Mr Taxman
Change the way you feel about taxes.
Get informed and discover what the taxman doesn't want you to know.
Sharing it with Australia, Mr Taxman is a regular Woman’s Day columist and TV finance commentator
  • click to visit Mr Taxman on Twitter
  • click to visit Mr Taxman on FaceBook
  • rss

Retired and now buying shares - am I an investor or trader?

Dec 01, 2011

I am now retired and have started trading FX from my home in Brisbane (Australia), I also own a small parcel of blue chip shares - would I be classified as a trader or an investor?

The distinction between traders and investors is significant for tax purposes as you deal with gains and losses differently.  In financial years where investments plummet, it is quite common for taxpayers to try and class themselves as a trader. If an Australian Taxation Office (ATO) audit finds that you have incorrectly claimed trading losses and you are unable to satisfactorily show that you are carrying on an investment business, then your deduction will be disallowed and penalties may apply.

You will be considered a trader if you:

  • conduct your business activities for the sole purpose of earning income from the buying and selling of investments; and
  • losses incurred are treated the same as any other losses from business.  Provided the non-commercial losses rules are satisfied, an immediate deduction is available against other taxable income.

You could be considered an investor if you:

  • invest with the sole intention of earning income from dividends and capital growth;
  • are eligible for the 50% CGT discount on gain;
  • claim losses incurred as a capital loss and not as an immediate deduction; and
  • carry forward capital losses to be offset against future capital gains.

In your situation, it is likely that you will be classified as both a trader (for your FX trading) and an investor (for your blue-chip shares). 

If you class yourself as a trader, the ATO may ask you to provide evidence that proves you are carrying on a trading business including:

  • purchasing and selling on a regular basis;
  • the use of any trading techniques;
  • decisions based on thorough analysis of relevant market information;
  • a contingency plan in the event of a major market shift; and
  • a trading plan showing analysis and research of each potential investment, the market and any formula for deciding when to hold or sell investments.

If you change from being an investor to a trader (or vice versa) then the ATO may request for evidence that proves that change is accurate and that you have not declared your income incorrectly in previous tax returns.  The ATO has issued a warning to taxpayers who seek to change their status from that of an investor to trader in their Taxpayer
Alert 2009/12.

 

This article first appeared in the Jul/Aug 2011 issue of YTE Magazine www.YTEmagazine.com. Copyright Your Media Edge Pty Ltd 2011.

Tags: CGTPersonal taxShares

Author: Mr Taxman

Comments

Post a New Comment

Media Availability

Are you interested in booking Mr Taxman for a speaking engagement or requesting his viewpoints for an article?

comments-rhsLatest Comments

  • "Hi. I came to Australia as a de-facto spouse. I have recently taken out a couples private health insurance policy for my partner and I and a reciprocal health care plan ontop for my partner only..."

    By: Lucy Howe at Aug 20, 2017 7:20AM

    Post: Marriage

  • "Hi Mr Taxman, I am married to my wife for 3 years now and it is the first time for us to lodge tax return in AU as we moved here in June 2016. I opened a personal bank account and deposited some..."

    By: Jure at Aug 16, 2017 5:39AM

    Post: Marriage

  • "hi, i run a small business that is yet to turn a profit as my start up expenses were high. Is it possible to offset these losses against my husband income?"

    By: heidi at Aug 15, 2017 11:19PM

    Post: Marriage

  • "Hi, not sure if this is travel or vehicle expenses..... Home is in town A - employer is located in town A (but I rarely work there). Get seconded for 12 months to town B (120km away) and other..."

    By: Jason at Aug 04, 2017 4:04AM

    Post: Claiming car expenses

  • "I've paid my outstanding HECS debt so my balance is now $0. My question is......Is it a good idea to keep the HECS coming out so at tax time I get a large lump sum back OR cancel my HECS and receive..."

    By: Sophie at Jul 31, 2017 8:38AM

    Post: Two important dates for those with HECS/HELP debts