The impact of this case on ATO policy is discussed in Decision Impact Statement: Picton Finance Limited and Commissioner of Taxation (Published 24 June 2013).

PICTON FINANCE LTD v FC of T

Members:
PW Taylor SM

Tribunal:
Administrative Appeals Tribunal of Australia, Sydney

MEDIA NEUTRAL CITATION: [2013] AATA 116

Decision date: 5 March 2013

PW Taylor SC (Senior Member)

1. Picton Finance Limited was incorporated in December 2003 under the International Companies Act of the Republic of Vanuatu. Its members were Vanuatu residents associated with the accountancy practice known as PKF Vanuatu.

2. Picton's only activity was to invest in EnviroGold Limited. In September 2004 EnviroGold Limited was called Southern Equity Holdings Limited. It was listed, but until 31 January 2006 suspended from trading, on the Australian Stock Exchange. In the intervening period it underwent various name changes. By August 2005 its name had changed to Compass Gold Limited. It changed name again, to EnviroGold Limited, in about September 2005.

3. Between September 2004 and October 2007 Picton acquired 6,000,000 shares in EnviroGold Limited in three "off market" transactions. From about May to October 2007 Picton sold 4,740,000 EnviroGold shares in three other "off market" transactions. The actual dates and prices of these various transactions are not easy to determine precisely. The relevant aspects of the transactions, as asserted by Picton, are summarised in the following table.

Picton Finance Limited - EnviroGold "off Market" share transfers

4. Between about 17 August 2007 and 14 April 2008 Picton bought and sold more EnviroGold shares in numerous "on market" transactions. These transactions were carried out by an Australian stockbroker, in the name of IFTC Broking Services Limited. It was another corporate entity controlled by PKF Vanuatu and had acted on Picton's behalf.

5. The Commissioner issued default assessments (under Income Tax Assessment Act 1936 (ITAA 1936) s 167) for each of Picton's 2007 and 2008 tax years, and imposed related penalties. Those assessments characterised Picton's EnviroGold share transfers as activities undertaken in the course of a share trading business, or otherwise undertaken for the purpose of profit making. The Commissioner determined that Picton's net share sale proceeds were Australian sourced income. Picton objected to the Commissioner's assessments.

6. In the 29 April 2011 decisions that are the subject of these review proceedings, the Commissioner disallowed Picton's objection to the 2007 tax year assessment, but partly allowed the objection to the 2008 tax year assessment (by removing EnviroGold share transactions that had already been included in assessments of entities other than Picton). As a result of the Commissioner's objection decisions, Picton's assessed tax liabilities, and the revised penalty amounts likely to apply, are as set out in the following table.

Assessment Items	2007	2008	Total
Income - assessed	318,182	137,344	455,526
Assessment	95,455	41,203	136,658
Penalties	71,591	37,082	108,673
Total tax & penalties	167,046	78,285	245,331

PICTON'S CONTENTIONS

7. Picton originally disputed, but by the time of the review hearing accepted, the Commissioner's characterisation of it as a trader in EnviroGold shares. It then contended that just before the 24 May 2007 share transfer it had started to hold its EnviroGold shares as "trading stock" for the purposes of Income Tax Assessment Act 1997 (ITAA 1997) s 70-10(1). The grounds of objection it pursued in the review proceedings principally involved the following propositions.^[1] Picton also submitted that the share sale proceeds were not assessable as statutory income for the purpose of ITAA 1997, because any capital gain was CGT event K4 – and was disregarded under the operation of Division 855 of ITAA 1997. The findings I have made on the other grounds make it unnecessary to address this submission.

(a) The 2007 and 2008 assessments had overstated the "off market" EnviroGold share sale proceeds.
(b) The 2007 and 2008 assessments both understated the relevant cost or value of the EnviroGold shares.
(c) The share sales did not give rise, in any event, to Australian sourced income.

THE SHARE SALE PROCEEDS

The "market price" at registration issue

8. The Commissioner's assessments calculated the gross sale proceeds of Picton's EnviroGold transactions by applying either the actual recorded price for the "on market" transactions or, in the case of the "off market" transactions, the average market price on the day the transfers were recorded in the EnviroGold share registry. Picton contended that the Commissioner's assessment did not reflect the actual "off market" share transfer prices and overstated the proceeds of the sale transactions. Picton tendered the three "off market" share sale transfers. Their nominated dates - 24 May 2007 (3,040,000 shares), 16 August 2007 (700,000 shares) and 7 September 2007 (1,000,000 shares) - were earlier than the share registry record dates. The transfers also recorded lower total purchase price amounts than those the Commissioner had calculated by using the average market prices on the registration dates.

9. An assessment based on the use of average market prices is not justified where there is acceptable evidence of the actual sale prices. The Commissioner's assessment had proceeded on the basis that there was no such evidence. But Picton provided evidence about both the circumstances in which the "off market" transfers had been prepared and executed, as well as evidence of the payment of the stated consideration to the New Zealand bank account of a trustee company controlled by PKF Vanuatu. In these circumstances Picton has established that the relevant sale prices were those recorded in the "off market" share transfers, and that the sale proceeds were less than those on which the Commissioner's assessments had been made.

The apparent over-statement of share sales

10. Picton complains that the Commissioner's assessment "double counted" seven transactions between 29 October and 9 November 2007. These transactions involved 534,000 shares and sale proceeds of $115,980. Picton suggests that the transactions have been "double counted" because the Commissioner took the details from the list of EnviroGold share trades carried out for IFTC Broking Services (albeit on behalf of Picton) and added them to the list of trades recorded, in Picton's own name, in the EnviroGold share registry. The key aspects of Picton's contention are (i) evidence that IFTC Broking Services caused all "on market" transactions to be carried out in its own name (rather than Picton's name), (ii) the fact that the summary of the list of transactions Picton said IFTC Broking Services undertook on its behalf did not include the seven transactions in question, and (iii) the appearance that identical parcels of shares were traded, at almost identical prices, on the same day.

11. The similarity in the details of the seven contentious transactions does give rise to the possibility that the transactions have been double counted in the assessment. But it is not the only possible explanation. Mr McLeish (whose role as Picton's administrative manager I outline in paragraph 20) gave no specific evidence about these transactions, but he did say that all of the "on market" trades that IFTC Broking Services caused the Australian broker to carry out for Picton were recorded in the broker's name. If that proposition was correct, then there would have been no reason for such a transaction to have resulted in changes to the EnviroGold share registry details relating to Picton. The fact that both the broker's records and Picton's share registry entries do each record the seven similar contentious transactions seems more consistent with the likelihood that there were separate, similar transactions, rather than that they have merely been duplicated in the Commissioner's assessment. The evidence ultimately is confusing and inconclusive. The confusion was not specifically addressed by Mr McLeish in his evidence. In the absence of specific evidence from either Mr McLeish or some other responsible and informed person, it is not appropriate to conclude that Picton has provided a sufficient basis to demonstrate that the Commissioner's assessment is overstated because of any "double counting" of the seven contentious transactions.

PICTON'S "OFF MARKET" ENVIROGOLD SHARE ACQUISITION COSTS

12. Despite the demonstrated overstatement of Picton's income in the challenged assessments, the Commissioner disputed that Picton had established the assessments were in fact excessive. The assessments proceeded on the basis that Picton had acquired 4,000,000 EnviroGold shares in September 2004 for a cost of $400,000, and a further 1,500,000 shares in October 2007 for $300,000. The assessments had not taken into account an amount of $75,000 Picton asserted was the cost of its 2005 acquisition of a further 500,000 EnviroGold shares.

13. In the review proceedings the Commissioner put Picton to proof of the cost of both the September 2004 and the 2005 share acquisitions. In so doing the Commissioner relied on the onus Taxation Administration Act 1953 (TAA) s 14ZZK(b)(i) imposed on Picton, of showing that the assessments were excessive. (Picton conceded that the 2008 assessment overstated the cost of the 1,500,000 share acquisition in 2007. I deal with this matter in paragraphs 36 to 43.)

14. A taxpayer who undertakes the task of discharging the statutory onus will necessarily focus upon the factual basis of the Commissioner's assessment, and the reasoning that underlies it. Speaking of the similarly worded onus provision then contained in ITAA 1936 s 190 (b), in
Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217 at 235 Stephen J said the provision:

casts the onus upon the taxpayer, where there is a subsisting assessment, of showing that assessment to be excessive. It does not concern itself with whatever may be the particular basis of liability to tax upon which the Commissioner relies, as for instance, of the alleged making of profit from a profit-making scheme. Should such prove, in a given case, to be the basis for the Commissioner's assessment, it will follow that to discharge the statutory onus the taxpayer must show, on the balance of probabilities, that his assessable income in fact included no profit of that character. He has to do so not because [the onus] would otherwise raise a presumption that such profit existed but simply because, knowing (as he is entitled to -
Bailey v F C of T (1977) 13 ALR 41; 7 ATR 251) that that is the particular basis upon which the Commissioner has included in his taxable income amounts which he regards as excessive, he thereby demonstrates excessiveness of the assessment.

15. The nature and extent of a taxpayer's onus, in demonstrating that an assessment is excessive, was authoritatively explained by Brennan J in
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614; (1990) 90 ALR 341. His Honour, recognised the practical reality that the Commissioner's reasoned assessment decision, and the grounds of objection, would often identify the matters to be determined in the appeal review proceedings. But that ordinary position applies where "all relevant circumstances have been proved": per Murphy J in
Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217 at 256. In such a case, a taxpayer would succeed by demonstrating, on the balance of probabilities, that the assessment included amounts that ought not to have been included, and that the assessable income was in fact less than the Commissioner's assessment. Brennan J then continued (at
168 CLR 621 and 625) (I have added the emphasis at the end of the first passage):

A taxpayer, who seeks to discharge the burden of proving that the amount shown in the notice of assessment is excessive, is limited by s 190(a) to the grounds stated in an objection against the assessment. An objection must state "fully and in detail" the grounds on which a taxpayer relies (s 185) and the Commissioner is required, after consideration of the objection, to "disallow it, or allow it either wholly or in part": s 186. But an objection and a Commissioner's notice of decision on the objection are not pleadings which so confine the issues as to preclude the Commissioner from putting the taxpayer to proof of the true amount of his taxable income . After all, the purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act. Oftentimes, the grounds of an objection and the Commissioner's notice of decision thereon will define the issues for determination by a court entertaining an appeal against the assessment; but not necessarily so. It is not the grounds of the objection against an assessment but the objection itself which is treated as an appeal and forwarded to a Supreme Court for hearing and determination: ss 187(1)(b), 197, 199. It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment .

…

… where, as here, the taxpayer has not proved that his actual taxable income is less than the amount assessed, the Court does not know all the material facts and it cannot find that the amount assessed is wrong.

16. This passage, and in particular the proposition that the Commissioner is not confined to the components included in the assessment, indicate why establishing error in one component of the assessment is not, of itself, sufficient to demonstrate that the Commissioner's assessment was excessive. In strict principle, the taxpayer must necessarily exclude all sources of income except those that have been disclosed and admitted. The taxpayer's case must be that they did not derive taxable income, from any source, to the extent that has been taken into account in the assessment:
George v Federal Commissioner of Taxation (1952) 86 CLR 183 per Kitto J at 189. But that statement was made in the context of a case where the substantial, and readily evident, point in controversy (as in Dalco) was the real extent of the taxpayer's income. A taxpayer who challenges an assessment does not have to speculate about the evidentiary basis on which the Commissioner opposes the taxpayer's attempt to show that the assessment is excessive:
Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214 at 227-8 per Aickin J. The Tribunal ought be given a clear understanding of the position of both the taxpayer and the Commissioner, without thereby imposing any element of burden of proof on the Commissioner:
BAE Systems Australia (NSW) Pty Ltd v Federal Commissioner of Taxation (2008) 69 ATR 567; [2008] FCA 48 at [19].

17. In the circumstances of the present case, despite the overstatement of the net sale proceeds for the "off market" EnviroGold share transfers, Picton had to establish that this overstatement effected the amount of its assessable income. The Commissioner correctly contended that, at the least, this required Picton to demonstrate the relevant cost of the shares.

Picton's 2004 share acquisition

18. The circumstances of Picton's EnviroGold share acquisitions are material both to the cost of the shares and to the purpose for which Picton acquired them. These different aspects of the materiality of the acquisitions require a careful evaluation of the nature of Picton, the role of PKF Vanuatu and the circumstances of Picton's EnviroGold share acquisitions.

19. According to Picton's constitution it had "unrestricted" objects and purposes, but was prohibited from carrying on business in Vanuatu except, inter alia, in furtherance of business carried on outside the country. (That prohibition did not restrict its ability to obtain professional services, keep records, or hold meetings, in Vanuatu.) It was a company limited by guarantee, but its members had no right to participate in any distribution of the company's profits. Any profits were to be accumulated. The company could be dissolved on the written determination of an "Appointor" nominated by the company's incorporators. On dissolution, the company's surplus assets were to be distributed to its members (as to US$5) and otherwise as directed by the "Appointor". I referred in paragraph 1 to PKF Vanuatu's role in Picton's December 2003 incorporation. PKF Vanuatu's usual practice, when incorporating international companies for clients, was to have its principal, Mr Robert Agius, nominated as the company's "Appointor". Mr Agius was a director of Picton between February 2007 and December 2008.

20. Picton's evidence about its 2004 and 2005 EnviroGold share acquisitions included both some contemporaneous documents and evidence from Mr McLeish. He was a PKF Vanuatu employee and a director of IFTC Broking Services (to which I referred in paragraph 4 above). He had been the authorised signatory of the PKF controlled company that was a director of Picton (and, apart from the period when Mr Agius held office, was the only director of the company). In his capacity as an authorised signatory Mr McLeish was nominally "responsible for the management" of Picton. The fact of Mr McLeish's involvement in Picton's activities in at least the years 2004, 2005 and 2007 was evident from contemporaneous documents. He also signed Picton's August 2010 notices of objection to the Commissioner's assessments.

21. Mr McLeish's evidence was that PKF Vanuatu had "managed" Picton at the instigation of a client named Andrew Hedges. He was a sometimes resident of the UK and Bahrain. Until Mr Hedges' death in about October 2005, Picton's directors acted in accordance with his instructions, and regarded him as the person relevantly entitled to the company's surplus assets. According to Mr McLeish, after Mr Hedges' death, his son Thomas took over and had authorised a Mr Johnson to look after Picton's interests. (Johnson was himself a director of EnviroGold. He was a director of each of the transferees in the 2007 "off market" share transfers referred to in paragraph 3 above. He was an Australian citizen.) Picton's activities were, so far as the evidence reveals, exclusively concerned with its shareholding in EnviroGold. I infer that PKF Vanuatu's management of Picton's EnviroGold shareholding was (subject to the constraints of propriety and lawfulness) merely responsive to the requirements and recommendations of Andrew Hedges, and after his death in 2005, those of Johnson.

22. In April 2004 a PKF Vanuatu controlled trustee (International Finance Trust Company Limited) transferred two amounts of AUD$500,000 from its New Zealand bank account to EnviroGold's Australian bank account. The trustee's records indicate it had acted on the instructions of an entity called Red Oak Holdings Limited. The records described the transfers as relating to Picton, and to another entity named Nanking Investments Limited. On 18 May 2004 the trustee made a further transfer of $100,000, again on the instructions of Red Oak Holdings, and relating to Nanking Investments Limited.

23. On 26 July 2004 Mr McLeish wrote to EnviroGold on Picton's behalf. Without referring to the previous transfers totalling $1.1 million, the letter made an offer for Picton to lend EnviroGold up to AUD$1.5 million. The offer was conditional on the money being onlent to another company ("DGPL") that held 50% of the shares in "LLL". (LLL was identified as a company with the rights to a gold tailings reprocessing project in the Dominican Republic.) The offer also required that DGPL further onlend the funds to LLL. Alternatively, EnviroGold could subscribe to the share capital of DGPL. If EnviroGold subscribed to the capital of DGPL, the Picton loan was to be converted into shares in EnviroGold. (In that event, Picton would advise EnviroGold of the names of the entities to which the EnviroGold shares were to be issued.) If EnviroGold decided not to subscribe to the capital of DGPL, then LLL was to be treated as the direct borrower from Picton. Mr McLeish concluded his letter with a request for fund transfer details, if the offer was acceptable.

24. The letter of 26 July 2004 offering a loan of up to $1.5 million is difficult to understand, unless it was merely a retrospective recording of the circumstances that applied to the earlier transfers of funds, in April and May 2004. Mr McLeish suggested, although without any actual recollection of the true state of affairs, that his 26 July 2004 letter had been misdated. That is a possibility, but one that generates no confidence about the actual sequence of events between the fund transfers and the issue of the shares.

25. Mr McLeish wrote to EnviroGold again on 3 September 2004. This letter referred to a prior loan of AUD$1.1 million by Picton to EnviroGold. (In so doing it reflected the total of the April and May 2004 transfers.) The letter went on to authorise EnviroGold to apply the loan funds to a subscription for shares at a rate of $0.05 per share. The letter detailed the share allocations required, (subject to a contemplated 2 for 1 share consolidation that was referred to in the letter). The share allocations requested were as set out in the following table.

Nominated Shareholder	Shares	Issued	AUD
	*requested*	*contemplated*
	at $0.05	at $0.10
Fersdon Limited	1,000,000	500,000	50,000
Nanking Holdings Limited	6,000,000	3,000,000	300,000
Pacific Resources Limited	7,000,000	3,500,000	350,000
Picton Finance Limited	8,000,000	4,000,000	400,000
Total	15,000,000		1,100,000

26. Only Picton and Nanking Investments Limited had previously been identified as the source of the April and May 2004 fund transfers. Neither was nominated to receive shares whose value reflected the amounts they had apparently provided. Conversely, entities that did not appear to have provided any funds (Fersdon Limited and Pacific Resources Limited) were nominated by Picton to have EnviroGold shares issued to them.

27. According to information in an October 2009 memorandum Johnson addressed to the Australian Federal Police, Fersdon Limited and Pacific Resources Limited were companies Andrew Hedges had incorporated in the Isle of Man in 2000 and 2001. In the same memorandum Johnson suggested that it was actually Fersdon Limited, and another Hedges' controlled company, TransGulf Trading International SA, that had provided the funds used for the April and May 2004 transfers to EnviroGold. Johnson also suggested that Red Oak Holdings Limited had changed its name to Nanking Investments Limited, and that they were the same entity. None of these suggestions was substantiated.

28. The Commissioner contends the evidence does not lead to satisfaction that Picton incurred any costs in acquiring the EnviroGold shares allocated to it September 2004. The Commissioner says that the evidence shows at most a loan and, even then, the real nature of the fund transfers, and the relationship between the various Hedges' companies, is obscure. In that regard there are obvious deficiencies in Picton's evidence in disclosing the arrangements between Picton and the other entities controlled by Hedges and apparently involved in the September 2004 EnviroGold share allocation to Picton. But the evidence in the contemporaneous documents does disclose EnviroGold's issue of 4,000,000 shares to Picton in September 2004. It also records Picton having provided $500,000 to EnviroGold, and its request to issue the shares in discharge of the loan obligation. Those circumstances, taken with the contemplated $0.10 issue price of the shares, suffices to establish that Picton's cost of the 4,000,000 shares issued to it in September 2004 was the AUD$400,000 amount taken into account in the Commissioner's assessment. The obscurity of the evidence in failing to explain the complete circumstances in which Picton either obtained the funds from, or directed the allocation of shares to, other Hedges' entities does not detract from the conclusion. On the balance of probabilities, the cost of the 4,000,000 shares EnviroGold issued to Picton was $400,000, and represented a cost of $0.10 per share. Picton has discharged its onus in relation to establishing the cost of the shares EnviroGold issued to it in September 2004.

