GREIG v FC of T

Judges:
Thawley J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2018] FCA 1084

Judgment date: 20 July 2018

Thawley J

1. This is an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) against a decision made by the Commissioner of Taxation on 9 May 2017 to disallow in full the applicant's objection to a notice of assessment issued in respect of the income year ended 30 June 2015.

2. The appeal concerns the deductibility under s 8-1 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) of the following amounts incurred by the applicant in the 2015 income year:

(1) a loss of $11,851,762 ( $11.85m ) incurred by reason of the compulsory transfer and cancellation of the applicant's entire shareholding in Nexus Energy Limited in December 2014 ( share losses ); and
(2) expenditure of $507,198 in legal fees incurred in connection with litigation arising out of Nexus's voluntary administration in June 2014.

3. The applicant, Mr Greig, claimed that the share losses and legal fees (totalling $12,358,960) were deductible under s 8-1 of the ITAA 1997 on one of two bases:

(1) First, the share losses and legal fees were "incurred in gaining or producing" assessable income and were therefore deductible under s 8-1(1)(a) of the ITAA 1997. He said the losses were revenue losses because they were incurred in a "business operation or commercial transaction" entered into for the purpose of making a profit, attracting the operation of the principle enunciated by the High Court of Australia in
Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199.
(2) Secondly, Mr Greig submitted that the relevant amounts were losses or outgoings "necessarily incurred in carrying on a business" for the purposes of s 8-1(1)(b). The asserted business was a business of "dealing" in the shares of Nexus, for profit. He did not contend that he was carrying on a business of share trading generally.

4. In relation to both bases for deductibility, it was submitted that the amounts were not losses or outgoings of capital, or of a capital nature, so as to be prevented from being deductible by s 81(2)(a) of the ITAA 1997.

5. The Commissioner contended:

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(1) First, the losses sustained by Mr Greig did not fall within s 8-1(1)(a) on the basis of the reasoning in Myer because: (a) the relevant transactions giving rise to those losses were not incurred in a "business operation or commercial transaction" of a kind contemplated by the Myer principle; and (b) the necessary profit-making purpose was absent.
(2) Secondly, the objective circumstances did not support a finding that Mr Greig carried on a business of dealing in Nexus shares capable of engaging s 8-1(1)(b).
(3) Finally, even if the losses fell within either or both of s 8-1(1)(a) or (b), those losses were on capital account and should be dealt with under the capital gains tax regime in Parts 3-1 and 3-3 of the ITAA 1997.

6. In closing submissions, both parties accepted that, in the particular circumstances of this case:

(1) If the applicant was successful in relation to deductibility under either paragraph (a) or paragraph (b) of s 8-1(1), he would also be successful under s 8-1(2), and if he was unsuccessful under both, he would fail under s 8-1(2).
(2) The result in relation to whether the legal fees were deductible would follow the result in relation to the share losses.

Overview

7. Between April 1981 and May 2015, Mr Greig held various managerial and senior executive roles within the Bechtel Group of companies. Those companies provided construction, project management and engineering services to a global network of clients, including companies in the mining and resources industries. Mr Greig was employed, at varying times, as Executive Director of the Bechtel Group, Managing Director of Bechtel Australia Pty Limited and President of the Brechtel Group's Mining and Metals Global Business Unit. His earnings and financial position were such that he could afford to make substantial purchases of shares. He retired from the Bechtel Group in May 2015.

8. In around May 2006, Mr Greig engaged Mr Kretschmer of Unity Partners to be his financial planner and adviser. Mr Kretschmer provided advice concerning superannuation, salary sacrificing, structuring of personal and family asset holdings and long-term financial planning. Although Mr Kretschmer attended meetings in 2012 at which the purchase of Nexus shares was discussed, Mr Kretschmer did not provide advice in relation to the acquisition of those shares.

9. In January 2008, Mr Greig retained Mr Foot of FSS Advisory, a firm of stockbrokers and financial advisors, to provide advice and to buy and sell shares on his behalf. Mr Greig transferred at least $1.2 million to FSS Advisory a short time after his conversation with Mr Foot in January 2008. An amount of $1.6 million was transferred into a "Macquarie Investment Manager" account for Mr Greig with Macquarie Bank in respect of which Mr Kretschmer was nominated as adviser and which had been opened at least in 2006. This account was used for share purchases. Before FSS Advisory was retained, Mr Greig had made certain purchases of shares without the assistance of FSS Advisory.

