"I have been told on 2 separate occasions by the ATO around 2000 that this is not the case. They claimed that you will either be deemed a trader or an investor, but cannot be both."
Although the above is what I was told by the ATO, it seems I was incorrectly informed by the ATO back then, or they have subsequently changed their opinion.
There is an article in today's Wealth section of The Australian (first page of section - "Small Target Strategy") where Tony Fittler, managing partner at HLB Mann Judd, specifically states that it is possible to be both a trader and an investor. So I phoned the ATO to clarify.
The first person I spoke to was from the CGT section and he said that he had seen the article and was confused by the statement and stated more or less what I had previously been told. But he stated he was not the expert in that area and put me through to someone from the business section.
That person stated that you could (as one individual) be both a trader and an investor, just as an individual could be in the business of buying and selling properties, but also have an investment property on the side. It all boils down to keeping appropriate records.
I asked what prevented one from changing a particular purchase/sale from a trade to an investment or vice versa, depending on which gave the best tax outcome, as I saw that as a potential exposure to the ATO's tax revenue. The following is my conclusion based on his reply, not the actual reply given.
Obviously if a purchase was made in one year and not sold until a subsequent year, it will be either a trade or investment depending on whether the cost of the purchase was included in the income/expenses for the purchase year or not. If you had included it, then you obviously intended that to be a trade. If not, you intended that to be an investment. Trying to subsequently alter records and still maintain the same totals that were reported in your tax submissions would not be easy and could be a problem if audited.
If the purchase and sale were made in the same year, there is obviously an opportunity to move them from one category to the other depending on what is most beneficial to you. I'm not saying you are allowed to do that (YOU ARE NOT) or suggest that one should contemplate doing that, I am just saying that there is an opportunity to do that without the same degree of difficulty as purchases and sales made in different tax years. Even though your records should show what were trades and what were investments, one can always alter them after the fact but before submitting your tax return, so you don't have the problem reconciling to submitted totals if subsequently audited. However, from the ATO's point of view, the exposure is not so great. Being in the same year, there is no benefit in reclassifying a trade as an investment to get the CGT discount, as shares held for less than a year don't qualify for the discount in any case. There may be an incentive to classify some losses that were meant to be investment losses as trades, so that they can be claimed in the same year, especially if you do not have sufficient investment gains in that year to write the losses against.
If you want to ensure that everything is above board with the ATO and don't want to have to justify some of your decisions as to what category they fall under in the event of an audit, I would suggest creating 2 different accounts with your broker and using one exclusively for trading and one for investing. Other than that, adopt the route I took, which was to set up a company for trading. That does impose some costs though (accountants, ASIC fees etc.) that may not have otherwise been necessary.
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