• The impact of this case on ATO policy is discussed in Decision Impact Statement: Wong and Commissioner of Taxation (Published 27 April 2012).

WONG v FC of T

Members:
A Sweidan SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2012] AATA 254

Decision date: 27 April 2012

---

A Sweidan (Senior Member)

Background

1. Applicant seeks review by this Tribunal of the objection decision referred to below.

Relevant facts

The Tribunal notes that the following facts are not in dispute.

2. At all relevant times the applicant carried on business as a medical practitioner.

3. Further, the applicant's husband, Leong Sea Wong ("John Wong") or the applicant and John Wong have at all material times been the trustees of a trust estate called the John & Evelynne Wong Family Trust ("the Family Trust").

4. The Prime Retirement and Aged Care Property Trust ("PTN") was a registered managed investment scheme established in 2001 for the purpose of investing exclusively in retirement villages and aged care facilities.

5. On 26 June 2007 an additional 50 million to 100 million units in PTN were offered to the public at $1 per unit.

6. In the Product Disclosure Statement ("PDS") for the offer by PTN, its objectives were stated as follows:

"The Prime Trust was established in 2001 as a public property trust dedicated to the specific asset class of property used for retirement and aged care facilities. The Responsible Entity considers that this designated sector of the property market has long term growth potential. Prime Trust's objective is to provide Unitholders with a total return from both regular distributions and capital growth."

7. John Wong as trustee for the Family Trust subscribed for and was allotted 1,100,000 PTN units at that time for $1,100,000 i.e. $1 per unit.

8. The above PTN units were listed on the Australian Stock Exchange for the first time on or about 3 August 2007.

9. The acquisition of these PTN units by John Wong as trustee for the Family Trust was not financed by a "margin" loan.

10. During the year ended 30 June 2008 John Wong as trustee of the Family Trust also purchased various shares and units listed on the Australian Stock Exchange for a total of $593,630.40.

11. The acquisition of the above shares and units was financed, at least in part, by way of an ANZ "margin" loan or loans.

12. During the year ended 30 June 2008 John Wong as trustee of the Family Trust also sold listed shares and units for a total of $374,861.68.

13. As at 1 July 2007 the applicant held various listed shares and units valued at $61,467.73:

14. Between 3 August 2007 and 21 February 2008 the quoted price of PTN units on the Australian Stock Exchange fell more or less continuously from $1.00 per unit to $0.69 per unit.

15. Further on 21 February 2008 or some earlier date the applicant purchased the 1.1 million units in PTN referred to in paragraph 9 above from the trustees of the Family Trust for a stated consideration of $1,100,000.

16. On 21 February 2008 the closing price for PTN units on the Australian Stock Exchange was $0.69 per unit. That price was down $0.02 on the previous day's closing price.

17. During the year ended 30 June 2008 the applicant purchased further listed shares and units (in addition to the 1.1 million PTN units she purchased on 21 February 2008 or some earlier date) for a total of $184,286.45 in a number of companies.

18. The acquisition of those shares and units was financed, at least in part, by way of an ANZ "margin" loan or loans.

19. During the year ended 30 June 2008 the applicant sold various listed shares and units for a total of $76,918.55 resulting in a gain of $10,019.57.

20. During the year ended 30 June 2009 the applicant purchased further listed shares and units for a total of $200,080.91.

21. During the year ended 30 June 2009 the applicant sold listed shares and units for a total of $97,179.66.

22. In addition, on 27 February 2009 the applicant sold 50,000 units in PTN for $3,860. She still holds the remaining PTN units.

23. As at 30 June 2009 PTN units were being traded on the Australian Stock Exchange for approximately 10 cents per unit.

24. On 30 June 2009 an income tax return for the year ended 30 June 2008 was lodged on behalf of the applicant. This return disclosed a taxable income of $163,053 calculated on the following basis:

Income
Gross interest		$2,416
Franked Dividend		$4,550
Franking credit		$1,950
Remitted GIC		$92
Net Capital Gain
Distribution from Trusts
Gross income from Medical Practice		$1,456,858
Less: Deductions
contractors	− $794,044
superannuation	− $8,896
rent	− $7,300
interest	− $40,273
depreciation	− $20,681
motor vehicle	− $3,134
repairs & maintenance	− $6,824
other	− $281,413
Expense reconciliation adj	− $2,050	− $1,164,615
Gifts		− $258
Managing tax affairs		− $178
Rental loss		− $81,233
Personal super deduction		− $50,000
Income protection		− $9,049
Taxable Income		$160,533

The applicant's losses suffered or gains obtained from selling listed shares and units did not form part of the calculation of this amount.

