How to Avoid Trading Tax in Australia
Everything You Need to Know

Financial trading is similar to any type of trading out there. The process implies buying and selling assets. There is only one aim – making a profit when you sell. Such assets vary widely, and there are plenty of trading instruments.

Each asset is assigned a particular value. The value will go up and down based on multiple markets, so the goal is to trade in the direction of these instruments. Now, there are literally thousands of financial markets out there, and most of them allow trading.

For example, you can get to markets like S&P 500 or perhaps FTSE 100, not to mention most currencies out there. Even commodities can be traded – cattle, for example.

Some of the most popular markets out there include:

  • -Shares
  • -Forex
  • -Bonds
  • -Interest rates
  • -Themes
  • -Indices
  • -ETFs
  • -Commodities
  • -IPOs

No matter what instrument you choose to trade on, everyone does it for the same reason – people want to make profits. They want to buy at a low price and sell at a higher price – simple as that. Sell it for less, and it becomes a loss.

Now, while trading may seem simple, there are situations when things can get problematic. Although the global market is liquid, the sector is still affected by numerous misconceptions, as well as a few challenges. Believe it or not, the practice is illegal in some countries too.

Some markets grow at an extremely fast rate – take the Forex market, for example. In 2021, this market was estimated at $6.6 trillion. In 1996, it was valued at $1.2 trillion. By 2016, it was up to $5.1 million, so you can observe a trend here.

When it comes to how it works, you buy, sell and exchange international currencies. They are obviously traded in pairs – one against the other. The idea is to make long-term investment or short term speculations.

Based on the fact that most markets work like this, trading is a legal business, whether it affects stocks, futures, commodities, or currencies. However, the market is not regulated at a global level, meaning local entities are responsible for watching what is going on.

These different regulations leave room for plenty of interpretation. There are multiple loopholes that can be exploited, not to mention the opportunities. Some techniques can be questionable, but no one can complain if they are legal.

Is trading legal?​

Now, there are more losses than wins in trading, and this issue has given the trading industry a bad reputation. Indeed, fluctuations can cause quick wins and easy losses, hence the necessity to trade responsibly.

Countries that understand how trading works aim to regulate it in the smallest details. The goal is to safeguard traders, but also to make sure brokers provide a quality service. From other points of view, regulating the market is also about making money by taxing the environment.

In countries where authorities believe people lose too much money, there is an unusual tendency to make trading illegal. In other countries, restrictions are extremely harsh and can make trading a real challenge for most people.

Take France, for instance. Local authorities have pushed to severely restrict binary options and the exchange market, as well as the marketing. Many brokerage services are not allowed to advertise for themselves – not even through digital media.

Belgium has taken things even further. CFDs, binary options, and Forex are completely banned. Authorities have suggested that there is no room for such financial instruments in the country. Obviously, there might be some loopholes here and there.

While not fully banned, trading faces similar restrictions in Iran, Saudi Arabia, Japan, China, Canada, Belarus, Pakistan, India, or Turkey. In fact, Turkey has even banned overseas trading if the respective brokers are not regulated.

On the other hand, there are countries that have heavily regulated the market. They recognize trading as a legal activity, but they also see it as a potential source of income. They know that most people lose money, yet they try to charge those who manage to make something out of it.

Australia is one of these countries, and the situation there can be quite problematic.

Exploring the trading situation in Australia​

Trading in Australia is regulated. The authorities are trying to grab a slice of every single source of income in the country, and trading makes no exception either. Now, taxation is a real challenge in the country because there is plenty of room for confusion.

The Australian Tax Office – ATO – has never bothered to provide too many details. There is no clarity whatsoever. Basically, you know that you are going to be taxed, but figuring out how or how much is almost impossible.

The problem is that penalties for missing taxes can be extremely harsh on your income. Moreover, there are more classifications in terms of taxes, as well as stipulations that target particular instruments. Tax benefits are not to be overlooked either.