Picton's 2005 share acquisition

29. In his written statement of evidence Mr McLeish recorded that "on or around 31 October 2005, [Picton] acquired a further 500,000 ordinary shares in EnviroGold at 15 cents per share". Picton contended the Commissioner had wrongly ignored the $75,000 cost of this 2005 "off market" share acquisition.

30. Picton provided an undated share transfer form recording a transfer of 500,000 EnviroGold shares by Pacific Resources Limited for a consideration of $75,000. That amount reflects a price of $0.15 per share. The transfer form was signed by Mr McLeish (as an authorised signatory of Picton's corporate director) and by Mr Andrew Hedges (as a director of Pacific Resources Limited). This undated transfer was, consistent with Mr McLeish's statement, ultimately registered on 31 October 2005 (that is, at about the time Mr Andrew Hedge died). Nevertheless, Picton claimed the relevant transfer date was 24 August 2005. Mr Hedges appeared to have faxed a copy of the transfer form to PKF Vanuatu's offices on 24 August 2005. There Mr McLeish signed it on Picton's behalf as transferee. But it is not clear whether Mr Hedges had already signed the form at that stage. Neither is it clear, because the form is undated, when the actual transaction was intended to take effect. The delay in registration of the transfer by EnviroGold, and the absence of any more specific evidence about the circumstances of the transaction preclude confidence about its real date.

31. Picton has not found any record of having paid Pacific Resources Limited the $75,000 price of the 500,000 shares. In a 9 March 2012 letter to the Commissioner, Picton's solicitors suggested that the absence of any evidence of payment by Picton to Pacific Resources Limited was that the transfer involved only a change of the legal ownership and not beneficial ownership of the shares. This suggestion, itself ambiguous as to the companies that were the respective legal and beneficial owners, may have been prompted by the share allocations requested in Mr McLeish's 3 September 2004 letter. In that letter 7 million EnviroGold shares were requested to be allocated to Pacific Resources Limited, notwithstanding the absence of evidence that company had contributed to the $1.1 million that had previously been sent to EnviroGold.

32. There is not an adequate factual basis to accept Picton's ambiguous assertion that the 2005 transfer of 500,000 EnviroGold shares by Pacific Resources Limited was a mere transfer of beneficial ownership. Both the share transfer form, and Mr McLeish's statement describe the transaction as a purchase for value - and a value greater than the either of the $0.05 or $0.10 allocation prices contemplated in the 3 September 2004 letter. Moreover the $350,000 allocation cost of the EnviroGold shares to be issued to Pacific Resources Limited far exceeded the $100,000 balance of Picton's original $500,000 fund transfer. Consequently, even if there was a justifiable basis for concluding that Pacific Resources Limited had been allocated shares in 2004, and had held them on a resulting trust for Picton, there is no acceptable basis for concluding that the undated share transfer related to those shares.

33. Mr McLeish suggested in his oral evidence that any payment by Picton to Pacific Resources Limited for the 500,000 share transfer would have been attended to by Mr Hedges by means of some kind of intercompany adjustment. Because they were both Hedges' companies, Mr McLeish's suggestion has some force, but only to indicate the possibility of such an adjustment. The undated share transfer, unless it is simply taken at face value, is probative of neither the neither the fact nor the content of any Picton liability in relation to the share transfer.

34. Picton says that despite the absence of any evidence it paid for the 500,000 shares transferred by Pacific Resources Limited, the acquisition should still be taken into account at the "market value" of the shares - because ITAA 1997 s 70-30(4) authorises that assessment basis where items have been acquired for "no consideration". The Commissioner responded to that contention by disputing that Picton had established that the transfer involved "no consideration". It is unnecessary to determine that point. Picton's evidence does not, in any event, establish an applicable "market value". In an attempt to do so, Picton referred to resolutions that had been passed at an Annual General Meeting of EnviroGold Limited on 21 September 2005. Those resolutions approved the issue of up to 25,000,000 fully paid ordinary shares at a price of $0.15, and the issue of a prospectus to raise $2.5 million from the issue of a further 12.5 million shares at a price of $0.20. But it is quite unclear whether those approvals, which reflect decisions of the EnviroGold board, provide a meaningful indication of the real market value of any shares. Regard to the prices of EnviroGold shares after "on market" trading resumed, at the end of January 2006, shows a general trading range from $0.10 to $0.14 for the remainder of calendar year 2006, with a peak of $0.15 on 11 May 2006. In addition, uncertainty about the relevant market value of the EnviroGold shares transferred by Pacific Resources Limited arises because the actual operative date of the transfer has not itself been established by the evidence. That date may have been either weeks before, or weeks after, the 21 September 2005 resolutions.

35. This evidence leads to nothing but uncertainty about the true nature and details of the 2005 share transfer by Pacific Resources Limited. In these circumstances, Picton cannot establish the actual substance of the transaction relating to the 500,000 shares it acquired from Pacific Resources Limited. It cannot, therefore, establish that the Commissioner's assessment was excessive, by failing to include any acquisition cost for the shares in determining the amount of gross proceeds Picton derived from its subsequent sale of EnviroGold shares.

Picton's 2007 "off market" share acquisition

36. The Commissioner's assessment included Picton's 2007 acquisition of 1,500,000 EnviroGold shares. The assessment had, in effect, assumed that it was on "on market" transaction that occurred at the $0.20 average market price on 30 October 2007 - the date when the transfer was recorded in the EnviroGold share registry. Mr McLeish gave no evidence about Picton's acquisition of these additional 1,500,000 EnviroGold shares.

37. The asserted details of this acquisition did not emerge until after the hearing of the proceedings, and in response to my enquiry to the parties. That enquiry was prompted by my initial analysis of the sequence of the "off market" transactions Mr McLeish had referred to in his witness statement. The table set out in paragraph 3 above includes (as unshaded entries) those "off market" transactions about which Mr McLeish gave evidence. The shaded entry is the 2007 transaction whose "off market" nature and details only became apparent in response to my enquiry. As the table indicates, but for the shaded entry (that is, taking Mr McLeish's evidence at face value) Picton appeared to have sold more shares "off market" than it had acquired. This appearance could not be accounted for by analysis of Picton's "on market" transactions.

38. My post hearing enquiry of the parties pointed out this apparent incongruity in the evidence. It also pointed to the claim Mr Johnson had made (in his 30 October 2009 Memorandum to the Australian Federal Police) that as at November 2007 Picton held 726,000 EnviroGold shares. The apparent incongruity in Mr McLeish's evidence, and Mr Johnson's claim gave rise to the possibility that Picton had been involved in EnviroGold share trading activities additional to those that had been taken into account in the Commissioner's assessments.

39. The Commissioner initially responded to my enquiry by suggesting the incongruity was more apparent than real, and disappeared if the transactions were analysed in the sequence in which the various dealings had been recorded in the EnviroGold share register. The Commissioner contended that no inferences should be drawn from any claims Mr Johnson had made in his Memorandum to the Australian Federal Police. The Commissioner disputed that there was any proper evidentiary basis to accept that Picton held 726,000 EnviroGold shares as at November 2007.

40. Picton, on the other hand, conceded that Mr McLeish's evidence had not properly described all of its "off market" EnviroGold share acquisitions. It provided another "off market" share transfer form (with the details I have summarised in the shaded entry in the table). That form was signed by Mr Thomas Hedges, as the sole director and company secretary of the transferor, Pacific Resources Limited. Picton contended that when this additional "off market" acquisition was taken into account it (i) removed the appearance of incongruity that otherwise emerged from the transactions to which McLeish had referred in his evidence, and (ii) it substantiated the claim Mr Johnson had made (in his 30 October 2009 Memorandum to the Australian Federal Police) that as at November 2007 Picton held 726,000 EnviroGold shares.

41. The Commissioner's further primary response was that the Tribunal should ignore Picton's additional material. In this respect the Commissioner emphasised (i) the belated nature of the evidence, (ii) the discrepancies between the dates of execution and registration of the transfer form for the 1,500,000 shares, and (iii) the lack of any explanation of the transaction. The Commissioner's alternative response, if the evidence of the 2007 "off market" acquisition of 1,500,000 shares was accepted, involved these propositions:

(a) the Commissioner's assessment was understated by at least $77,400 (because the assessment had assumed a market price acquisition cost of $0.20 - rather than the $0.10 price indicated by the "off market" transfer form);
(b) there was no evidence from which the Tribunal could properly conclude that Picton had continued to hold the 726,000 EnviroGold shares from November 2007 until June 2008, and that this absence of evidence precluded Picton from discharging its onus of proof;
(c) Mr McLeish's witness statement, with its claim that Picton held approximately 3.388 million EnviroGold shares as at 30 June 2008, contrasted with the Commissioner's assessment that Picton held about 3.6 million EnviroGold shares, the contrast suggested that the Commissioner's assessment had either overstated the true level of Picton's share purchases, or understated the amount of its shares sales, and on either basis may have understated the amount of Picton's assessable income.

