• The impact of this case on ATO policy is discussed in Decision Impact Statement: Mehta and Commissioner of Taxation (Published 1 June 2012).

MEHTA v FC of T

Members:
MD Allen SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2012] AATA 208

Decision date: 13 April 2012

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ATC 4698

MD Allen (Senior Member):

1. By application made the 7th day of June 2011 the Applicant sought review of an objection decision by the Respondent, which affirmed an assessment of income tax and shortfall penalty issued against the Applicant.

2. The issues that arise in this matter are:

• (i) Was the Applicant in the tax year ending 30 June 2009 carrying out the business of share trading;
• (ii) If yes to (i), was the Applicant entitled to a deduction for non-primary production losses in the sum of $117,639.00 or some other amount;
• (iii) Did the Respondent correctly impose an administrative penalty of $12,110.50 on the Applicant for the failure of the Applicant or his agent to take reasonable care to comply with taxation law; and
• (iv) Should all or part of the administrative penalty be remitted?

3. Pursuant to s 14ZZK of the Taxation Administration Act 1953 the Applicant bears the onus of proving that any assessment of tax is excessive. In order to discharge the onus of proof the taxpayer must prove not only that the assessment is excessive, but also prove what the true amount should be. See
Federal Commissioner of Taxation v Dalco 90 ATC 4088; (1990) 168 CLR 164.

4. In this matter therefore the onus was upon the Applicant to show that he carried on the business of trading in shares. The indicia of what constitutes the carrying on of a business was stated by Mason J (as he then was), and with whom Gibbs CJ, Stephen and Aitkin JJ agreed, in
Hope v Bathurst City Council 80 ATC 4386; (1990) 144 CLR 1 at 8, namely that a business is constituted by activities engaged in for the purpose of profit or on a continuous and repetitive basis.

5. It is to be noted that Mason J expressly dismissed the notion that an activity might not be "significant" enough to constitute a business. As His Honour pointed out in Hope at 10, Walsh J in
Thomas v Federal Commissioner of Taxation 72 ATC 4094; [1972-73] ALR 368 expressly conceded a man may carry on a business though in a small way.

6. In
Spriggs v Federal Commissioner of Taxation 2009 ATC ¶20-109; (2009) 239 CLR 1 at 19 the High Court said:

"The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner."

7. So far as shares are concerned, the mere acquisition of shares for the purpose of realising a profit without more does not constitute the business of trading in shares. See
Federal Commissioner of Taxation v Whitfords Beach Proprietary Limited 82 ATC 4031; (1982) 150 CLR 355 at 362.

8. As was pointed out by Hill J in
Federal Commissioner of Taxation v Radnor Pty Ltd 91 ATC 4689; (1991) 102 ALR 187 at 205:

"Ultimately, the question whether the respondent was carrying on a business of dealing in shares is a question of fact and degree, a question of impression."

9. The Applicant's evidence was that in 2005 he had sold an investment property. He then consulted a firm of accountants, Tarrant and Tarrant, about future ventures. Although he received some advice from Tarrant and Tarrant, he very perspicaciously rejected their invitations to join in several schemes being advanced by that firm.

10. Ultimately the Applicant determined to operate as a trader in shares. To this end, he reduced his hours of work in his primary occupation from 70 to 80 hours a week to 35-40, and made a conscious decision to spend 35-40 hours per week on share trading.

11. Apart from capital of his own of $150,000.00, the Applicant borrowed, as a margin loan from Bankers Trust Australia, the sum of $500,000.00.

12. The Applicant also set up a dedicated office at his home, upgraded his computer, and purchased an electronic whiteboard and other

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ATC 4699

office furniture such as a desk, chair and filing cabinets. He also invested in accounting software.

13. It was put to the Applicant that although he may have outfitted an office there was no record of his having purchased any software applicable to share trading. The Applicant stated however that he had access to research materials such as the Financial Review, the Sanford Report, the Morning Star Report, Westpac Premium Research and research from BT Australia plus the annual reports of companies in which he held shares.

14. The Applicant was cross-examined regarding the actual research that he did, and I accept his evidence that although that he did not carry out activities such as charting or noting trend lines and cyclic performance of stocks, he had availed himself of advice that various persons or bodies were offering, and used and applied their analysis to influence the shares he either bought or sold.

15. The Respondent submitted that the Applicant did not apply any "business acumen" to his share trading, but simply adopted advice generally. I do not understand what is meant by business acumen, but I would have thought that the Applicant's ability to garner advice and act upon it is the application of intelligence to an activity, and for a modest trader it is not necessary to show that sophisticated software and strategies have been undertaken.

16. If an investment newsletter recommends the purchase of certain stocks, and the taxpayer has a defined strategy to act on that advice, I do not see the adoption of that course as inferior to in-depth research on one's own account.

17. What is more problematic is whether there was any particular strategy upon which the Applicant based his share trading activities.

18. The Applicant stated that in January 2007 he had prepared a strategy document. That document was created by him using advice he had received from Tarrant and Tarrant and Investone. The document was subject to a further version in June 2007 and then another version was created in June 2009.

19. Exhibit A7 in these proceedings is stated by the Applicant to be the document he created as his share trading plan. A document similar to A7 was annexed to the Applicant's Notice of Objection to the Respondent's assessment decision. Notwithstanding previous submissions made on the Applicant's behalf by his tax agent, the strategy document was first produced when the Applicant's objection was lodged.

20. The Respondent has pointed out anomalies in the three versions of the strategy document which were before me, namely Exhibit A7, and the documents at T1-23 and T10-220 of the documents prepared for the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act 1975.

