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.