Rebecca is very impressed with the tax return that your group has prepared for her. So much so that she has referred one of her major clients, Drew Richardson, to your group for taxation advice. Drew is 56 years of age. He has recently retired from his full-time job as a radiologist. He is an Australian resident for tax purposes and brings the following issue to your attention.
Drew advises you that he has approximately $3 million invested in the Australian sharemarket. Drew acquired these shares in August 2010. At any one time, Drew’s portfolio consists of around 35 to 40 different companies shares (combination of blue chip shares and small mining, biotech and pharmaceutical companies).
In August 2010, Drew borrowed $2.5 million from Macquarie Bank to fund the purchase of these shares. He is currently paying interest in respect of this loan.
Prior to retiring, Drew worked as a radiologist and did not know much about share investing. Two months after retiring, in order to better understand how the stockmarket works, in July 2010, Drew completed an intensive share trading course run by the Australian Stock Exchange.
Before investing his money into the market, Drew developed a detailed trading plan (in consultation with Rebecca). Drew conducts extensive research and analysis himself using a variety of resources including the internet, screening techniques, reading share investor magazines and reading over company reports and bulletins sent by his stockbroker.
Drew spends most of his day analysing charts and trends for companies that he currently owns shares in or intends buying and regularly monitors the share prices of his ‘favourite’ stocks using the ‘watchlist’ function on the internet. Even though he uses a stockbroker (Rebecca), Drew has also opened a trading account with ComSec (an online broker) which allows him to monitor the share prices of his favourite stocks on a daily basis. He uses a computer in a small office in his home to monitor the share prices and undertake trades, and when away from his office, Drew accesses the share prices using his Apple i-phone.
In fact, Drew has a reputation of being interrupted on the golf course by Rebecca to discuss whether to buy or sell particular shares.
Drew is a member of the Australian Shareholdersââ?¬â?¢ Association and makes a special attempt to attend the Annual General Meetings of companies that he owns shares in. He keeps monthly summaries of his trades and maintains all ‘buy’ and ‘sell’ contracts. Drew enters all of his transactions into a computer program produced by the stockbroking company, TopShare. This program keeps track of all share transactions, including calculation of unrealised and realised gains and losses as well as franked and unfranked dividends received.
When receiving dividends, Drew generally reinvests these dividends and opts to receive additional shares in the company, rather than take the cash.
Drew advises you that during the 2011 income year, he completed 66 share transactions (ie. both buying and selling). While his intention is generally to hold shares long-term, if the price of a particular share rises by more than 15% to 20% since he first acquired it, he generally sells that share in order to make a ââ?¬Å”quick buckââ?¬Â?. All realised profits are re-invested back into the sharemarket and used to buy additional new shares. For the first nine months of 2011, Drew advises you that he realised profits in the order of $90,000 to $100,000.
However, in recent times, due to the downturn in the Australian stockmarket, share prices have fallen considerably, meaning that Drew has not made many trades in the last quarter of 2011. Most of his shares are trading below what he bought them for, resulting in some significant unrealised losses.
Drew is quietly optimistic that the stockmarket will recover and that his shares will gradually increase in value. He tells you that once they increase above what he bought them for, he hopes to start selling the profitable shares again.
Drew specifically seeks your advice on the following matters:
(i) From a taxation viewpoint, what factors need to be taken into consideration in determining whether Drew is regarded as a share trader or a share investor?
(ii) What are the taxation consequences if Drew is regarded as a share trader?
(iii) Alternatively, what are the taxation consequences if Drew is regarded as a share investor?
(iv) Based on the given facts, in relation to the 2011 income year, Drew seeks your opinion as to whether he is a share trader or a share investor.
There is no need to perform any calculations as Drew has not provided with you with detailed figures.
Students are expected to use language and terminology commensurate with professional business letters. Please use 1½ line spacing.
Please include each of the four questions that Drew has asked (above) as headings in your letter.
Furthermore, ensure that you make appropriate references to sections of the Income Tax Assessment Acts (1936) and (1997), relevant cases, Taxation Rulings and ATO Interpretative Decisions in your letter.
Do not quote references to paragraphs of the CCH Australian Master Tax Guide. This is not a source of taxation law and as such, should not be quoted or referenced by students.
For the purposes of the letter, Drew currently resides at:
Mr Drew Richardson
49 Royal Terrace
Hamilton, QLD, 4007