Day Trading and Tax: Your business obligations explained

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Today, buying low and selling high is not just for those in the top-end of town. In fact, over the last 10 years local and international share markets have become easy for anyone to get involved with. So much so that there is now a whole wave of Aussies who happily class themselves as ‘day traders.’

So, what’s the difference between a day trader and investor, and what implications does being a day trader have on your tax obligations. Let’s take a look.

Day trader vs investor

The ATO defines a stock investor as a person who holds shares for the purpose of earning income from dividends.

A stock (day) trader, meanwhile, has been defined as a person who carries out business-like activities for the purpose of earning income from buying and selling shares.

How you get taxed on capital gains will depend on whether you’re classified as a ‘trader’ or ‘investor.’ If you are classed as a day trader you will most likely be treated like a sole trader who carries out a business.

Investor or day trader - how does the ATO decide?

The ATO will likely classify you as a day trader if you buy and sell shares frequently on a regular basis, with the intention of making a profit. The ATO may also look at other trading behaviours such as volume, regularity, and your record keeping to decide if you’re a trader (and not an investor) for tax purposes.

On the other side business advisors can also help with ongoing needs, and this can be highly beneficial for large as well as small businesses. As a business adviser gets to know your business, they will be able to anticipate problems that are on the horizon and offer solutions to pre-empt trouble in the future. Ongoing help from a business adviser could even help you take advantage of an opportunity that you may not even be aware of.

Registering for an ABN as a day trader

Generally speaking, if you’ve identified yourself as a share trader, you’re considered to be carrying out business activities for the purpose of earning income so you need to register for an ABN.

An ABN is a unique 11 digit number that identifies your business to the government and community. You can use an ABN amongst other things, to: Identify your business to others when ordering and invoicing, claim goods and services tax (GST) credits and much more.

If your turnover is more than $75,000 a year (before GST), you are required to register for GST, and to do that you need an ABN.

ABN and Business Activity Statements

A Business Activity Statement (or more commonly referred to BAS) is an Australian Taxation Office form issued to all GST registered entities and reports a businesses’ Goods and Services Tax (GST) activity for a specific period.

If you have an ABN and your annual turnover is more than $75,000 you must register for GST and lodge a BAS.

If you earn (or expect to earn) less than $75,000 per annum you don’t need to register for GST, and won’t be expected to submit a BAS.

How often is BAS needed?

The due date for lodging and paying is displayed on each BAS that is issued by the ATO. Generally speaking, the due dates are:

Due Date
1. July, August & September
28 October
2. October, November & December
28 February
3. January, February & March
28 April
4. April, May & June
28 July

Note: If you lodge online, you may be eligible for an extra two weeks to lodge and pay your quarterly BAS.

Online BAS Lodgements

Get in touch today to start lodging your Business Activity Statements or call 1300 180 630 to speak to one of our consultants for a no-obligation consultation.

Tax rates and requirements

Being registered as a sole trader while undertaking your day trading activities, rather than registering as a company does make a difference to the rate of tax you pay.

A sole trader is a person who runs and manages the entire business. Under this arrangement, you can simply follow the individual income rate when filing taxes instead of the company tax rate.

Companies pay 25-30% tax on their income, whereas sole traders pay personal income tax, so the tax rate depends on the amount that you earn, including the business’ earnings. The highest personal tax rate is currently 45c in the $1 for $180,000 of income and above.

Sole traders must lodge personal tax returns. Company owners must lodge both personal and company tax returns, along with maintaining financial records and meeting the reporting requirements of the Australia Securities Investment Commission.

For both CGT and GST, the same rules apply for sole traders as they do for companies. Sole traders can also apply for small business tax concessions as long as they meet the requirements.

Day trader tax advantages

If you’re classified as a day trader, you’re allowed to offset losses on selling stocks against any other profits made during the year which helps reduce your taxable income. You can also claim many of the tax benefits that businesses enjoy.

