Offsetting Capital Loss, page-27

Some advantages and some disadvantages.

Profits and loss from trading do not come under the capital gains tax regime but are treated as revenue income. This income gets added or subtracted from your other income for the tax year and you are taxed on your marginal tax rate. The way you calculate income is by valuing sales, purchases, opening and closing stock for the year.

Basically Trading profit (or loss) = Sales - (opening stock + purchases - closing stock). The term in brackets is commonly known as Cost of Sales. You are allowed different ways to calculate the values of opening and closing stock (by market value or at cost price for instance) and the method used can vary from year to year and from lot to lot. The only restriction is that the opening stock value must equal the closing stock value of the previous year. Because of the way profit is calculated, you can have a profit or loss even though you have bought nothing or sold nothing in the year. A simple example. Say, you decide to value all your stock by market price and all you have is 100 of Stock A that had a market price of $10 per share at the end of the previous year and this year end it is now worth $15.

Using the above formula: Trading Profit = 0 - ($1,000 + 0 - $1,500) = $500.

Because trading does not come under the CGT regime, you do not get the 50% discount for shares held for more than 12 months, which can be a big disadvantage. It is also the reason you should separate your trading activity from investing activity (as a minimum you should use different accounts for each). You do not want to be sitting on a large capital gain that qualifies for the 50% discount only to have the ATO deem you to be a trader and tax your profits as revenue and not capital gains.

Investors come under the capital gains tax regime and thus can qualify for the 50% discount where the shares are held for over 12 months. Your capital gain or loss is calculated on a per trade basis, subtracting the cost base from the sales proceeds.

You should really only consider trading (as opposed to investing) if you intend to turn over your trading stock fairly often and thus wouldn't qualify for the 50% CGT discount in any case as you hold nothing for more than a year.