With the current economic climate seeing bank interest rates at such low rates and the emergence of cryptocurrencies and other online investments, many people have been looking at turning their savings towards the stock market and cryptocurrencies. Access to these online markets has made these types of investments seem easier than it had been previously. With this has seen the ATO and other government agencies scramble to trace and track purchases and sales on these online markets and introduce rulings and laws pertaining to them.
The reason why the ATO has been so active in this area is not just because of their rise in popularity but also the potential revenue, that could be captured by them on the sale of these commodities. With new reporting requirements for online marketplaces chances are that the ATO has been alerted to any sales that you make on these investments and warnings will show up in your annual ATO prefilling report for your end of year taxes.
There are potentially 2 implications for you when selling these investments and they depend on whether your activities have been classified as investing activities or as conducting business activities. The classification determines whether the income you receive is treated as capital or revenue.
For simplicity we will only talk about selling these commodities at a profit, to discuss how selling at a loss can affect your circumstances please get into contact with us here.
If it is determined that your transactions are investment activities, they will be treated as capital and therefore treated as capital gains and then subject to the rules of capital gains. Simply the gain on the sale of your investment is determined by:
Capital Gain = Sale price – Cost base
If you have held the investment for more than 12 months you are then entitled to a further 50% discount on the capital gain (except for Companies).
The remaining capital gain is then included in your Taxable Income and assessed at the applicable tax rate.
If it is determined that your transactions are business activities they will be treated as revenue. This means that any sales of these commodities you make is deemed as business sales, also any purchasing of these commodities are included as purchases and any commodities you hold at the start or the end of the year will be treated as stock. The resulting profit will be included in the overall taxable income of the taxpayer and taxed at the applicable rate.
To be classified as business income you need to consider the following characteristics as a whole:
- The nature of the activities, are they with the purpose of profit making
- The repetition, volume and regularity of the activities, (eg is this a daily thing, are commodities bought and sold regularly or consistently?)
- Organised in a business like way, for example are detailed records kept, have there been applications for licenses and qualifications etc)
- The amount of capital invested
- The length of time the investments have been held.
If all of these factors are present, then it is highly likely that you would be considered to be operating as a business and the income would be classified as revenue. Points number 2 and 3, these really distinguish those from a capital investor and someone conducting business activities. As you can see the determination is very circumstantial and each would need to be considered on a case-by-case basis. The ATO has had many cases where taxpayers have argued for both sides regarding the treatment of these sales and these can be handy to read into to help with your decision making. If the circumstances are close to call it may be worth getting a private ruling for your scenario. If you would like to discuss this further, please feel free to contact us via our contact us section of our website