42. The Commissioner's frustration with Picton's belated disclosure of its "off market" 2007 EnviroGold share acquisition, and its consequentially necessary concessions about the inadequacy and inaccuracy of Mr McLeish's evidence, are understandable - to say the least. But it would be wrong not to have regard to the 2007 transfer. The Commissioner's assessments relied on the registration details in the EnviroGold share register. The share register details themselves disclose both the registration of 1,500,000 shares on 30 October 2007, and that Picton was the registered holder of 726,000 EnviroGold shares as at 12 November 2007. The apparent discrepancy between Picton's claim (in Mr McLeish's statement) that IFTC had accumulated 3.38 million EnviroGold shares in on market transactions, and the Commissioner's claim that Picton had accumulated a total shareholding of 3.6 million EnviroGold shares does not undermine this conclusion. That is because Mr McLeish's statement does not correctly account for either the EnviroGold shares Picton held in its own name, or the seven transactions from 30 October to 9 November 2007 which, as I have already held, Picton unsuccessfully contended had been "double counted". When those matters are taken into account, there is no real unexplained discrepancy between the Commissioner's and Picton's competing contentions. This can be demonstrated as follows:

Picton's claimed shareholding	3,388,053
Shares held in Picton's name	726,000
Shares sold 30 Oct to 9 Nov 2007	-534,000
Share acquisition disputed by Picton	20,000
Total shares in contest	3,600,053
Commissioner's assessment	3,600,053

Findings on acquisition costs and sale, proceeds

43. In accordance with the matters addressed in the preceding paragraphs I make the following findings.

(a) Picton has made good its contention that the Commissioner's assessments overstated the company's proceeds of sale for the three "off market" transfers in the 2007 and 2008 tax years.
(b) Picton has made good its contention that the cost of its September 2004 acquisition of EnviroGold shares was $400,000.
(c) Picton has failed to establish that it incurred a cost of $75,000 for its 2005 acquisition of 500,000 EnviroGold shares.
(d) The details of Picton's 2007 EnviroGold share acquisition show that the Commissioner's assessment overstated the cost of that acquisition, and hence understated Picton's assessable income in the 2008 tax year, by at least $77,400 (that is, the cost of the number of those shares that were sold during the year).

THE "TRADING STOCK" ELECTION ISSUES

44. In the review proceedings Picton said it should be treated as having made elections, under ITAA 1997 ss 70-30(1) and 70-45, to take the market value of its EnviroGold shares as their relevant "cost" in calculating the net proceeds of the various sale transactions. This assertion depended on the shares being regarded as "trading stock" for the purposes of ITAA 1997 s 70-10(1). Picton ultimately contended (despite the position it had previously adopted) that it had started to hold its EnviroGold shareholding as "trading stock" as at the 24 May 2007 date recorded on the first "off market" transfer. At the conclusion of the review hearing Picton tendered a letter dated 3 August 2012, as evidence of those elections for each of the 2007 and 2008 tax years. This letter, in relation to the 2007 tax year, was expressed as (i) an unconditional election for Picton "to be treated as if … just before they became trading stock" it had sold the EnviroGold shares for market value and had "immediately bought the shares back for the same amount," and (ii) an election to value at market cost the EnviroGold shares it held as trading stock at 30 June 2007.

45. The 3 August 2012 letter complemented a similar, but conditional, election letter dated 11 April 2012. At the time of the earlier letter Picton had not abandoned its original contention (that its EnviroGold share sales in 2007 and 2008 were not "share trading" transactions). In the April 2012 letter it had expressed the "election" as an alternative argument, and one that was conditional on the rejection of its original contention. The unconditional 3 August 2012 "election" letter was Picton's response to the Commissioner's argument that the conditional nature of the 11 April 2012 letter precluded it from operating as an election.

46. The wording of ITAA 1997 s 70-30(2) applies if a taxpayer starts to hold previously acquired assets as part of the taxpayer's "trading stock". If that contingency applies, the section permits a taxpayer to make an election about the cost at which the assets are taken into account as "trading stock", for the purpose of calculating the "cost of goods sold" and hence the taxpayer's gross trading revenue. (The permissible election is between historical cost and the relevant market value of the assets.) The section requires the taxpayer to make the election either by the time they lodge their tax return, or as soon as is reasonable after they realise that the items had become trading stock. If the taxpayer has lodged a return but not made a timely election the Commissioner has a discretion to allow a belated election.

47. The wording of s 70-30(2) ITAA 1997 (and the election time limit it contains) is directed at the ordinary case where a taxpayer lodges a tax return for the relevant year. It does not apply, to require a taxpayer's timeous election, where the Commissioner issues a default assessment under s 167 ITAA 1936. The election referred to in s 70-45 of ITAA 1997 applies to the value of trading stock on hand at the end of an income year. It appears to be a mandatory election, to which no expressly stated time limit applies. Picton contended that, where it had not lodged a tax return, the terms of both ss 70-30(1) and 70-45(1) entitled it to have the benefit of an election, irrespective of any time limit that might otherwise have applied under s 70-30(2) ITAA 1997.

48. The statutory wordings appear to require the conclusion, and the Commissioner's final written submissions accepted, that a taxpayer who had not lodged a tax return could make relevant "post assessment" elections. The Commissioner nevertheless disputed the efficacy of Picton's August 2012 elections. The Commissioner's contentions were as follows.

(a) Picton had acquired its EnviroGold shares as "trading stock" and could not make an election under s 70-30(1) - because the section only permits an election where a taxpayer starts to hold (previously acquired) items as trading stock.
(b) The 3 August 2012 letter could not operate as an effective election under s 70-30 because it did not provide (i) any date when Picton had started holding the EnviroGold shares as trading stock, and (ii) any specific market value for the shares.
(c) The 3 August 2012 letter could not operate as an effective election under s 70-45 for the 2007 income year because it was "tied to" the election under s 70-30(1).
(d) The 3 August 2012 letter could not operate as an effective election under s 70-45 for the 2008 income year because (i) Picton had not established that it had continued to hold the shares as trading stock as at 30 June 2008, and (ii) the letter did not provide any value for the shares.

The formal sufficiency of the "elections"

49. The Commissioner's contentions about the formal insufficiency of the 3 August 2012 letter are not supported by the proper interpretation of s 70-30(1) of ITAA 1997. The subsection describes a factual contingency (that the taxpayer starts holding an item as trading stock) and then declares that the taxpayer will be assessed, at the taxpayer's election, "as if" either of two sales had occurred - a sale at either "cost" or "market" value. Where the election is as to "cost" then the relevant amount is to be "worked out" by the application of either s 70-45 or s 70-30(4) of ITAA 1997.

50. The terms of neither ss 70-30(1) or 70-45(1), in granting the taxpayer a right to elect, condition the availability of the election to the formal manner of its exercise. In particular, there is no requirement for the taxpayer to specify, for the purpose of s 70-30(1), the date when the taxpayer started holding items as trading stock. Indeed, the terms of the section contemplate that the character in which the taxpayer holds the contentious items is to be determined as a matter of objective (and retrospectively determined) fact, rather than the subjective beliefs or assertions of the taxpayer. Similarly, the actual "amount" (both "cost" and "market value") that is attracted by any election, is to be quantified by the application of the statutory criteria to the actual (or deemed) circumstances. Against that background, Picton's 3 August 2012 letter sufficiently, and effectively, conveyed an election to be treated "as if' it had acquired the EnviroGold shares at market value "just before [they] became trading stock". Similarly, the letter sufficiently conveyed elections of the kind contemplated by s 70-45(1) of ITAA 1997.

The factual insufficiency of the "opening stock" election relating to the 2007 year

51. Even though the 3 August 2012 letter was formally sufficient to evidence a market value election for the purposes of s 70-30(1) ITAA 1997, it is still necessary for Picton to establish, as a matter of fact, both (i) that it commenced to hold the shares as trading stock in the 2007 financial year, and (ii) the relevant market value of the shares when they changed the character in which they were held. Picton said the Commissioner's Statement of Facts, Issues and Contentions had effectively conceded both the fact and the date of the change of character as matters that were not in dispute.

52. The Commissioner's issues statement, properly understood, made no such concession. The issues statement pointed to the difficulty (because of the absence of specific evidence) of determining the precise character in which Picton had originally acquired its EnviroGold shares. Without conceding that Picton had acquired any of its EnviroGold shares on capital account, the Commissioner's issues statement merely highlighted the facts involved in Picton's execution of the off market transfer form on 24 May 2007, and the subsequent registration of the transfer on 27 June 2007. The Commissioner contended that those facts showed that Picton had come to hold the shares as "trading stock" - at the latest - by the time of its decision to sell some the EnviroGold shares.

53. It is unlikely, having regard to the nature of the characterisation task involved, to be possible to determine the precise point in time "at which" (as distinct from the point of time "by which") a taxpayer will have started to hold a previously owned item as "trading stock". Nevertheless in these proceedings the onus still lies on Picton to establish that the Commissioner's assessment was excessive. This onus requires Picton to provide, or to at least be able to identify, the evidence establishing the relevant date by which it had started holding its EnviroGold shares as trading stock. Discharging that onus is complicated by the variations in the positions Picton has adopted. In its 11 April 2012 letter Picton had contended its EnviroGold shares became trading stock on 27 June 2007. In its 3 August 2012 letter it avoided nominating any date. In its final submissions Picton contended the relevant date was 24 May 2007 - the date it executed the first of the off market sale transfer forms.

54. In the years following Picton's December 2003 incorporation only entities associated with PKF Vanuatu fulfilled the roles of member, director, secretary of the company, and trustee of its funds. In those various capacities they administered the affairs of the company. I have earlier recorded my inference, based on the evidence of Mr McLeish, that the activities PKF Vanuatu entities undertook in Picton's dealings in EnviroGold shares were merely responsive to the directions and recommendations of Mr Andrew Hedges and, after his death, in about October 2005, those of Mr Johnson: see paragraph 21 above.

55. In their 9 March 2012 letter to the Commissioner, Picton's solicitors described Mr Johnson as a person who had a long personal and commercial relationship with both Andrew and Thomas Hedges. His involvement with Picton appears (from a memorandum Johnson wrote in November 2008) to have begun following discussions in April or May 2006 when Mr Hedges' son Thomas asked him to "continue to look after his father's interests in Vanuatu until we could get time to realise the assets held in Vanuatu". His most specific direct involvement is evident from the contents of the first of the three "off market" share sale transfers in May 2007. Entities of which Johnson was a director, and which appear to have acted at his instigation, purchased all of the EnviroGold shares that were the subject of Picton's three "off market" transfers between May and September 2007. Johnson signed each of the "off market" transfer forms, in his capacity as a director of the transferee company. The evidence in the review proceedings included another memorandum (and its attachments) that Mr Johnson had provided to the Australian Federal Police on 30 October 2009 (and an earlier memorandum dated 4 November 2008). But there was no other evidence from Mr Johnson.