25. Also on 30 June 2009, an income tax return for the year ended 30 June 2008 was lodged on behalf of John Wong as trustee for the Family Trust. This return disclosed a net loss of $69,957 calculated on the following basis:

Total business income		$372,199
Less:
opening stock	$0
purchases & other stock	− $738,253
closing stock	$396,265	− $341,988
Interest		− $75,514
Other expenses		− $1,600
Net rent		− $23,055
Net Loss		− $69,958

26. The business income declared on behalf of John Wong as trustee for the Family Trust in the above income tax return was exclusively from the sale of listed shares and units and the references to opening stock, purchases and closing stock made in that return are references to such shares and units held and/or purchased as the case may be.

27. In addition to the above loss incurred in the year ended 30 June 2008, as at 30 June 2008 John Wong as trustee for the Family Trust had other prior year tax losses of $23,798.

28. The above sales, opening stock, purchases and closing stock disclosed in the income tax return of John Wong as trustee for the Family Trust for the year ended 30 June 2008 did not include the PTN units referred to in paragraph 7 above.

29. On 2 August 2010 an income tax return for the year ended 30 June 2009 was lodged on behalf of the applicant. This return disclosed a taxable income of $329,185 calculated on the following basis:

Gross interest		$952
Franked Dividend		$6,026
Franking credit		$2,582
Net Capital Gain		$31,281
Distribution from Trusts		$5,246
Gross income from Medical Practice		$1,732,016
Less :
contractors	− $1,008,579
superannuation	− $9,698
rent	− $6,801
interest	− $43,625
depreciation	− $18,928
motor vehicle	− $3,359
repairs & maintenance	− $2,158
other	− $282,673
Expense reconciliation adj	− $2,975	− $1,378,796
Rental loss		− $58,472
Income protection		− $11,650
Taxable Income		$329,185

The applicant's losses suffered or gains obtained from selling listed shares and units did not form part of the calculation of this amount.

30. On the same day an amended income tax return for the year ended 30 June 2008 was lodged on behalf of the applicant. This return disclosed an amended taxable income of $148,819 calculated on the following basis:

Income
Gross interest		$2,416
Franked Dividend		$4,550
Franking credit		$1,950
Remitted GIC		$92
Net Capital Gain
Distribution from Trusts
Gross income from business		$1,533,777
Less: Deductions
contractors	− $794,044
superannuation	− $8,896
rent	− $7,300
interest	− $60,923
depreciation	− $20,681
motor vehicle	− $3,134
repairs & maintenance	− $6,824
other	− $281,413
Expense reconciliation adj	− $2,050	− $1,185,265
opening stock	− $61,467
purchases and other costs	− $1,284,286
closing stock	$1,277,770	− $67,983
Gifts		− $258
Managing tax affairs		− $178
Rental loss		− $81,233
Personal super deduction		− $50,000
Income protection		− $9,049
Amended Taxable Income		$148,819

31. The reference in that return to gross income from business included gross receipts from the sale of listed shares and units in addition to gross income from the applicant's medical practice.

32. The references in that return to opening stock, purchases and closing stock related exclusively to listed shares and units purchased by the applicant including the PTN units referred to in paragraph 15 above.

33. On 13 August 2010 an amended income tax assessment for the year ended 30 June 2008 was issued to the applicant in accordance with the above amended return.

34. On 18 October 2010 Messrs Stirling Horne and Petr Vrsecky were appointed joint administrators of PTN. By that time all trading in PTN units on the Australian Stock Exchange had ceased.

35. On 30 November 2010 a notice of income tax assessment for the year ended 30 June 2009 was issued to the applicant in accordance with the applicant's income tax return for the year ended 30 June 2009.

36. By notice dated 21 January 2011 the applicant objected to her above assessment for the year ended 30 June 2009. The grounds of her objection included a contention that her taxable income for that year should be reduced to nil because of losses, not disclosed in her above return, that she suffered as a result of carrying on a business of share trading. It was also contended on her behalf that the calculation of those losses should be calculated on the basis that the PTN units referred to in paragraph 15 above were trading stock of that business.