Believe it or not, going through the trading laws in Australia feels like reading a book. If you are new to it, figuring out what you are liable for can be confusing. Now, tax liability depends on your actual income. What matters is how much money you make and lose over a tax year in Australia.

The assets you deal with are just as important in the process and can affect your tax.

Rules do not apply to everyone. For instance, some people can be exempt from trading taxes if they stay within the tax-free allowance. But if you are successful and actually smash it, the Australian government may try to take almost half of your earnings – up to 45% in taxes.

It may seem hard to believe, but you can face hefty fines if you make late payments. Based on how much you owe the government, you might as well end up in jail. Obviously, such situations are quite rare and less likely to occur.

Now, looking at statistics, despite Australia being a developed country, the truth is the government is not doing too much to help entrepreneurs or small businesses. About 40% of all new businesses in Australia go bankrupt, and taxes represent one of the main reasons.

With these thoughts in mind, you simply cannot afford to overlook the necessity of education.

Before moving on, you should also know that taxes depend on what you do – traders are taxed differently from investors. There are serious differences between the two, yet they can also overlap to exploit loopholes.

Considering trading taxes in Australian​

Holding assets for limited periods of time will put you in the trading category. Now, the good news is that taxes for traders are paid after all the expenses are deducted. Your losses will be counted as expenses, so there are no issues there – you will pay tax on your actual profits.

Now, there is one thing you have to keep in mind – any gain you make from this activity counts as taxable income. You will pay everything upfront. However, all your losses can be deducted later on, as you claim for tax deductions.

If the ATO classifies you as a trader, that means you conduct business activities. You are a businessperson and will be charged accordingly. Despite the law looking confusing, recent case law has made this situation a bit clearer.

So, what does it mean that you are trading like a business?

First of all, your motivation is one of the most important things out there. If you are trading to make some profit, you trade like a business. Your behavior will also tell the authorities what kind of person you are. They will look at the frequency, volume, and repetition of your activities.

Your activity will also be compared to other traders’ activities. Basically, the authorities have a model for the day trader, and they try to apply it to everyone in this industry. The more frequently you do it, the more likely you are to get in this category.

How about your organization? Do you keep track of everything you do? How about your trades and accounts? Things can go even further if you are registered as a business. Plus, records from your broker could also help you support a claim.

Then, authorities will also look at how skillful you are, as well as your capital. Things like setting amounts aside, investing on a daily basis, and boosting your income will underline your activity as a trader, meaning you will be targeted by particular taxes.

Now, whether you are an investor or a trader, each category has both pros and cons.

As a trader, you will have more notable advantages, though. One of them implies the possibility to offset your losses at the end of the year – sure, you pay the tax first, but you can claim your losses later on with no problems at all.

Your losses are considered expenses. But at the same time, you can claim on other expenses as well. All the costs you go through over a tax year can be deducted. Your computer could break down, for instance – get a new one and deduct your expenses.

Now, considering these two major advantages, you can reduce your tax to a minimum. There can always be expenses, which you would rather have and improve your gear or knowledge than pay to the government – how about some courses, for example?

In terms of disadvantages, you will not be able to use the 50% discount on capital gains on shares if you hold them for over a year. But then, that benefit is for investors only. If you are into trading, chances are you will not hold assets for a year anyway.

How different types of trading can affect trading taxes in Australia​

Now, most traders naturally believe that different instruments will bring in different rules. From many points of view, that is true, but this is not ATO’s primary concern. Instead, the ATO is more worried about how you trade, rather than what you focus on.

It could be stocks, currencies, futures, CFDs, you name it – most of them go in the same category, and there will not be too many differences between them. One asset, in particular, stands out because it is not fully regulated and allows a certain degree of anonymity – digital money.

Cryptocurrency taxes explained

Bitcoin is the oldest and main digital coin out there – not the only one, though. It goes up and down on a regular basis. Whenever it goes down, it seems to come back even stronger. Tax implications in this field are quite important then.

