Ask our resident Trading Tax expert Adrian Raftery, aka ‘Mr Taxman’, your tax questions.

You would be able to claim a deduction for the interest expense in relation to money borrowed for the purchase of shares but only during the period/s in which it is expected that you will derive an income.  Once the shares were sold, it is quite clear that your original loan to purchase the shares changed its character and is now essentially for private purposes. As you no longer derive an income after the sale, then you are not entitled to claim any interest as a tax deduction. If, however, you had elected to re-invest the proceeds into another income-producing investment then the character of the loan would not have been in question and deductibility of the interest would have been intact til such time that you no longer reasonably expect to derive an assessable income.

Losses are sometimes unavoidable, particularly during volatile markets. Provided the non-commercial losses rules are satisfied, the Australian Taxation Office (ATO) allows traders to claim an immediate deduction for their trading losses and offset the losses against other taxable income, such as salary and wages, interest and dividends.

The ATO will allow you to offset your trading loss against assessable income from other sources only if:
• You earn less than $250,000 and satisfy one of the four noncommercial losses tests: the profits test, assessable income test, other assets test and real property test; or
• The Commissioner of Taxation uses his discretion to allow you to claim the loss (this rarely happens). The non-commercial losses rules limit the ability of taxpayers to offset business losses against other assessment income unless one or more of the following tests are met.
• Assessable income generated by the business is at least $20,000 (assessable income test);
• The business shows a profit for at least three out of the last five years (profits test);
• The business has property or an interest in real property with at least $500,000 on a continuing basis (real property test); or
• The business has at least $100,000 of other assets being used on a continuing basis (other assets test).

Assuming that you have satisfied those rules, you can qualify for claiming the loss in your tax return this year. If you have earned less than $10,000 in other income to offset these losses, show your taxable income as zero. The remainder of the unutilised losses are carried forward and can be offset against income in future years.

You must have been conducting your business activities for the sole purpose of earning income from buying and selling investments.

If an Australian Taxation Office (ATO) audit finds you have incorrectly claimed trading losses and you cannot satisfactorily show you are carrying on an investment business, your deduction will be disallowed and penalties might apply.

If you were an investor, rather than a trader, the losses would be classified as capital losses, which could be offset only against capital gains, not normal assessable income. If you do not have any capital gains to offset them against in this tax year, they can be carried forward indefinitely until used in full.

Better luck with your trading this financial year!

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

You are 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 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 evidence of:
• 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), the ATO may request evidence to prove the change is correct 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 a trader in their Taxpayer Alert 2009/12.

A self-managed super fund (SMSF) is a type of super fund that members manage for their own benefit. If you have the time and expertise to manage your investments, and advisors you can call on, setting up a SMSF might be an option for your retirement future.

A main benefit of a SMSF is having freedom of investment choice about how and where to invest your superannuation monies. The funds are growing in popularity as members’ balances rise, and as people are becoming more knowledgeable about managing their retirement savings. More than 27,000 new SMSFs were established last year.

Being able to invest super monies in particular assets means that similar growth is expected for some time yet. However, SMSFs cannot operate trading entities. You need to carry out share activities as an investor rather than as a trader. You can purchase (and sell) exchange-traded options as part of a hedging strategy, but any premiums paid (or received) must be shown as CGT events.

Whilst you can invest your super monies in shares, options and contracts for difference (CFDs), it must be in accordance with your written investment strategy for the fund and in compliance with the SIS Act that regulates SMSFs.

Be careful with investment in CFDs. If you deposit funds with a CFD provider as security for the fund’s obligations to pay margins, you contravene the SIS Act, because you are effectively providing a charge over fund assets.

The country you reside in is generally the country you have to pay tax in. The ATO considers you an Australian resident for tax purposes if you meet any of the following conditions:
you are born and bred in Australia;

• you are living permanently in Australia;
• you have been living in Australia for at least six months and have worked most of that time at the same job and lived at the same place; or
• you have been living in Australia for more than half the financial year, except where your usual home is overseas and you do not intend to live in Australia permanently.

As you are an Australian resident, you are taxed on your worldwide income. As a result, any foreign income must be included in your Australian tax return as assessable income.

Whilst the US taxman would obviously want a piece of the tax pie, there is an agreement between the Australian and US governments to avoid double taxation of income. US tax is restricted to only dividends (15%) or interest (10%) that you might derive from the United States in your trading activities. You are entitled in your Australian tax return to a foreign income tax offset for the amount of any US tax paid. The only way the United States could tax your trading income is if you operated through a permanent establishment, but there is a specific exemption if you are merely using US brokers.

Don’t try to hide the income from the taxman. The ATO has tax treaties with 46 countries, including the United States, which allow it to exchange information about offshore income and transactions. Any data received is matched against Australian tax returns. The ATO also receives information from AUSTRAC, which monitors domestic and international transactions of more than $10,000.

Your net trading income should be shown in your annual tax return under the heading ‘Net income or loss from business’. It will be added to your other assessable income and taxed at your marginal tax rate. Make sure you remember to offset any expenses you incurred gaining this income, such as internet, journals, subscriptions, telephone, and depreciation on your computer and any other equipment.

If you are using another entity, such as a company or family trust, any trading income is shown in the business income schedule of that entity.

Based on your trading profit to date, expect to have to pay back some tax this year. It might be a good idea to do some tax planning and pre-pay some of your expenses up to 12 months in advance, such as subscriptions or interest on borrowings. It is also a good idea to join a registered tax agent’s lodgement programme so you get a bit of extra time before you need to pay the taxman.