A guide to shareholding and trading as an investor

By Mark Chapman

December 14 2018
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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. It’s a crucial question to consider because it will determine how you’re taxed on any profits or losses you make on your share portfolio.

A guide to shareholding and trading as an investor

A share investor is generally someone who buys shares with the intention of holding them long term to generate profit througha growth in value and income through dividends. If you’re a share investor – and most people who buy and sell shares are regarded as investors by the ATO, irrespective of how the investors see themselves – any profits or losses you make from selling your shares will be governed by the capital gains tax rules which means that profits and losses will only arise when shares are physically disposed of.

A share trader, i.e. someone carrying on the business of dealing in shares, will be marked out as someone who buys and sells shares purely for short term profits and will show some or all of the following hallmarks:

A substantial volume of transactions
A clear profit making intent
A substantial commitment to running activities in a business-like manner (eg, a large investment of capital, a well-developed business plan, extensive research and properly maintained books and records).

In tax terms, someone who buys and sells shares as part of a business will treat those assets as trading stock, and gains or losses on them will be treated as ordinary income rather than capital gains.

The key tax advantage for a trader is that losses can be offset against other income. In valuing trading stock at year end, each share can be brought into account at either cost, market value or replacement value. Where market value is less than original cost, this means that an immediate trading loss can be crystallised and deducted. In short, unrealised losses can be booked immediately but unrealised gains held back. It’s entirely up to you which method you use to value your year-end portfolio but there is of course a need for consistency; if you choose to value shares in A Pty Ltd at market value in year one, you need to use a consistent basis in year two; you can’t chop-and-change valuation methods to suit your particular circumstances in each year.

If you’re not sure whether you’re an investor or a trader, you might need to apply to the ATO for a Private Ruling.

Deductions for investors

You can claim various deductions for costs related to earning your investment income including:

interest on borrowed funds where you have financed your investment portfolio using those funds (negative gearing works for shares and other investments as well as investment properties)
Borrowing costs incurred in arranging finance, such as legal expenses, loan establishment fees, etc (deductible over five years or the term of the loan, whichever is shorter, unless the amount is $100 or less in which case its immediately deductible)
bank charges for bank accounts to manage your investment income and expenses
management fees or retainers paid to a financial planner (but not the initial costs of drawing up an investment plan)
the cost of running a home office to manage your investments (including telephone, computer and internet expenses),
the cost of investment-related journals and subscriptions
costs of obtaining tax advice
travel costs associated with your investments, such as trips to see your financial planner or stockbroker, or the cost of attending AGMs

You can also claim depreciation on any assets used to manage your portfolio, such as computers, laptops, etc, with the deduction apportioned between private/domestic use and use in your investment activity. Immediate deductions can be claimed for depreciating assets that cost less than $300.

Mark Chapman is the Director of Tax Communications at H&R Block

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