37. By notice dated 27 June 2011 the respondent disallowed the applicant's objection in full.

Issues

38. The main issues for determination in this matter are:

• 42.1 whether the applicant was carrying on a business of trading in listed shares and units during the year ended 30 June 2009;
• 42.2 if so, whether the PTN units referred to in paragraph 15 above comprised part of the trading stock of that business during the year ended 30 June 2009 or at all;
• 42.3 whether, in either event, at the time the applicant acquired the PTN units profit making by resale was a significant purpose of the applicant or whether, instead, her dominant purpose in acquiring the PTN units was a purpose of:
  • 42.3.1 minimizing her income tax liability by offsetting the loss expected to arise on the disposal of or loss in value of the PTN units against her assessable income from other sources; or
  • 42.3.2 long term investment.

Respondent's contentions

39. The respondent does not admit that the applicant was ever carrying on a business of trading in listed shares and units.

40. The respondent asserts that:

• 44.1 The PTN units were acquired by John Wong as trustee for the Family Trust for the purpose of long term investment and the PTN units were never trading stock of any business of share trading that might have been carried on by John Wong as trustee for the Family Trust.
• 44.2 The PTN units were acquired by the applicant from John Wong as trustee for the Family Trust on 21 February 2008 for their full acquisition cost (i.e. by the Family Trust) of $1.00 per unit despite the fact that at that time the market value of the PTN units was approximately $0.69 per unit and had been in continuous steady decline since shortly after their acquisition by the Family Trust on or about 3 August 2007.
• 44.3 The applicant acquired the PTN units because it was anticipated that a large loss would be incurred by John Wong as trustee for the Family Trust on disposal of those units or through their loss in value and because it was anticipated that it would not be possible, in the foreseeable future, to offset that loss against any net income of John Wong as trustee for the Family Trust whereas it was anticipated that the applicant would have substantial taxable incomes in the year ended 30 June 2008 and in subsequent years that could be readily offset against the anticipated losses, thus reducing the applicant's income tax liability in those years.
• 44.4 Further or alternatively, the applicant acquired the PTN units from John Wong as trustee for the Family Trust for long term investment purposes.
• 44.5 The PTN units were not acquired by the applicant for profit making purposes and for that reason they never formed part of the trading stock of any business of share trading if, which is not admitted, the applicant was carrying on such a business.
• 44.6 For similar reasons, any realized loss that the applicant might have incurred on the sale of the PTN units was a capital loss and is therefore not deductible.
• 44.7 Further or alternatively, if, which is not admitted, any such realized loss is deductible, then it is restricted to the loss incurred by the applicant on the 50,000 PTN units that she actually sold during the year ended 30 June 2009.
• 44.8 Further or alternatively, if, which is not admitted, the PTN units were trading stock of a share trading business carried on by the applicant, John Wong as trustee for the Family Trust and the applicant were not dealing with each other at arm's length in relation to the acquisition of the PTN units. Accordingly, pursuant to section 20-70 of Income Tax Assessment Act 1997 the acquisition cost to the applicant of those units for income tax purposes is equal to the market value of those units as at 21 February 2008.

Applicant's contentions and Tribunal's findings

41. The applicant asserts that she was carrying on a business of trading in listed shares and units during the year ended 30 June 2009 and that the 1.1 million Prime Retirement and Aged Care Trust ("PTN") units acquired by her at some time during the previous financial year from the trustees of the John & Evelynne Wong Family Trust ("the Trust") were trading stock of that business. On that basis she claims that she is entitled to a deduction equal to the gross proceeds of sale of any shares or units sold in that year less her relevant "Cost of Goods Sold".

42. Applicant's husband (who managed her share investments) testified that the PTN units were acquired for profit making by sale in the first instance by the trustees and then by the applicant from the trustees. His evidence was that it was believed that the NTA (net asset value) of PTN was in excess of $1 per unit and that initial offer was underpriced. The Tribunal accepts his evidence.

43. Cost of Goods sold is ascertained by applying the formula:

"Opening Stock + Purchases − Closing Stock = Cost of Goods Sold;

where 'Opening Stock' is the cost price of the listed shares and units she was holding on 30 June 2008;

'Purchases' is the amount she has spent on acquiring shares and units during the year ended 30 June 2009 and

'Closing Stock' is cost price of the listed shares and units she was holding on 30 June 2009."

44. It is clear that if such a business is found to be carried on and the relevant shares and units are in fact trading stock of that business, the bringing to account of the gross sale proceeds and deduction of Cost of Goods Sold is authorized by Division 70 of ITAA 97, in particular section 70-5.

45. In that regard trading stock is defined in s 70-10 as "anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business".