While still a form of currency – and not a local one, digital money cannot really be considered foreign currency. Instead, all digital coins go in a different category – digital commodities. It means you purchase an asset and not a currency.

Now, imagine buying a digital coin. You spend $500 for one coin. Now, if you follow the local tax in the smallest details, you have not really made a profit. You have simply swapped Australian dollars for a different currency – be it Bitcoin or something else.

Now, things can get confusing when it comes to paying tax. What does the ATO believe about trading cryptocurrencies one for another? Based on the rules, it is like swapping assets. You have silver and you swap it for gold. You get rid of one asset and get another one – simple as that.

So, imagine purchasing BTC with ETH – just a few random coins. With one BTC, you could buy more ETH. The ATO would admit you have disposed of the BTC. The authority would also admit the exchange rate, which you have to keep a record of to prove your point.

Now, is there a profit there? This is what the office wants to know. To figure it out, you will need to do a bit of math. Consider the sales proceeds from disposing of BTC, the acquisition cost of ETH, and the associated costs, if any.

If you bought the BTC for $10,000 and you made the ETH transaction when BTC was valued at $20,000, you have a $10,000 profit that must be taxed accordingly. The last transaction only provides some details, but the initial one is just as important.

The profit can be reduced if you work on your tax deductions, though.

As a short final conclusion, currency and CFD trading tax is similar to share trading tax. There are not any major implications in tax. The ATO only cares about your profit, loss, and potential expenses – nothing else. Sure, how you make money does matter, but it is not the main concern.

What does it mean? No matter what type of trading you do in Australia, you cannot avoid tax.

Preparing for trading tax in Australia​

Things can go in your favor if you know how to play this game, but the truth is you will never be able to avoid tax if you live in Australia – not legally, at least. Knowing how to prepare for these taxes can help you save a bit of money.

One year could take you through hundreds of trades. The ATO will ask for evidence regarding them. You could get evidence later on, but you would have to dig through a full year of trades, which can be time-consuming. There are a few things you can do, though.

Keeping records

Keeping records of everything is essential. It makes no difference if you have an accountant do taxes for you or you do everything yourself. Detailed records will make the process smoother and easier. To avoid any unwanted situations, keep these records for five years or more.

All in all, you will need to know the instrument, price, size, purchase and sale date, as well as entry and exit points. You will need such details for each trade – it sounds daunting, but imagine doing it over a full year.

Many brokers keep records for their clients and can hand them over, but this is not always the case.

You can also enhance your collaboration with the ATO by using asset registers, which are provided by the office. Such registers allow you to get rid of records – the ATO will store everything for you and can even guide you.

Using software

All the hassle and headache associated with trading taxation in Australia can be avoided with modern advancement in terms of technology. You can purchase proper tax software that will allow you to keep records and even do all the math for you.

Some software can be linked to your broker. The bad news is that a good program will never come for free. There is nothing to be concerned about, though – this is just another expense that you can claim later.

Finding a solution to reduce Australian taxes to a minimum​

Is there a way to reduce the trading tax to a minimum in Australia? Or better said, can you clear out tax completely in Australia? There are loopholes and ways to avoid tax, but you need to be very careful, or you could get in trouble.

It makes no difference what type of trading you are interested in – assets, bonds, and so on.

As a trader, the only way to do it legally while residing in Australia is to have as many expenses as your profits. But then, you can only claim to a limit. If it makes no common sense, you will be questioned. You cannot claim a new car you need for trading because, well, you do not need one to trade.

Even if you do manage to find expenses to match your profits, what is the point of trading then? You make money to invest in things, only to avoid paying the government. There is no profit then, so you might as well do something else.

Now, the problem with Australia is that most income is taxed. If you are a resident or citizen of Australia, you will need to pay income tax. International tax? No problem – Australia will still tax you. The general idea is fairly simple to understand.

If you are on Australian soil, you will pay income tax.

If you are not a citizen or resident – but just a tourist, you are not even allowed to work then.

