date on market trends and the prospectus of companies
For example, Mark is an ordinary office worker. He decides to start trading on the side to make some extra money. To do this, Mark uses $200,000 of his savings to purchase shares. He spends 5 hours every day analyzing the market and studying trends. Soon, he was able to buy 30 shares and sell 25. He purchased the shares for an average of $2,000 and sold them for $2,900. The longest holding period of a share was 10 weeks.
In this scenario, Mark is clearly a trader. He engages in business activities with regular transactions of shares to generate a profit.
How Taxation Applies to a Trading Business
- Your share sales receipts constitute as assessable income
- Your shares purchased become your trading stocks
- Costs that are generated from transactions become part of your deductible income
- Your gains become part of your ordinary income
Implications of Tax on Investors and Traders
This helpful table will distinguish the main differences from a tax perspective for an investor or trading business.
| Implications of tax on Investors | Implications of tax on Traders |
| Cost of share purchase is a capital cost. | Receipts from share sales constitute income. |
| Receipts from share sales are not counted as assessable income. | Costs from share transactions are a deductible expense |
| Capital gain on disposal is included in assessable income. Owning shares for one or more years opens eligibility for a 50% discount. | Dividends are included in assessable income |
| Assessable income includes dividends while costs sustained in earning dividend income fall into deductible expense. | Shares held at the end of the fiscal year need to be brought to account for cost, replacement value, or market value. |
| Costs generated from the transaction of shares are not a deductible expense but can be considered as capital gain. |
Finally, it is worth mentioning cryptocurrency trading. Investors should also educate themselves on how the ATO will tax them in this area. Since it’s a new space, it can be easily overlooked and end up a costly mistake.