56. Apart from Andrew and Thomas Hedges, Johnson and McLeish, the only other person who appears to have had any potentially material involvement in Picton's EnviroGold share dealings was Mr Agius. He was the principal of PKF Vanuatu, and held office as a director of Picton between February 2007 and December 2008. He signed the 24 May 2007 off market transfer form, involving the sale of 3,040,000 EnviroGold shares. Mr Agius did not give any evidence in the review proceedings.

57. Accordingly the only direct oral or written evidence relating to Picton's EnviroGold share dealings was that provided by Mr McLeish. I have outlined Mr McLeish's relationship with Picton in paragraph 20 above. Mr McLeish said, in his written statement, that Picton acquired the 4 million EnviroGold shares in 2004 for the purpose of holding a long term investment. The proffered rationale for this investment was EnviroGold's prospective involvement in a gold tailings recovery project in the Dominican Republic. This claim is consistent with the contents of Mr McLeish's 26 July 2004 letter (see paragraph 23 above).

58. Mr McLeish said in his written statement that Picton's second acquisition of 500,000 EnviroGold shares in August 2005 was a purchase made also for the purpose of long term investment. But no contemporaneous documents evidence the substance or purpose of that particular transaction. I have previously indicated that its real nature is unclear - see paragraphs 29 to 35. I have also noted that Mr McLeish gave no evidence about Picton's 2007 acquisition of 1,500,000 EnviroGold shares.

59. Mr McLeish's evidence did not lead to satisfaction that he had any reliable knowledge of Picton's actual intentions and purposes at the time of the Picton's EnviroGold share acquisitions. Picton was but one of very many companies that PKF Vanuatu controlled for the benefit of clients of the accounting practice. In his written statement of evidence Mr McLeish simply made assertions about Picton's purpose. His evidence did not identify the primary facts, including any specific client instructions, that provided an otherwise objective basis for his assertions.

60. The objective circumstances of Picton's 2004 share acquisition are partly revealed by the fund transfers of April and May 2004 (see paragraph 22 above) and the contents of Mr McLeish's letters of 26 July 2004 (see paragraph 23 above) and 3 September 2004 (see paragraph 25 above). But when Mr McLeish was cross examined about these matters it was clear that he had little recollection of the details surrounding either the original fund transfers, the 26 July 2004 letter, or the share allocation request in his letter of 3 September 2004. In particular he did not explain, and indeed appeared unable to explain, why the share allocations requested in that letter did not correspond with the loan funds said to have been previously provided.

61. Mr McLeish's evidence was particularly unreliable, and inconsistent with the contentions Picton advanced at the review hearing, in relation to the character of the share sales that were the subject of the May and August 2007 "off market" transfers. In his written statement Mr McLeish said their purpose was for Picton to realise funds to invest in another entity that had purchased agricultural land in Vanuatu. This proposal was, according to Mr McLeish, another long term investment by Picton.

62. In response to a written request by the Commissioner to provide evidence of that investment, Picton provided details of the April 2007 incorporation of a Vanuatu company in which Mr Johnson and Mr Agius were (through corporations they controlled) two of the three founding shareholders. Picton also provided four pages of information that appears to have been extracted from a larger document provided to prospective investors in a project to develop an integrated cattle breeding and sandalwood plantation. But Picton provided no evidence to substantiate the proposition that it did actually invest in the Vanuatu project.

63. Mr McLeish also said that "at the same time" as its August 2007 EnviroGold share sale Picton decided it wanted to rebuild a large shareholding in EnviroGold. This statement is difficult to accept as either informed or reliable. One reason for the difficulty is that Mr McLeish gave no evidence of Picton's 2007 acquisition of 1,500,000 EnviroGold shares. Although that sale was not finally recorded in the EnviroGold share register until 30 October 2007 the transfer form was signed by Thomas Hedges on 22 May 2007. Furthermore, it was in August and September 2007 that Picton undertook the "off market" sale of 1,700,000 EnviroGold shares. This sequence of events seems rather more consistent with a desire to trade in EnviroGold shares than to hold them as a long term investment.

64. The difficulty in accepting Mr McLeish's evidence is only increased by analysis of Picton's "on market" trading in EnviroGold shares. Mr McLeish provided a detailed list of the "on market" transactions carried out by IFTC Broking Services Limited, between 17 August 2007 and 14 April 2008, on Picton's behalf. The list reveals that Picton was buying and selling EnviroGold shares at the same time that Mr McLeish said Picton was committed to making a long term investment in EnviroGold. More specifically, the list of transactions shows that by the end of October 2007, Picton had bought and sold an additional 1,180,000 EnviroGold shares. Most of those sales, particularly in September and October 2007, were at share prices markedly greater than those at which Picton had acquired its EnviroGold shares. After November 2007, Picton acquired a shareholding approximating 75% of its previous total shareholding, for which it paid prices that were typically less than the asserted $0.15 for its August 2005 transfer from Pacific Resources Limited. Picton had originally contended (in its January 2011 response to the Commissioner's request for information) that the September and October 2007 "on market" sales were not indicative of either a business or a profit making undertaking. They were said to be the mere realisation of a capital asset at a time when market values were unusually high. This contention sits ill with Picton's concession at the hearing (that it had traded EnviroGold shares in 2007 and 2008). It also sits ill with proper analysis of both the "off market" and "on market" trades Picton undertook.

65. The pattern of trading evident from both Picton's "off market" and "on market" EnviroGold share transactions suggests that (at least from May to the end of October 2007) Picton was a profit motivated trader, aware of the potential for fluctuations in the EnviroGold share price and the desirability of putting itself in a position to take advantage of them. The pattern of Picton's EnviroGold trading up until the end of October 2007 tends to contradict the assertion in Mr McLeish's written statement that Picton had determined to rebuild a large shareholding in EnviroGold. It is a significant consideration that when Mr McLeish was questioned about this statement he could not remember or identify the source of the information on which he relied. He surmised that the statement must have been based on his understanding of the files that he had taken into account in preparing his witness statement in these proceedings. But he neither produced those files nor provided any description of any information they may have contained.

66. The abbreviated background to Picton's 2004 and 2005 EnviroGold share acquisitions is ambiguous as to whether or not its purpose was that of a long term investment in EnviroGold. Alternative possibilities are (i) that Picton intended, from the outset, to trade in EnviroGold shares, or (ii) that it made an opportunistic acquisition, with a view to profit making by sale, when and if the apprehended uncertainties of the proposed mining operations in the Dominican Republic had been (or were regarded by the market as likely to be) favourably resolved.

67. The history of Picton's substantial trading in EnviroGold shares (between May 2007 and November 2007) encourages the conclusion that Picton's initial acquisition of the shares was undertaken for the purpose of share trading, or at least a profit making purpose. In its submissions Picton sought to avoid the former conclusion by emphasising that under s 70-10(1) ITAA 1997 "trading stock" referred to property "held for purposes of … sale … in the ordinary course of a business". Picton pointed out that EnviroGold shares had been suspended from trading between 2004 and 31 January 2006. It further sought to rely on what it said was "little movement" in the share price between January 2006 and May 2007. Picton suggested this pointed to the probability that it only started to hold the shares as trading stock as at 24 May 2007. In that context Picton sought to rely on the Commissioner's June 2010 reasons for decision regarding the audit of tax affairs. They had identified the fact that the suspension of EnviroGold shares from trading on the Australian Stock Exchange precluded a conclusion that the shares were trading stock when Picton first acquired them.

68. Picton's submissions obscure three matters. The first is that "on market" EnviroGold share trading resumed in February 2006. Consequently, even if it was correct to regard the prior suspension from public ASX trading as precluding characterisation of Picton's shareholding as "trading stock", that preclusion did not apply after February 2006. The second matter is that the EnviroGold share price varied throughout the subsequent period, and there were times when the prices were well above Picton's 2004 acquisition cost of $0.10. Consequently, even in the absence of actual sales, Picton may have held the shares during that period for the purpose of being sold as and when Picton regarded the market as most favourable: see
Federal Commissioner of Taxation v St Hubert's Island (in liquidation) (1978) 138 CLR 210 at 237 per Jacobs J. Thirdly, Picton had to establish when it did begin to hold its EnviroGold shares as "trading stock". It is only if the shares acquired that character in the 2007 financial year that Picton was entitled to make the election in the 3 August 2012 letter.

69. The reality is that Picton provided no reliable direct evidence to establish the character in which it had acquired or held its EnviroGold shares at any time prior to 24 June 2007. Mr McLeish's mere assertions were not probative, in any real sense, of Picton's purpose in relation to the acquisitions of EnviroGold shares in 2004 and 2005, or in relation to the character in which Picton held the shares at any time. For these reasons I am not satisfied that Picton discharged its onus of establishing that its EnviroGold shares only became trading stock within the 2007 tax year or, more specifically, as at 24 May 2007.

70. Ultimately Picton's case involved an argumentative assertion that the Commissioner's assessment for the 2007 tax year, based on the proposition that Picton had commenced to hold the shares as trading assets "at a time which was prior to, or at its latest, concurrent with" the decision to sell a substantial part of its EnviroGold shareholding, justified fixing upon the apparent date of the first share transfer form as the date when Picton started to hold the shares as trading stock. This assertion contrasts with the contentions Picton first advanced in its 11 October 2011 Statement of Facts, Issues and Contentions. In that document, and in Mr McLeish's statement, Picton had asserted not only that it had originally acquired the EnviroGold shares for long term investment purposes, but also that the same purpose of long term investment underlay its decision to sell a substantial part of the shares (commencing) in May 2007.

