Investing v share trading

Hi all
We started up our SMSF last July and began trading shares through it in February this year. Now belatedly, I am worried that the tax office might consider that we are running a business of share trading and therefore are not a compliant fund. I know the tax office looks at a profit motive, extent of record keeping and that the operation was run in a business-like way but they are all necessary for an SMSF anyway. We had no previous experience with share trading (we weren't former financial planners or stockbrokers etc). My husband is above preservation age and not working. We made approx. 10% return on our capital, which includes money from bank interest but traded an average of 4 shares each day for five months. Has anyone had any experience with what the tax office considers too much "regularity of transactions"? I don't want to pay 47.5% tax.
Holley

 

You are OK - provided you are investing inline with the investment strategy for the fund.

Your SMSF would not be considered to be running a business.

As trustees you are simply managing your portfolio in an active manner to try and achieve the best returns for your members (i.e. yourselves).

Because your fund is new, the ATO would be looking at the lodgment of your first super fund return closely - i.e. you are more likely to receive an audit (according to the ATO's propaganda), however provided your auditor gives the sign off you will be OK.

Get some advice from a SMSF Specialist (accountant or auditor) if you have further concerns:

www.spaa.asn.au (not sure if there is anyone around Ipswich)

You also should have read the booklets the ATO should have sent you when you registered your fund - they are actually a good general source of information.

I hope this eases your mind.

 

4 trades every day for 5 months. That is heavy duty speculation in my opinion, not investing.

I'd be reading up on your SMSF rules. Here is a link...

Running a self-managed super fund

 

"4 trades every day for 5 months. That is heavy duty speculation in my opinion, not investing".

Wrong....It’s not speculation.
It’s a day trading = BIG difference !!
You better get your 1300 plan in order.

 

Running a SMSF isn't a joke. If you can't contribute constructively to the thread, don't type anything at all.

 

It seems you do not understand what I said. Of well...not to worry.

 

In the interests of education (i.e. this is InvestEd), I have attached some more detailed information from CCH in regards to the SMSF investment rules.

Running an SMSF is a complex business, and you need to ensure you have all the correct documentation in place.

I would also point out in general it is possible for the same thing to have different definitions in different areas of law - i.e. super law v tax law v GST law etc.

I stand by my original comments, and if anyone can find a case where trustees who have traded in such a way and the ATO has found that they were running a business rather than managing the investments of the fund for the benefit of the members as per a correctly formulated investment strategy I would love to see it.

Please go and see and accountant or auditor who is a SPAA Specialist (SPAA - Home).

All the best!

 

From the ato webpage...
Investment strategy

"The strategy needs to reflect the purpose and circumstances of your fund and consider the following: "

"diversification and the benefits of investing across a number of asset classes (for example, shares, property and fixed deposit) in a long-term investment strategy"

Considering he has past the preservation age and not working...
"the needs of members (for example, age, income level, employment pattern and retirement needs)."

and from your attachment Superman...

"The fundamental investment objective of a superannuation fund is to obtain the highest expected return compatible with an acceptable degree of risk. The level of risk may depend on the age of the fund members and whether they are in accumulation or
pension phase."

All I am saying is I don't think placing up to 4 buy and sell orders a day for the last 5 months (when the market has been going up) is investing carefully or complying. Considering the market has made double their returns & not to mention the amount of expense they have placed on the fund. At $20 a pop they would have spent over $8500 in brokerage.

Anyway, I think it's good she is getting different opinions. She will do her own homework to find out for sure if she is complying or not

 

Thank you for all your comments.

Firstly I rang the ATO. They gave me their usual standard of assistance so consequently I was no further enlightened than before I rang. They seem to leave the question unanswered so that they can make a determination based on their mood on the day. I then talked to an accountant specialist in SMSFs and he considers that the ATO would NOT deem our stock movements to be trading.

Yes, you are right 1300 GET A PLAN, in my opinion we did spend far too much in brokerage by doing too much chopping and changing in a market that was in hindsight on the way up. But hindsight is a wonderful thing and at the time doom and gloom was the order of the day and we played carefully to avoid betting burnt by an overnight collapse. I could point out to the Tax Office that it shows our lack of experience in share trading and backs up our claim of not running a business.

Holley

 

s.295-85 ITAA97 acts as a "primary code" for complying super funds "gains and losses".

This means you are *DEEMED* to be an investor and CGT applies for buying and selling equity securities.

Of course, this is always open to question by the ATO where your trades are more than merely to "enhance or protect your investment".

So I would be uncomfortable with shorting or short term profit taking since these are indicators of a business.

The Commissioner might also argue that you are plundering your super to satisfy your need to dabble in the market. This might happen to people with no experience who go to the 2 day "Day Trader" courses, lose their own money and then start the same activity with as Trustee of their super - i.e. the super being used to fund their activity.

Review your "investment" plan.

Cheers,

Rob