10. From 29 January 2008 until, relevantly, the end of the 2015 income year, Mr Foot recommended various stocks for Mr Greig to buy and sell on the Australian Stock Exchange ( ASX ). Throughout that period, Mr Greig instructed Mr Foot (typically following Mr Foot's recommendations) to buy and sell ASX-listed stock, mostly in companies operating in the mining, energy and resources sectors. According to Annexure ACG-3 to the affidavit of Mr Greig sworn 10 April 2018 ( second affidavit ), Mr Greig expended many millions of dollars on share purchases (other than shares in Nexus) over the period 29 January 2008 to 23 April 2014. The shares which were acquired were held for various periods of time from a number of days to a number of years. Mr Greig gave evidence, by his second affidavit, that all of the losses and gains on these transactions were returned on capital account in his income tax returns for the relevant years.

11. In addition to those shares (and other shares which, it transpired, were not included in Annexure ACG-3), Mr Greig purchased shares in Nexus on the recommendation of Mr Foot. He purchased 1 million Nexus shares in February 2011. He disposed of those shares in May 2011 at a loss. He treated that loss as a

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capital loss in his 2011 tax return. Notwithstanding that, Mr Greig stated in his affidavit sworn 24 October 2017 ( first affidavit ) that the purchase of those shares was in accordance with a strategy which, it was submitted, constituted a "business operation or commercial transaction" which fell within the Myer principle. That strategy was referred to as his "Profit Target Strategy".

12. After that purchase and sale of Nexus shares in 2011, Mr Greig again purchased Nexus shares over the period March 2012 to May 2014. He contended that these shares were purchased in accordance with the same "Profit Target Strategy" and "business operation or commercial transaction" pursuant to which the 2011 shares had been purchased.

13. Nexus ultimately failed and was placed into administration. Nexus's creditors approved a Deed of Company Administration ( DOCA ) which was executed on 22 August 2014. On 17 October 2014, Nexus's administrators filed proceedings in the Supreme Court of New South Wales seeking leave to transfer all of the existing shares in Nexus for nil consideration. Mr Greig spent a total of $507,198 on legal fees in unsuccessfully opposing the proceedings. His shares were transferred for nil consideration resulting in a loss of $11,851,762 in the 2015 financial year.

14. Mr Greig then sought advice in relation to these losses from the advisers who had prepared his earlier tax returns. After receiving that advice, Mr Greig took the position that the Nexus shares were held on revenue account such that the loss was deductible in the 2015 financial year. He took the position that the loss was incurred in carrying on a business of dealing in Nexus shares or, alternatively, in accordance with the principle in Myer. By the time of the hearing of this appeal, his primary case was based on Myer and his alternative case was that he carried on a business of dealing in Nexus shares.

15. Mr Greig did not put a case that he was engaged in the business of share trading generally. Rather, his "business" for the purposes of s 81(1)(b) was characterised as a business of dealing in Nexus shares. Likewise, the only shares he alleged were purchased pursuant to a Myer "business operation or commercial transaction" were the Nexus shares. Mr Greig treated all of the other shares he acquired with the assistance of Mr Foot and FSS Advisory (from approximately January 2008) as being held on capital account.

16. Although Mr Greig contended that all of the Nexus shares, including those purchased and disposed of in 2011, were purchased pursuant to either a Myer "business operation or commercial transaction" or a business of dealing in Nexus shares, he nevertheless claimed a capital loss of $113,571.91 in respect of the one million Nexus shares he disposed of in the income year ended 30 June 2011. The treatment of his Nexus shares as being held on capital account in the 2011 income year was consistent with the treatment of all of his other shares.

17. If Mr Greig is correct in his contentions so far as concerns the Nexus shares, he would be able to deduct the loss of approximately $11.85m in the financial year ended 30 June 2015 rather than treating the shares as being held on capital account and giving rise to a capital loss on their disposal. On the other hand, he has maintained the treatment of all of his other share acquisitions and disposals as being on capital account.