For one, any expenses you incur in carrying out your trading activities become allowable deductions against your overall taxable income.

Trading in overseas shares and other instruments

For those who trade in overseas markets these trades are treated no differently from trading local shares. In fact, it’s fair to say that for the ATO it’s your permanent place of residency (i.e., Australia) that’s more important to them than where the shares are traded.

Stocks, futures, forex all fall under the same ATO guidelines when it comes to tax – and this also applies to Cryptocurrency i.e., just like stocks, a capital gains tax (CGT) event occurs when you dispose of a cryptocurrency.

The ATO has also said that when a digital wallet contains different types of cryptos, each digital token will be a considered as a separate CGT asset. And just a word of warning – they also claim to be able to decipher the buyers and sellers behind each transaction so blockchain technology won’t keep you anonymous, nor will it matter if you set up your digital wallet overseas.

Tax Preparation for day traders

As a day trader, it’s quite conceivable that in any 12 month period you may make thousands of different trades. When it comes to the ATO and tax submission you should be prepared for them to ask to see evidence of ALL of the trades that you have carried out. With this in mind, its super important to do the following:

Keep records

Regardless of whether you prepare your tax return yourself, or have an agent do it, you must keep a detailed record. In case of future audits, it’s worth keeping these records for at least five years. You should keep details of the following:

  • Instrument
  • Purchase & sale date
  • Price
  • Size
  • Entry & exit points

The ATO also help facilitate ‘asset registers.’ The benefit of this is it allows you to throw away records you otherwise may want to hold on to. They provide a secure way to store all your trading information. Head to the ATO website for guidance on how to set one up.

Use day trading tax software

There is a range of sophisticated day trading tax software available that makes keeping records really easy, plus many of the products available can be linked directly to your brokerage. Using this type of software means that when it comes to filing your returns at the end of the year, you have all the information you need.

Lodging your tax return and making payment

Depending on how complex your taxes are, you may want to lodge your own return or get a professional to lodge it for you.

You can lodge your tax return:

  • With a registered tax agent
  • Online with myTax if you’re a sole trader
  • With standard business reporting enabled software if you’re a company, trust, or partnership
  • By paper.
  • By mail.

If you use a tax or BAS agent, make sure they’re registered with the Tax Practitioners Board (TPB).

When it comes time to pay your tax the ATO has a range of self-service tools and online services to help you manage payments.

  • You can pay with BPAY or a credit/debit card.
  • Online payment – using ATO’s Business Portal or myGov account 
  • Electronic transfer
  • Pay by phone
  • Pay by mail
  • Pay in person at Australia Post
  • Transfer from an overseas bank account

Ensure all your details are correct and complete before making payment to avoid inconveniences.

At this point, the most vital information is your payment reference number (PRN) which is also called an EFT code. This unique number guarantees that your payment is credited to the correct account.

Take note that different types of tax require different PRN, so make sure to use the right PRN for the tax you’re paying for.

Keeping Your Day Trading Tax Compliant

It’s important to note the ATO assess day traders on a case-by-case basis, but failure to meet your tax obligations, be it through overdue payments or non-payments, can result in serious consequences. Need help? The team at POP Business can provide expert advice and services to ensure you remain ATO compliant. To find out more, call the team today – 1300 180 630 or visit the links below

Tax Compliance Packages

Keep your day trader business tax compliant with our essentials package – we’ll keep you up to date with your quarterly BAS, annual tax return and provide any financial statements to ensure you are compliant with the ATO. Speak to one of our consultants today on 1300 180 630 or follow the link below:

Picture of Sidney Cachuela

Sidney Cachuela

I am a business mentor, an associate financial advisor and one of the co-founders at POP that genuinely revels in solving complex problems that businesses face. I’ve worked with high profile wealth managers, financial advisors and business owners to drive innovation and achieve success. My expertise includes helping small businesses with a range of accounting services, including: financial advice, accounting and bookkeeping, GST tax planning, as well as company, trust and partnership tax returns and more.

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