71. I am left with the impression that Picton's ultimate reliance on the "election" argument, and its belated contention that it commenced to hold the EnviroGold shares as "trading stock" immediately before the share transfer dated 24 May 2007, was merely the adoption of a forensically advantageous position, without elucidation of the real facts and circumstances that provided its evidentiary justification. The fact that the transfer form is itself dated 24 May 2007, and was prepared at about that time, is not probative of that date being the point in time by which Picton first started to hold its EnviroGold shares as trading stock. On the contrary, the fact of what Picton did after 24 May 2007 by engaging in significant selling of its EnviroGold shareholding, and subsequently acquiring further shares when the market price declined, is at least consistent with an earlier, and perhaps even an original, intention to trade in the shares. Picton has provided no persuasive evidence to establish either that its original acquisition was for long term investment, or that it first commenced to hold the shares as trading stock as at 24 May 2007.

Trading stock as at 30 June 2007

72. Picton's entitlement to make an election under ITAA 1997 s 70-45 determining the valuation basis for its EnviroGold shares as at 30 June 2007 did not depend on when it first commenced to hold the shares as trading stock. The right to elect existed if the shares were trading stock at the end of the 2007 financial year. I consider that Picton's 3 August 2012 letter was formally sufficient to constitute an effective election. I do not accept the Commissioner's contention that this election was in any relevant sense "tied" to the inefficacy (as I have held) of Picton's attempted "opening stock" election under ITA 1997 s 70-30.

Trading stock as at 30 June 2008

73. The Commissioner's assessment took Picton's EnviroGold shareholding as at 30 June 2008 into account at an amount that was said to reflect its historical cost. This assessment implicitly assumed that the shares retained their character as trading stock as at 30 June 2008. Picton contended that characterisation of its shareholding was correct and that, as a consequence of its 3 August 2012 election, the shareholding should be valued at its market selling price. Picton asserted in its submissions, but adduced no evidence to establish, that the market price of EnviroGold shares was $0.095 as at 30 June 2008.

74. That absence of evidence is itself sufficient to preclude Picton from establishing that the assessment was excessive. But the Commissioner also contended that Picton had not established, in any event, that Picton's EnviroGold shareholding retained its character as "trading stock" as at 30 June 2008. This response to Picton's reliance on the "market selling price" election permitted by ITAA 1997 s 70-45 seems surprising, having regard to the facts that (i) the assessment had proceeded on the assumption that the shares were trading stock, and (ii) the Commissioner's primary stance in the review proceedings had been to put Picton to proof that the shares had ever had any character other than trading stock.

75. Picton responded to the Commissioner's contention by encouraging the Tribunal to accept that (i) it had traded in EnviroGold shares up until April 2008, (ii) it was more probable than not that it had continued to hold the shares in that capacity after April 2008, and (iii) that Picton relevantly discharged its onus of proof by pointing to the evidence suggesting the most likely characterisation of the nature of its shareholding as at 30 June 2008. In circumstances other than those in the present case, Picton's contention about the characterisation of its shareholding as at 30 June 2008 would be persuasive. But it is not persuasive in the present case, because of the contrast between, on the one hand, Picton's original grounds of objection and the evidence of Mr McLeish and, on the other hand, the forensic position Picton adopted in the review proceedings.

76. As I have previously indicated, Mr McLeish gave evidence, in his written statement, that "at the same time" as its August 2007 sale of 700,000 EnviroGold shares, and apparently before its subsequent sale of 1,000,000 EnviroGold shares in September 2007, Picton had determined to "rebuild a large shareholding in EnviroGold". In paragraphs 63 to 65 I characterised Mr McLeish's evidence as difficult to accept, and as likely to be no more than opinion based not on his own knowledge and recollection, but on the unproduced contents of files on which he thought he may have relied. I commented that Mr McLeish had given no evidence about Picton's 2007 "off market" acquisition of 1,500,000 EnviroGold shares. I rejected his evidence as probative of the character of Picton's on market transactions involving EnviroGold shares.

77. In some contexts the rejection of a taxpayer's evidence about the asserted purpose of a transaction justifies an inference to the contrary:
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 90 per Mason J. But that reasoning process ought not be applied to an evaluation of Mr McLeish's evidence. Mr McLeish did not, as I ultimately came to regard his oral evidence, really have any knowledge of the actual purpose underlying Picton's EnviroGold share acquisitions. Although he was allegedly the person who instructed IFTC Broking Services to undertake the "on market" trades, he did so only on the instructions, as I would infer, of Mr Johnson. In those circumstances, and in the light of his failure to address the 2007 "off market" acquisition of the 1,500,000 EnviroGold shares, the rejection of Mr McLeish's assertions (for the reason that they carry no weight) simply leaves the objective evidence (that is, the apparent circumstances of both the "on market" and "off market" transactions in 2007 and 2008) equivocal about the real nature and purpose of Picton's EnviroGold share purchases. Equivocal evidence, especially where there is reason to believe that a party has the apparent capacity to adduce relevant evidence, cannot be regarded as discharging an onus of proof:
McCormack v Federal Commissioner of Taxation (1978-1979) 143 CLR 284 especially at 291, 303-304 and 306.

78. Furthermore, when one looks at the details of Picton's share purchases, particularly after October 2007, they reveal a sustained course of purchasing over a period of approximately six months. During that period the price of EnviroGold shares trended incrementally downward. But there were occasions where the share price rose, albeit marginally, after some of Picton's purchases. And in any event, the share price seems to have remained above $0.12 until at least April 2008. That pattern of accumulating purchases, and the retention of 726,000 shares that had been acquired in a 2007 "off market" transaction at $0.10 per share, with no intervening sales, is equivocal as an indicator of the purpose that motivated the relevant share acquisitions. It is consistent with the acquisition of trading stock. It is also consistent with an intention to accumulate a large, long term shareholding.

79. In the light of the equivocal nature of the pattern of Picton's EnviroGold share purchases in 2007, I do not accept that Picton has discharged its onus of establishing that the assessment for the 2008 financial year was excessive, because of the "trading stock" value on which it was based. Picton's ultimate contention that the shares were trading stock as at 30 June 2008 was contrary to Mr McLeish's written statement, and to Picton's original grounds of objection. The position Picton adopted at the hearing, in order to justify confidence that it reflected the proper conclusion to draw from the evidence, required more than just a forensic assertion.

SOURCE OF INCOME

80. Where the essence of the taxpayer's business is that of entering into transactional contracts of purchase and sale the place where the trading income is derived will often be determined by the place where the contracts are made:
Mount Morgan Gold Mining Company Ltd v Commissioner of Income Tax (Queensland) (1922-1923) 33 CLR 76 at 110 per Starke J;
Lovell & Christmas Ltd v Commissioner of Taxes [1908] AC 46. However, the proper identification of the source of income in any particular case depends upon the totality of the taxpayer's relevant circumstances:
Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525. Where a contract is made in one place, but is to be performed in another, the place of performance may be regarded as the geographical source of the taxpayer's income. For example, where a taxpayer's business involves the purchase of goods in one place, and their transport to and sale in another, the place where the goods are sold is likely to be regarded as the relevant source of the taxpayer's income:
Commissioner of Taxation (WA) v D & W Murray Limited (1929) 42 CLR 332 at 345-346 and 349-350. If a taxpayer's business involves the manufacture or processing of goods in one place, and their sale in another, part of the taxpayer's income is derived in each place, and the whole of the income must be apportioned between them:
Commissioner of Taxation v Kirk [1900] AC 588;
Federal Commissioner of Taxation v Lewis Berger & Sons (Australia) Limited (1927) 39 CLR 468.

81. In some circumstances, particularly those involving a taxpayer who derives only investment income from equity holdings in other entities, the relevant source of income may be the place where the taxpayer exercises management and control of its affairs:
Esquire Nominees Ltd v Federal Commissioner of Taxation (1971-1973) 129 CLR 177 at 212. But the location of management and control is not determinative where income is derived from trading operations conducted elsewhere. In the case of a corporation engaged in foreign commercial business operations, even dividend income paid to a taxpayer may be regarded as having its relevant source in the places where the corporation carried out those operations:
Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183. This is because the concept of the "source" of income does not refer to a strict legal concept but rather to "something which a practical man would regard as a real source of income": Nathan at 189 and 195.

82. Picton accepted that income derived from share trading activities would ordinarily be regarded as having its source either where the contracts were made or, in some instances, where the contractual undertakings were actually performed. The place of contracting as the relevant source of income is recognised in
Lovell & Christmas Limited v Commissioner of Taxes [1908] AC 46 at 51-52;
Tariff Reinsurances Limited v Commissioner of Taxes (Vic.) (1938) 59 CLR 194; and in
Australian Machinery and Investment Company Limited v Deputy Commissioner of Taxation (1946) 180 CLR 9 at 27. The potential for the place of relevant contractual performance to be recognised as a geographical income "source" is apparent from the remarks of both Rich and Williams JJ in
Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525. The apparent imprecision involved in the proposition that the place of contracting is not always conclusive, is inherent in the concept of a "source" of income. That concept expresses a criterion of generality that requires consideration of substance rather than form. It requires a categorisation based on "practical business affairs, rather than on nice distinctions of law". The substance of the matter involved in assessing the "source" of income "is a large view of the origin of the income - where it came from - as a businessman would perceive it":
Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1834 at 1846 per Burchett J.

83. Picton's submissions proceeded from these uncontroversial generalities to emphasise part of the reasons for judgment of Barwick CJ in
Esquire Nominees Ltd v Federal Commissioner of Taxation (1971-1973) 129 CLR 177 at 212. That case involved determining the source of dividend income paid by a company whose profits had been generated solely as a result of its shareholding in another entity. In distinguishing the approach taken in Nathan's case (to dividend income derived from trading profits) the then Chief Justice had said:

… a company may make profits without trading in goods or commodities or for that matter in securities. It may make profits simply by investment and may do so though its investment portfolio consists only of shares in one other company or even of all the shares in one other company. In such a case its net income from its investment will be its profits. Further, in my opinion, the place where the company makes its investment income will be the place where it has its central management and control. It will, of course, be different in the case of a company conducting manufacturing or trading activities. In the case of such companies the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield.