46. It is clear that listed shares and units are capable of being trading stock.

47. The bringing to account of Opening Stock and Closing Stock is provided for in sections 70-35, 70-40 and 70-45.

48. While the value adopted for Opening Stock must be equal to the value adopted for Closing Stock in the immediately preceding year of income (per section 70-40) a taxpayer has a choice as to how he or she values Closing Stock. "Cost", "market selling value" or "replacement value" can be adopted.

49. The effect of these provisions is that unrealized as well as realized losses can be deductible. For example, if the value of shares on hand falls during the year, and market selling value is adopted for Closing Stock, then the mere reduction in value of stock on hand will reduce a taxpayer' s taxable income.

50. Deputy President RK Todd in case X86 90 ATC 681 said at 90 ATC page 629:

• "22. In relation to the question of whether this applicant was a share trader or a speculator it is necessary to determine whether or not he was engaged in the business of share trading. In Case X31 at p. 298 the Tribunal cited with approval the following passage from
  Martin v. FC of T (1952) 10 A.T.D. 37 at p. 39:

  '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… the determination is eventually based on the large or general impression gained.'

The question is therefore essentially one of fact. In deciding this issue the case law has established the following factors as generally relevant considerations:

• (a) the nature of the activities and whether they have the purpose of profit-making;
• (b) the complexity and magnitude of the undertaking;
• (c) an intention to engage in trade regularly, routinely or systematically;
• (d) operating in a business-like manner and the degree of sophistication involved;
• (e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
• (f) the volume of the taxpayer's operations and the amount of capital employed by him.;"

51. The Tribunal is of the view given the extent and volume of her trading that the applicant was carrying on a business of share trading and the Tribunal accepts that the PTN units were trading stock of that business, having been acquired for profit-making purposes.

52. The applicant claims that her share trading business made a loss which she seeks to offset against her other taxable income (mainly from from her medical practice) of $329,185 . The amount of that loss is said to be $1,109,042 - see folio 147 of the T docs.

53. Of that amount, $1,096,140 is said to be attributable to a loss incurred in relation to 1.1 million units in PTN.

54. According to folio 81 of the T docs, only 50,000 of those units were actually sold by the applicant during the year in question, realizing sale proceeds of $3,860. The remaining 1,050,000 units appear to have been unsold and on hand as at 30 June 2009. According to folio 147 of the T docs, these remaining shares have been valued, for the purposes of section 70-45, at "nil", hence the claimed unrealized loss of $1,096,042 - i.e. Opening Value of the PTN units (i.e. $1.1 million - based on the cost to the applicant of acquiring them from the Family Trust) less Closing Value (nil), less the realized sale proceeds of 50,000 units actually sold (i.e. $3,860).

55. Although the Tribunal accepts that the applicant was carrying on such a business and that the PTN units were trading stock of that business, the Tribunal does not accept that her loss attributable to the PTN units would have been $1,096,140. However it is accepted that it would have been greater than her other taxable income of $329,185 , with the result that her taxable income for the year would have been nil.

56. The evidence does not show that the market value of the PTN units as at 30 June 2009 was nil. The ASX chart suggests that they had a market value of approximately $0.10 per unit. On that basis an amount of $1.05 million × $0.10 = $105,000 would have to be added back.

57. The Tribunal also notes that the acquisition of the PTN units from the Family Trust was not at arm's length, and that section 70-20 would restrict the opening stock value to the market value, which the evidence (see the ASX Chart) suggests was approximately $0.70 × 1.1 million = $770,000.

58. As noted above on the evidence before it the Tribunal is of the view that the applicant was carrying on a business of dealing in shares and that the PTN units were trading stock of such a business. The Tribunal finds that the applicant was a "share-trader" in the sense of carrying on a continuous business enterprise of dealing in shares in the 2009 year

59. The Tribunal in that circumstance finds that the applicant's taxable income for the year of income ended 30 June 2009 is nil. That effectively deals with the assessment that she claims is excessive. The exact quantification of the applicant's consequent carry forward loss can be left for determination by the Commissioner at a later date.

Decision

60. The Tribunal sets aside the decision under review and remits the matter to the respondent for re-consideration and the issue of an amended income tax assessment in accordance with the Tribunal's findings that:

• (a) the applicant was carrying on a business of share trading in the relevant years of income;
• (b) the PTN units were trading stock of that business; and
• (c) the applicant's taxable income for the year ended 30 June 2009 was nil.