21. For his part, the Applicant has stated that the document at T1-23 was meant to be a copy of the document at T10-220 but that he accidently printed an older working copy.

22. A version of Exhibit A7 did accompany the Applicant's objection. That objection, included at T1-18, was prepared by the Applicant's tax agent and, although that tax agent was not called to give evidence, at paragraph V of the objection it is noted:

"The reviewer was given sufficient information to make a valid appraisal. At no time was there a request to submit business plans or any other additional information …"

23. As stated above a copy of the share trading strategy accompanied the Notice of Objection.

24. I do not accept the Respondent's submission that Exhibit A7 is a concoction for the purposes of the Applicant's objection. That said, I do believe it is very much a consolidation of advice given by Tarrant and Tarrant, rather than any individualistic application of skill on the part of the Applicant.

25. The Applicant was cross-examined regarding the application of his strategy and his evidence that the global financial crisis intervened, and that although he tried to follow his strategy the market conditions did not allow him to adhere to that strategy. To my mind this shows that the Applicant was applying his mind to the management of his portfolio.

26. The Applicant was cross-examined as to the existence of other indicia of trading, such as charting, trend lines and records of the cyclic performance of stock. As I understand his

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ATC 4700

evidence, he agreed he did not himself undertake this activity, but did not consider it necessary to do so as he relied on advice from services such as Westpac Premium Research and the information disseminated by Chris Caton at BT Securities. He regarded himself as the user of other people's technical analyses.

27. Section 262A(1) of the Income Tax Assessment Act 1936 states that a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of this Act.

28. The Applicant has a dearth of records pertaining to his share trading activities. In particular the share trading strategy the Applicant claims he adopted recommends that the Applicant use both fundamental and technical analysis to get a holistic and daily view of his share trading activities, market performance and volatility of the companies and sectors of the economy in which he is trading.

29. The lack of documents supporting technical analysis has been explained by the Applicant, namely that he relied upon the analyses of others, but there was no other documentation save a share trading sales journal. This document could be reproduced from the records of Westpac but, as the Applicant pointed out, it was not necessary for him to maintain his own records of trade when he could download them from Westpac.

30. The Respondent conceded that the Applicant's share purchases and sales were for substantial amounts relative to the value of his income and assets. Further, as was pointed out in the
Commissioners of Inland Revenue v Livingstone (1926) 11 TC 538 (cited by the Respondent) Clyde LJ at 543 stated:

"The trade of a dealer necessarily consists of a course of dealing either actually engaged in or at any rate contemplated and intended to continue".

These factors were met by the Applicant.

31. The real issue in this matter is: did the Applicant advance beyond a person with a pastime or hobby, albeit an intensive one to which he devoted time and effort, to a stage where it could be said he was undertaking the business of trading in shares as opposed to investing in shares.

32. In
John v Federal Commissioner of Taxation 89 ATC 4101; (1989) 166 CLR 417 at 430 the Court said:

"If trading has not commenced or if there is no discernible trading pattern, the question of intention or purpose may be relevant in the sense that if there is an absence of intention or purpose to engage in trade regularly, routinely or systematically then the person may well not be a trader."

33. As Hill J pointed out in Radnor supra, intention may be relevant particularly in a case where the determination of business or no business is to be made at the time of commencement of the business. In this matter the Applicant explained that he had intended his activities to constitute a business in the tax year in question, and took steps to create corroborating particulars, as his then accountants had advised him the year previously that his activities did not exhibit enough indicia for the Respondent to regard his share trading in that year to amount to a business. I do not regard the Applicant as akin to the taxpayer in
Williams v Federal Commissioner of Taxation 72 ATC 4157; (1972) 128 CLR 645 who made "individual forays into the market" (at 656).

34. Reference was made to the Applicant being unable to demonstrate the application of "business acumen". I am unsure what this term means, but I am of the opinion that by applying his mind to the specialist commentators on the share market, seeking advice from others and from sources such as the Financial Review and deciding when to buy and sell certain stock, the Applicant was applying his mind to the business in hand. Whether his application could be said to be the application of acumen (which is defined by the Oxford Dictionary online as "sharpness of wit, quickness of penetration or perception, keenness of discrimination, the ability to make good judgements and decisions") is best determined by the results obtained.

35. The Applicant referred to the example of "Molly" in a document apparently downloaded from the Australian Taxation Office's website (see T1-8 of the s 37 documents). The

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ATC 4701

Respondent did not disown the document, but of course the example given can in no way bind either the Commissioner of Taxation or this Tribunal. On the other hand, the document must be taken to represent the considered view of the Respondent. The example given does not refer to charts, trend lines and technical analysis. The example does however refer to the use of resources such as financial newspapers, investment magazines and stock market reports, all of which were resources of which the Applicant availed himself.

36. Various cases were cited by the Respondent dealing with what constitutes being involved in trade. However, as pointed out in
North Australian Cement Ltd v Federal Commissioner of Taxation (1989) 89 ATC 4765 at 4768, there is no precedent value in findings of fact. Ultimately, as pointed out by Webb J at first instance in
Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474:

"The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained."

37. Further, as was pointed out by Hill J in Radnor supra:

"… every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business."

38. The Applicant has, having regard to the provisions of s 14ZZK of the Taxation Administration Act 1953, satisfied me that his activities amounted to the carrying on of a business in the tax year ending 30 June 2009.

39. The objection decision under review is set aside and this matter remitted to the Respondent with the direction that in the tax year ending 30 June 2009 the Applicant carried on the business of trading in shares. It follows that any penalty imposed is also remitted.