84. Based on the distinction alluded to in this passage between trading and investment income, Picton submitted that the relevant "source" of its income was not Australian. Picton contended that all the relevant "off market" contracts were executed in Vanuatu by Picton's agents, and on the basis of client instructions from persons who were not Australian residents.

85. Picton's contention that the share transfer income was not Australian sourced depends ultimately on accepting the proposition that it was in substance investment income of the kind that Barwick CJ referred to in
Esquire Nominees Ltd v FCT, and income that could consequently be regarded as having its relevant "source" in the place where Picton exercised its central management and control. This contention is fallacious, and involves a misinterpretation of the relevant passage from the former Chief Justice's reasons in the Esquire Nominees case. Fundamental to the Chief Justice's comment was a postulated distinction between on the one hand, "profits … by investment", and, on the other, profits from "trading in goods or commodities or for that matter in securities". It was only in relation to profits and income of the former kind that the Chief Justice contemplated that the relevant "source" would be the place where the profit maker had its central management and control. This is readily apparent from the Chief Justice's explicit statement that in the case of profit making from manufacturing "or trading activities … the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield".

86. In any event, it is difficult to accept Picton's contention that, at the relevant time of the share transfers in the 2007 and 2008 tax years, its relevant management and control has been shown not to have been located in Australia. The starting point in Picton's contention was the identification of Mr Andrew Hedges as the principal person who controlled Picton and instructed the PKF Vanuatu related entities that administered its affairs. The probability is that Hedges himself was not an Australian resident. But it is also the case that Hedges had died by about October 2005. Thereafter, although it is his estate (and the beneficiaries of his estate) who may have been ultimately entitled to the benefit of Picton's assets, the actual decision making in relation to the EnviroGold share sale transactions appears to have been undertaken, in Australia, by Johnson. The fact that the transfer transactions also required the formal assent of Picton's directors (at the relevant time they were Mr Agius and, in practical reality, Mr McLeish) is an immaterial consideration in suggesting that Picton's relevant management and control was in Vanuatu. Mr McLeish's evidence made it clear that in his capacity as a PKF Vanuatu employee, and consequentially as the "manager" of Picton, his role was to implement client instructions, to the extent that they were lawful and appropriate. I would infer that his role as the "manager" of Picton was essentially administrative and compliant. He did not, relevantly to the circumstances of the present case, undertake any real decision making activities. It may be inferred that Mr Agius, as the principal of PKF Vanuatu, played no different role. There was certainly no evidence to establish the extent of his activities, other than the fact of his execution of one of the "off market" transfer forms.

87. Each of the "off market" share sale transfer forms was prepared in Australia on the instructions of Mr Johnson. The forms were sent to Vanuatu and signed by Picton. They were then returned to Australia and signed by Johnson as a director of the transferee company. The transferee then arranged for the executed transfers to be sent to the EnviroGold share registry in Australia. The Australian location of the "off market" transactions emerges from the evidence that each of the relevant transfers was effected in a sequence that involved (i) the preparation of the transfers in Australia, (ii) the transfer document being sent to Vanuatu for execution by Picton, (iii) the return of the "Picton executed" transfer document to Australia, and (iv) the execution of the transfer document in Australia by the transferee. (This sequence of events points to the transferee's execution of the document being the event that resulted in the actual formal conclusion of the transferee contract, and that event occurred in Australia:
Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 112.)

88. The Australian location of at least the "off market" EnviroGold transactions points towards the conclusion that the income attributable to them was Australian sourced. The "on market" transactions should also be regarded as having been made in Australia.

89. Picton contends that the fact that the actual "on market" transactions were carried out by an Australian resident broker operating on the ASX, was insufficient to characterise the sale proceeds as Australian sourced income. Picton contends that Vanuatu is the relevant source of its share trading income. It advances three reasons for that conclusion. First, the ASX online trading system is a "screen-based" trading system, accessible by authorised traders from any physical location. It would be arbitrary to characterise the nominal location of the trading transactions as all having occurred where EnviroGold maintained its share registry. Second, all the online trades were carried out on the immediate instructions of IFTC Broking Services (an entity controlled by PKF Vanuatu). The sale proceeds were paid to IFTC's bank account in Australia. Picton's portion of the sale proceeds was held in another IFTC bank account in New Zealand. Third, all the relevant decision making in relation to the "on market" trading was carried out by Mr McLeish, acting on Picton's behalf, and those decision making activities were all carried out in Vanuatu.

90. The Applicant's submissions in relation to the "source" of the income derived from the "on market" EnviroGold share transactions are insubstantial. The fact that IFTC Broking Services directly instructed the Australian broker, and appeared to be the only entity actually conducting any activities (the provision and receipt of funds) in Australia, has no real significance. It has no real significance because, on Picton's own case, the "on market" share sale transactions occurred in Australia, IFTC Broking Services acted on instructions from Picton and IFTC Broking Services itself had no beneficial interest in the share transactions.

91. It follows that Picton's EnviroGold share sale income, involving both the "off market" and the "on market" transfers, was Australian sourced.

SIGNIFICANCE OF THE OVERSTATEMENT OF GROSS INCOME IN THE ASSESSMENTS

92. The evidence of Picton's EnviroGold sale transactions in each of the 2007 and 2008 years sufficiently establishes the error involved in the Commissioner's assessments (see paragraph 9 above). Ordinarily the existence of an error in the assessment is insufficient to establish that the amount assessed is actually excessive. This ordinary position applies where the taxpayer has failed otherwise to establish the relevant totality of the taxable facts. If a taxpayer establishes the taxable facts, and they include identifying an error in overstating the income that has previously been taken into account then, in the absence of some offsetting adjustment, the overstatement of income demonstrates that the assessment was excessive. In the present case the Commissioner suggested that Picton had not excluded the possibility of some offsetting adjustment, because it had not established the costs of the EnviroGold shares it acquired, and because the Tribunal could not be satisfied Picton had fully disclosed the nature and extent of its dealings.

93. In relation to the 2007 tax year, I rejected the Commissioner's contention that Picton had failed to establish that it had incurred at least the share acquisition costs that had been taken into account in the assessment. I also held that Picton was entitled to have its 30 June 2007 closing stock valued at market value as at 30 June 2007. The market value of EnviroGold shares between 29 June 2007 and 27 July 2007 was between $0.18 and $0.19. It is reasonable to find that the market value as at 30 June 2007 was at least $0.18.

94. In relation to the 2008 tax year I accepted the Commissioner's contention that Picton's own (albeit belated) evidence about its 2007 "off market" acquisition of 1,500,000 EnviroGold shares demonstrated that the assessment had underestimated Picton's assessable income by at least $77,400. This understatement in the assessment more than offset the corresponding errors ($43,750 + $32,500 = $76,250) that Picton contended had resulted from the assessment having ignored the actual sale prices involved in the "off market" sale transactions in the 2008 tax year.

95. The Commissioner's contention about the general inadequacy of Picton's evidence was advanced primarily in response to my post hearing enquiry that had prompted Picton's belated production of the 2007 "off market" transfer form for its acquisition of 1,500,000 EnviroGold shares. The Commissioner complained that the circumstances of this transaction were unexplained, and that explanation was required both because of the belated nature of the disclosure and the discrepancies between the dates of execution, apparent transfer and registration. Another matter that required explanation was the actual cost of the shares. The share price evident from the transfer was $0.10. But the market price of EnviroGold shares as at the March and July 2007 transfer execution dates was about $0.12 and $0.19.

96. Until Picton disclosed its 2007 "off market" acquisition of EnviroGold shares there was an impression of incompleteness in Picton's evidence about its dealings. That impression would have meant that Picton had failed to discharge its onus. But the 2007 "off market" acquisition, when analysed against the previously available evidence of the EnviroGold share register, and the trading records of the broker that effected the "on market" transactions, accounts for the totality of Picton's EnviroGold share transactions. Moreover, in a 27 January 2011 letter to the Commissioner, Picton's solicitors stated that Picton had only ever invested in EnviroGold shares. There is no basis in the evidence to question the accuracy of that statement.

97. Consequently, Picton has discharged its onus of demonstrating that the assessment was excessive in relation to the 2007 tax year, to the extent that it assumed the price of the EnviroGold shares that Picton sold in that year was $0.18 - rather than the $0.125 indicated in the "off market" share transfer from, and reflected in the payment that Picton actually received. Picton has also established that the assessment was excessive by not taking the 30 June 2007 closing stock into account at market value.

98. On the other hand, Picton has failed to discharge its onus of establishing that the assessment was excessive in relation to the 2008 tax year. Whilst the assessment overstated the proceeds of the "off market" share sales, that error was more than offset by understatement of the cost of the 1,500,000 shares that the assessment wrongly assumed had been acquired "on market". Picton in fact provided no evidence to substantiate the actual cost it had incurred in the acquisition of those shares. Picton also failed to demonstrate that the Commissioner's assessment had "double counted" the share sales between 29 October and 9 November 2007. Finally, Picton failed to establish that it held its EnviroGold shares as trading stock as at 30 June 2008.

PENALTY

99. A taxpayer is "liable to an administrative penalty" if they fail to provide a timely return, the return is necessary for the Commissioner to determine accurately a "tax-related liability" of the person, and the Commissioner determines the liability without the assistance of the return: Taxation Administration Act 1953 Schedule 1 subsection 284-75(3). The penalty amount is 75% of the person's "tax-related liability" (Item 7 of subsection 284-90(1) of TAA 1953 Schedule 1) - unless it is either increased (under subsection 284-220) or reduced (under subsection 284-225 - in circumstances involving voluntary disclosure of information to the Commissioner).

100. Picton did not dispute either that a "non-resident of Australia" who had derived Australian-sourced taxable income was required to provide a return for each of the 2007 and 2008 years, or that it had not submitted any returns within the time they were required. Picton's contention was that it was a "foreign resident", rather than a "non-resident, of Australia" and it was not required to file a return. There is no substance in this point. A person is a "non-resident" of Australia unless they are within the definition of a "resident of Australia" in ITAA 1936 s 6(1). A company incorporated in Vanuatu is only a "resident of Australia" if it carries on business here and has either its central management or its voting power in Australia. It was fundamental to Picton's case that it did not fall within that definition. The corollary is that it was a "non-resident" of Australia.