With these ideas in mind, it makes no difference if you are interested in setting up companies, trusts, establishing businesses abroad, and so on. The legal way implies no way to avoid trading tax if you are in Australia.

Things can get messy if you go abroad too. You are a tax resident in Australia and you risk double taxation.

How about the CRS?​

If you think that getting abroad and making your trading money there will help, you need to consider the CRS first. The CRS is a worldwide standard for the collection and reports of financial account information. Countries exchange information in order to help each other tax you.

The system has also been introduced in Australia – just one of the numerous measures introduced to prevent tax evasion. It was brought in by the TAT – Task Avoidance Taskforce. The goal? Ensuring everyone pays the right tax in Australia – more, rather than less.

This concept has helped the ATO boost taxation by almost $23 billion. Over the past five years, the office has collected almost $16 billion in cash due to the information received from other jurisdictions in the group.

The purpose is to identify foreign sources of income, investigate them and ensure everything is declared and taxed. You get the point – go to a country that has such an agreement with Australia, and you would not be able to avoid tax.

How about avoiding CRS countries then? You cannot avoid tax if you reside in Australia, just like you cannot avoid it if you go to many other countries. Your next thought is pretty obvious – getting to a country that is bothered about the CRS.

CRS countries and other alternatives​

Now, to help you get an idea about countries that have signed the CRS agreement, you should know that the entire European Union is part of it. Then, every country offering citizenship by investment is in the same boat, as well as most developed countries out there.

Some countries have not joined this CRS trend yet, but there are rumors that they may go in the same direction. For example, countries like Albania, Peru, or Nigeria may join soon, yet, there are no official statements for now.

The list changes on a regular basis. Before deciding on a jurisdiction, it pays off considering its plans too.

At the moment, certain countries are far from signing this agreement. Here are a few examples:

  1. -Armenia
  2. -Cambodia
  3. -Dominican Republic
  4. -Georgia
  5. -Guatemala
  6. -Paraguay
  7. -Philippines
  8. -Ukraine
  9. -USA – the USA has a different standard though

If you want to avoid a different jurisdiction reporting your accounts to you, the general idea is fairly simple to understand – go to a country with no CRS requirements. This way, your account is less likely to be reported.

Considering second citizenship – Is it a good idea?​

A second citizenship may look like a good idea at first. Choose a country that has no intentions to sign up for the CRS agreement, and it sounds like you can avoid tax completely. There are more options to seek citizenship.

Naturalization takes years and lots of expenses – by the time you are done, the country may have already signed an agreement to join the CRS group. Unfortunately, countries offering citizenship by investment are already reporting details.

This idea may work in certain situations – for instance, you could give up on your Australian citizenship. But then, as long as you reside in Australia, you are still tax resident there. Your nationality is irrelevant because you will still have to pay trading income tax.

Brokerage and banking options in non CRS countries​

Opening a bank account in a non CRS country may sound like a good idea, but there are a few things you need to know. From a legal point of view, finding both brokerage and banking in a non CRS country is a difficult task.

In theory, it can be done. There are lots of options. Now, the question is – would you really choose an obscure brokerage service in Cambodia or Armenia? Would you trust someone with your money? This risk is also worth some consideration.

Moreover, this cannot be done from a distance. You are in Australia, and you are hoping to avoid authorities completely. Getting a bank account and brokerage services in another country with no residence or without even visiting can be difficult.

It feels like a vicious circle. Your Australian citizenship could be an issue. Your residence is another issue. Other countries could be an issue. Potentially safe countries could be an issue later on. Your banking needs might raise some issues, too, not to mention the brokerage service.

Based on all these, it feels like there is just too much hassle involved. There is plenty of traveling involved, lots of paperwork, and bureaucracy. To keep it simple, it might be easier to just relocate from Australia or even give up your nationality after getting a second citizenship.

There are many traders and investors who have managed to find the perfect setup. They have tried different jurisdictions, banking systems, accounts, and trading platforms. If there is one thing they all have in common, that is the fact that they all relocated outside of Australia to do it.