18. It was submitted that the only relevant question in these proceedings was whether: (a) the Myer principle applied with respect to the acquisition and disposal of the Nexus shares; or (b) there was a business of trading in the Nexus shares (but not a share trading business more generally), such that either paragraph (a) or (b) of subsection 8-1(1) of the ITAA 1997 applied. It was submitted that the facts concerning the many other share purchases (and disposals) were a "red herring" - that is, in substance, that they were not relevant to the Court's assessment of the facts in relation to the Nexus shares.

19. I accept that the critical issue is the correct treatment of the Nexus shares. This does not mean that the facts concerning his shareholdings more generally are necessarily irrelevant to the determination of the correct treatment of the acquisition and disposal of the Nexus shares, in particular whether Mr Greig was in the business of "dealing" in Nexus shares. The Nexus shares were administered or

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managed by Mr Greig's advisors in the same "portfolio" as his other shares.

Background Facts

Initial retaining of FSS Advisory: 2006 to 2008

20. Mr Greig met Mr Foot at Mr Greig's wedding in 2006. Mr Greig had "moderate cash resources" at that time which he wanted to use to generate substantial cash profits in the short term. He considered the stock-market a suitable vehicle for achieving that objective. His schedule as a senior executive at Bechtel Australia was such that he considered he should engage a stockbroker who could monitor the market and find stocks for him, which he could buy to sell at a profit in a short time frame.

21. Mr Greig's first affidavit set out his initial conversation with Mr Foot in January 2008, where he said:

I want to purchase stocks that are undervalued and which are likely to go up in the short-term. I'm not looking for blue-chip companies. I'm more interested in smaller companies that are going to outperform over the next 12 months or so. The mining sector is booming at the moment and there are a lot of opportunities in that space.

I want you to have a look at what's out there and tell me which stocks you like. I'll give you $1,200,000 to begin with and we can see how things go.

22. Mr Foot's account of the conversation was that Mr Greig stated he wanted to "find undervalued stocks that [he could] buy at decent volumes and then sell quickly in order to make a profit". He claimed Mr Greig had stated: "I'm not looking for shares to hold in the long term". Mr Greig stated to Mr Foot that he knew quite a bit about mining and thought there were lots of opportunities.

23. Mr Greig said that, by early 2011, he adopted a specific strategy pursuant to which the Nexus shares, but no other shares, were purchased. At that time, he had substantial cash available and could afford to take risks to increase his short-term wealth. He thought he would retire from Bechtel in around 2015. He stated that his overall objective was to maximise the amount of cash that would be available to him upon his retirement. He could then use that cash to invest in managed funds and superannuation to secure his long-term financial wellbeing as well as to provide start-up capital for any business ventures that he might wish to pursue. He considered the most suitable means of achieving that objective was to buy and sell equities on the stock market. He believed he could make substantial profits in a short space of time by buying and selling the right stocks at relatively large volumes. He was familiar with how the stock market functioned because he had purchased shares in the past.

24. He described his strategy in the following terms (at [23]-[25] of his first affidavit):

23. My strategy for making a profit from buying and selling shares was to select stocks whose market value was likely to increase in a short space of time - whether due to the relevant company being undervalued by the market, the potential for that company's business to experience rapid growth, the company becoming a target for a corporate takeover, investors taking a favourable view of the performance or potential of a particular industry or sector of the market, or some combination of all of those factors.

24. I did not set out to purchase shares in a particular industry, but I intended to draw upon my professional experience, skills and expertise gained in the course of working for Bechtel Group Inc. to identify suitable socks in the mining, energy and resources sector, which at that time in early 2011 was generally performing very strongly.

25. In selecting shares to purchase, my aim was to find stock that I could acquire and then sell at a profit within [a] period of several months, or [an] even shorter period, depending on the circumstances of the individual company. I wanted to be able to purchase shares, sell them quickly at a profit upon the happening of a liquidity event (such as the announcement of a takeover bid), and then use the proceeds to make other trades. The high degree of liquidity in the stock market appealed to me, because it meant that I could react quickly to changing circumstances and sell out of positions if it appeared to me that more money could be made by purchasing different stock.

25.

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For the purposes of his evidence, this strategy was given the label "Profit Target Strategy".