101. As I have just described, a taxpayer is liable to an administrative penalty where the Commissioner determines they have a tax-related liability following the person's failure to provide a return that was necessary for an accurate assessment of that tax liability. On 24 June 2010 the Commissioner made such a determination, in relation to Picton, for each of the 2007 and 2008 tax years. The penalty amount that applies to such a determination, generally 75% of the person's "tax related liability" (Item 7 of subsection 284-90(1) of TAA 1953 Schedule 1), was increased by 20% (in the circumstances provided for in s 284-220(1)(e) of TAA 1953 Schedule 1) for the 2008 tax year. (I note that the Commissioner's objection decision disallowed Picton's objection in so far as it related to penalty.)

102. The terms of s 284-220(1)(e) of TAA 1953 Schedule 1 were amended by the Tax Laws Amendment (2010 Measures No. 1) Act 2010, with effect from 4 June 2010. Prior to the amendments the base penalty was increased by 20% if the taxpayer's liability arose under s 284-75(3) (for failure to provide a return) "and you were liable to a penalty under that subsection for a previous accounting period". After the amendments that took effect on 4 June 2010, the 20% increase applied to a failure to provide a return "and you were previously liable to a penalty under" s 284-75(3) of Taxation Administration Act 1953 Schedule 1.

103. In
Gashi v Commissioner of Taxation 2012 ATC 20-235, [2012] FCA 638 Jessup J held that the expression "for a previous accounting period", in the context of a similar uplift provision in s 284-220(1)(c) of TAA 1953 Schedule 1 (relating to false or misleading statements), applied to impose an uplift penalty amount for later tax years, even where the assessments, and the penalty amounts, were determined at the same time. His Honour recognised the possibility of a legislative policy that the uplift should only apply where the defaulting conduct followed the previous imposition of a penalty - as distinct from being intended to apply to merely repeated defaults. But Jessup J considered that the wording of the provision more clearly pointed to the penalty uplift applying to repeated defaults. Consequently the uplift penalty applied even where the several different tax years fell for consideration at the same time.

104. Picton suggested that, in the light of Jessup J's comments, the 2010 amendments, by removing from s 284-220(1)(e) of TAA 1953 Schedule 1 the reference to liability "for a previous accounting period", and substituting the expression "previously liable", had adopted the legislative policy His Honour had recognised as a possibility. I do not think that Picton's suggestion should be accepted.

105. The Tax Laws Amendment (2010 Measures No. 1) Act 2010 made significant amendments to both s 284-90(1) and s 284-220 of TAA 1953 Schedule 1. The most significant of the amendments was to include a provision for penalties to apply to false and misleading statements, even when they did not result in the taxpayer having a "shortfall" amount. The penalty amounts provided for in s 284-90(1) in relation to such statements were expressed as "penalty units" - as distinct from a percentage of either a "shortfall amount" or a "tax-related liability". These amendments to s 284-90(1) were complemented by material amendments to s 284-220. In particular, these amendments (i) removed from the opening words of s 284-220(1) the reference to the base penalty being "for an accounting period", and (ii) included a new paragraph (ca) that provided for a penalty uplift where a base penalty "was worked out … previously" under the items in s 284-90(1) relating to misleading and deceptive statements.

106. Against the background of the more extensive changes to ss 284-90 and 284-220 referred to in the preceding paragraph, it is extremely doubtful that the removal of the expression "for a previous accounting period" from s 284-220(1)(e) was intended to have the effect for which Picton contends. That doubt is enhanced by the contents of the Tax Laws Amendment (2010 Measures No. 1) Bill 2010 Explanatory Memorandum. Paragraph 647 of the Explanatory Memorandum refers to the changes to s 284-220. It describes the changes (emphasis added) as "a minor change from the current law (which increases the base penalty amount if there was a similar penalty for a previous accounting period). The change is necessary because false or misleading statements that do not lead to a shortfall amount will not always be related to an accounting period."

107. It is apparent from this review of the material changes to ss 284-90 and 284-220 that the change in wording to refer to "previously" as distinct from "a previous accounting period" has its genesis in substantive changes relating to the imposition of penalties for false and misleading statements. There is no basis for regarding them as intended to otherwise alter the effect of the provisions. In particular there is no basis for regarding them as intended to embrace the legislative policy to which Jessup J alluded in
Gashi v Commissioner of Taxation. In my view the use of the expression "previously" in the amended form of s 284-220 does not refer to a chronological sequence of penalties being quantified (that is, "worked out" - see s 284-220(1)(c)-(d)) or arising as liabilities as a consequence of a Commissioner's assessment (see s 284-220(1)(e)). If that was the true intention of the amendments, the liability of a taxpayer might depend on the mere administrative practices of the Commissioner - for example, by ensuring that assessments relating to different tax years were always made sequentially. In my view the expression "previously liable to a penalty" in s 284-220 refers to a liability that arises in respect of a taxpayer's default in providing a return that related to a tax year preceding the tax year in question. Accordingly, s 284-220(1)(e) operated to impose a 20% base penalty increase in relation to Picton's tax related liability for the 2008 tax year.

REMISSION OF PENALTY

108. As Picton submitted, the remission discretion conferred by TAA s 298-20 of Schedule 1 (relating to administrative penalty) is a general discretion and does not require "special circumstances" for its exercise. It permits remission, in the particular circumstances, of either the whole or part of the penalty that would otherwise apply. In the exercise of that discretion regard must be had to the purpose of the penalty regime (to encourage compliance by taxpayers with their tax obligations), to the nature of the non-compliance, to the taxpayer's degree of compliance, and to the particular impact of the penalty on the taxpayer. In that context it is permissible to have regard to both the amount of the penalty and its proportionality to the tax related liability.

109. Picton submits that several considerations justify the exercise of the discretion in its favour. These are (i) the fact that the Commissioner's assessments unjustifiably ignored the actually recorded "price" of the "off market" share transfers, and (ii) the fact that the Commissioner did not give Picton the benefit of a deemed "market price" election as the relevant "cost" of its EnviroGold shares. Picton also complains that the Commissioner departed from his usual practice, by issuing a default assessment without prior advice to the taxpayer. Finally Picton submits that its situation does not involve any element of hindering or impeding the Commissioner in obtaining information relevant to the assessment.

110. Picton's grounds for exercise of the remission discretion are insubstantial. Picton's complaint that the Commissioner's assessment ignored objective information in his possession establishing the consideration for the "off market" transfers in 2007 overstates the position. The document to which Picton referred, a "Case Plan" apparently created in December 2009, refers to funds transferred, by Johnson related entities, to Picton between July 2007 and August 2008. The amounts identified approximate the share transfer considerations set out in the Table in paragraph 3 above. But they are described in the Case Plan as amounts lent to Picton. This awareness of the fund transfers is not, to my mind, sufficient to make good a contention that the Commissioner, in making the assessment, disregarded objectively credible and reliable information. In any event, the more significant consideration is that the penalty amount applies as a proportion of the tax-related liability. If it was to avoid any penalty liability, Picton bore the onus of establishing that the assessment was excessive in imposing any taxation liability. I have found that Picton has failed to discharge that onus - despite the error to which it has pointed in the consideration it received for the "off market" transfers.

111. Similar considerations apply to Picton's complaint that the Commissioner's assessment denied it the benefit of a "trading stock" election. If Picton had wholly made good its entitlement to make and quantify all of its trading stock elections, the result would have been reflected in a revised assessment. Picton failed to establish its entitlement to make two of the three elections for which it contended. Its disappointment on that account does not provide a material consideration favouring remission of the penalties.

112. No different conclusion is reached by consideration of Picton's complaint that the Commissioner issued a default assessment, without prior notice. Picton had the opportunity to present its evidence fully in these review proceedings. Despite that opportunity it has failed to establish that it had no taxation liability. Picton's complaint about the Commissioner's unilateral action in proceeding to make an assessment does not, therefore, provide a material consideration in favour of remission of any part of the penalties.

113. Picton's contention that its circumstances did not involve any deliberate hindering or impeding of the Commissioner may be taken at face value. Nevertheless the position ultimately reached at the hearing was that after a long period in which it had consistently maintained that none of its EnviroGold transactions involved trading or profit making activities, Picton abandoned that contention and conceded that it had traded in the shares. This course of conduct, whilst I refrain from categorising it as deliberately obstructive, suggests a determination to adhere to a position that was ultimately, as I have found, not justified by the evidence.

114. In the light of the history of the stance Picton took in the proceedings, I am unable to conclude that Picton's non-compliance, in failing to provide income tax returns, was a matter of mere inadvertence. Nor did Picton adduce any evidence to suggest that it had acted on advice in refraining from lodging tax returns in relation to its Australian sourced income. As I have found, its assessable income was derived from share trades that were relevantly carried out in Australia, and at the likely instigation of Mr Johnson. Those circumstances carried the risk that the income generated would be regarded as Australian sourced. So far as appears, Picton was content to take the risk that, if discovered, it would be so regarded.

115. The overall amount of the tax penalties is significant - as is apparent from the Table in paragraph 6 above. However, the penalty amount is consistent with the statutory provisions. Picton has not provided any evidence to establish that it would suffer any particular hardship by being required to meet the primary tax and penalty amounts.

DECISION

116. The decision under review in relation to the 2007 tax year is set aside and remitted to the Commissioner for redetermination in accordance with these reasons.

117. The decision under review in relation to the 2008 tax year is affirmed.

Footnotes

^[1] Picton also submitted that the share sale proceeds were not assessable as statutory income for the purpose of ITAA 1997, because any capital gain was CGT event K4 – and was disregarded under the operation of Division 855 of ITAA 1997. The findings I have made on the other grounds make it unnecessary to address this submission.

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