While this may seem like a challenge for most people out there, you actually have two ways to do it by the book. One of these options is the safe and legal way. The other one covers a bit of a gray area and may expose you at some point or another.

Here are both of them explained.

The legal way to avoid trading tax in Australia​

As mentioned earlier, the legal way to avoid trading tax in Australia is fairly straightforward – you have to get out of Australia, find tax residency in another country, and ensure there is no income tax. If there is, make sure trading is not considered a form of income.

Getting an offshore bank account is not sufficient. Just because you have an account in a country that does not report based on the CRS, it does not mean that you are doing it legally. Instead, it means you are hiding money from your government.

This is a gray area because while it may work for a while, it is not a guarantee that Australian authorities will never find out about it. At some point, the country you chose might decide to join the CRS group, and your money will be reported to Australian authorities.

Renouncing your citizenship is optional. Getting tax residency in another country means you will no longer need to pay tax in Australia. Now, here comes the interesting part, and it mostly depends on what jurisdiction you choose.

You could get tax residency in another country and live in Australia as a tourist. Not every country will do, though. Your chosen jurisdiction must have a solid treaty with Australia, meaning Australia will not impose any limits on how long you can stay in the country.

However, being in Australia as a tourist implies you are not supposed to do any work there. Sure, no one can really control what you are doing over a laptop or smartphone and an Internet connection, unless you are a celebrity or you deal with millions and draw some attention.

But at the end of the day, it is still not legal – a gray area though that some lawyers could help you overcome. Bottom line, it does matter what kind of country you choose for your tax residency, its income tax laws, and its agreements with Australia.

The illegal way to avoid trading tax in Australia​

The illegal way may seem easy at first glance, but it brings in a series of insecurities in the long run, as well as some risks. Keep in mind that it implies doing tax evasion, which may bring in hefty fines or even time in jail.

For instance, you get a laptop, connect it to the Internet and start trading. Who is going to check? Exactly – no one. You get a few hundred dollars in your bank account every now and then – nothing too suspicious. It could be gambling money or a donation.

Things can get ugly as you gain experience and eventually make more money. When your bank sees $7,500 a month in your account – or more or less on a regular basis, someone will raise some eyebrows and ask where they come from.

Another option would be to get an offshore bank account in a country that is not bothered – a country with no CRS requirements, a country with no major agreements and a country that many entrepreneurs choose for their tax optimization.

Such jurisdictions want money in the country, but they will not always bother where they come from. It is imperative to find a country with no CRS requirements. Otherwise, your Australian identity will force the bank to report your account to local authorities, meaning your government will find out.

If you were an outlaw and had to choose between these two options, the first one – keeping everything local – would imply less risk because small amounts of money will not trigger any question marks. Either way, you are committing tax evasion, which is illegal.

The solution would imply more steps, and relocation is the most significant one.

Now, it will take months of research to find a good setup to overcome the trading tax in Australia. The problem is that many laws change every now and then all over the world. Just when you think you have the perfect country, it may end up signing a CRS agreement.

With these thoughts in mind, your best bet is to rely on a law firm. Find a lawyer with experience in tax evasion and tax optimization. You need someone who has dealt with similar cases before and can guide you in the right direction.

No matter what you do, keep in mind that all these changing procedures will inevitably ask for flexibility. Things could change in a year, so you may need to find a different jurisdiction and start all over again, so you always need to be ready for a change.

Conclusion

As a short final conclusion, trading is considered a form of income in Australia and will be taxed accordingly. A tax lawyer can help you figure out a way to reduce it by bringing expenses in – after all, this is a solid benefit for traders.

But to fully avoid local authorities, the most common option implies relocating from Australia and seeking tax residency in another country. You might have heard of various cases or traders doing things differently, but they basically live on the edge.

There is a gray area in Australian law, yet it tends to work for the government. A good lawyer may, indeed, guide you accordingly, but get ready to face lots of hassle to ensure you will never be bothered by Australian authorities.