26. Mr Greig stated that, although his intention in early 2011 was to execute his Profit Target Strategy by acquiring shares in different companies, as events ultimately transpired, the only stocks he purchased in line with that strategy were the Nexus shares.

Nexus Phase 1: purchase and sale of Nexus shares in 2011

27. Mr Foot called Mr Greig on around 31 January 2011 stating that he, Mr Foot, had found a stock he thought Mr Greig would be interested in. The stock was Nexus. Mr Greig was familiar with Nexus because of his knowledge of the mining and resources sector. He was aware that Nexus held interests in a number of natural gas fields located near Western Australia, the most valuable of which was the Crux resource in the Browse Basin. He was aware that Nexus held its interest in the Crux resource jointly with Royal Dutch Shell and Osaka Gas.

28. During their telephone call on around 31 January 2011, Mr Foot told Mr Greig that Nexus had recently acquired an option from Shell which would give Nexus time to extract liquids from the Crux resource. Mr Foot stated that Nexus shares were trading at $0.46 but that he had research reports which valued those shares at $0.67. Mr Foot sent a research note to Mr Greig.

29. Mr Greig read the research note and expressed to Mr Foot the view that there was value in the company that was not reflected in the then-current share price. He stated that he decided to purchase Nexus stock in line with his Profit Target Strategy. He stated that this decision reflected his view that (at [33]):

(a) there was underlying value in the Crux asset and correspondingly Nexus' economic interest in that asset;
(b) in negotiating the option with Shell, Nexus had removed an important impediment to realising a greater portion of the underlying value in the Crux asset, and the market had reacted positively to that development;
(c) additional developments were likely to take place in the following 12- to 18-month period, such as a potential sell-down by Nexus of its equity stake in the Crux project, which would cause Nexus' share price to increase; and
(d) there was a reasonable prospect of making a profit (and potentially a substantial profit) by selling Nexus shares upon the announcement or happening of a positive event in the months ahead.

30. On about 8 February 2011, Mr Greig telephoned Mr Foot noting again that he considered the Nexus share price did not reflect the true value of its assets and instructing Mr Foot to purchase one million shares. Mr Greig stated in his first affidavit (at [36]):

At the time I acquired the Nexus shares on 8 February 2011, my intention was to make a profit by selling those shares within a period of several months, upon a material increase in the shares' market value.

31. Mr Greig stated that he monitored the share price between February and May 2011 and observed that the share price declined steadily. He stated that he also reviewed articles in the financial press and Nexus's public announcements.

32. In around mid-May 2011, Mr Greig received a telephone call from Mr Foot who stated that Nexus was not panning out the way they had wanted and the share price was continuing to fall. Mr Foot said he thought there was value in the company but it would probably take longer than they had thought before that value would be reflected in the share price. Mr Foot stated: "I think your best bet would be to take the loss and sell your shares".

33. Mr Greig stated that he sold the shares because he considered there was no longer a sufficient prospect of making a profit upon the sale of his Nexus shares in the short term in accordance with his Profit Target Strategy. As noted above, Mr Greig sustained a loss as a result of the sale of Nexus shares.

34. FSS Advisory sent to Mr Greig a document which included a "Tax Summary" in respect of the income year ended 30 June 2011. This document related to Mr Greig's "portfolio". The "Tax Summary" was divided into an "Income Summary" and a "CGT Summary". The "Income Summary" recorded income such as dividends. The

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"CGT Summary" recorded share sales in three ASX-listed corporations: Lynas Corporation Limited, Nexus and Pryme Energy Limited. The sales of shares in Lynas resulted in a taxable capital gain of $1,074,144.22. The sales of shares in Nexus resulted in a capital loss of $113,571.91. The sales of shares in Pryme resulted in a capital loss of $172,219.75.

35. The fact that the Nexus shares were treated as being held on capital account in the 2011 year (and that this was inconsistent with Mr Greig's position that those shares were purchased in accordance with a Myer "business operation or commercial transaction") was the subject of submissions filed and served by the Commissioner and dated 3 April 2018. At the hearing, Mr Greig was granted leave to file in Court and read his second affidavit which had been sworn on 10 April 2018. In this second affidavit, Mr Greig confirmed that he had read the submissions served by the respondent and stated (at [9]):

The FSS Report was provided to me by Warwick Foot in around July 2011. I did not read the document at that time because, first, I was extremely busy with my work at Bechtel, and secondly, I knew that the Report would be provided to PwC by FSS Advisory, and I was content to leave it to PwC to review the Report and to prepare my tax return. To the extent that the FSS Report contained information about "capital gains tax" in relation to share transactions listed in the Report, the provision of that information was not based on any discussion with me, or at my request.

36. At the hearing, Mr Greig stated that he believed he did look at the document but that he would have done so quickly and then sent it to his tax advisors, PricewaterhouseCoopers ( PwC ).

37. In his second affidavit, Mr Greig stated that he thought he met with PwC to review the draft tax return prepared by them for the 2011 financial year (prepared, inter alia, on the basis of the FSS Advisory "Tax Summary") but that no discussion occurred regarding the tax treatment of the losses on the sale of the Nexus shares. He stated that he relied upon his advisers at PwC to prepare and lodge the tax return on his behalf and that it did not occur to him in 2011 or 2012 that the losses incurred on the sale of his Nexus shares might be treated differently for tax purposes from the other share transactions that he had undertaken in that year. He stated (at [12]):

.It was only after I incurred the loss on the compulsory transfer and cancellation of my Nexus shares in December 2014 that I turned my mind to the question of whether that loss should be treated as a CGT transaction for tax purposes. I consulted PwC. By that stage I was out of time to seek to amend my tax return for the 2011 financial year, or to apply for a private ruling in respect of the tax treatment of the losses that I incurred on the sale of Nexus shares in that year

38. As a matter of convenience, this initial purchase and sale of Nexus shares was referred to during the hearing (and is referred to in these reasons) as "phase 1".

Nexus Phase 2: purchase of Nexus shares from 2012 to 2014 and disposal in 2014

39. Between 28 March 2012 and 9 May 2014, Mr Greig made 64 separate acquisitions of a total of 134,893,686 shares in Nexus for $11,851,762, as set out in Annexure A to these reasons.

40. The circumstances of those acquisitions are dealt with in further detail below. Mr Greig did not sell any Nexus shares during this period.

41. In his first affidavit, Mr Greig stated that he undertook the following activities during the period from March 2012 to May 2014 to inform himself in relation to Nexus's ongoing financial circumstances (at [54]):

(a) I monitored the price of Nexus' shares on the [ASX] on a daily basis, and sometimes two or three times a day;
(b) I read all announcements made by Nexus to the ASX and to the media;
(c) I reviewed each day the financial press, including publications such as the Australian Financial Review, The Australian newspaper and Bloomberg, for articles about Nexus;
(d) I read research reports about Nexus published by investment banks, stockbroking firms and other stock market analysts;

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(e) I communicated with Mr Foot, either in person at my offices in Brisbane or by email or telephone, every couple of weeks, or shortly following any public announcement by Nexus, to discuss developments regarding Nexus' share price and to obtain Mr Foot's advice in relation to whether I should purchase or sell Nexus shares in line with my Profit Target Strategy.

42. On 23 January 2012, Mr Greig met with Mr Foot and Mr Kretschmer. Mr Greig had recently received a substantial cash bonus from Bechtel and anticipated that he would continue to receive substantial cash payments in subsequent years. He considered this would provide him with substantial means to advance his Profit Target Strategy. He stated that he said to them:

I want to use all that cash to buy shares that I can sell at a profit in the short term. This is about generating high profits in the next few years before I retire. I'll then give a chunk of that money to David [Kretschmer] to put away in my super and managed investments.

43. In early March 2012, Mr Greig received a phone call from Mr Foot in which Mr Foot advised Mr Greig that Nexus had entered into a non-binding heads of agreement with Shell and Osaka Gas on 19 January 2012 to develop the Crux resource. Mr Greig said he met with Mr Foot a few days later and Mr Foot gave him a copy of the announcement by Nexus regarding the heads of agreement and an article from the Australian Financial Review ( AFR ) concerning Nexus. Mr Greig said that Mr Foot said to him: "There is potentially a very good profit to be made by buying and selling the shares".

44. After his meeting with Mr Foot, Mr Greig read the Nexus announcement and the AFR article and considered the following information contained in those documents to be significant (at [48]):

(a) under the terms of the Heads of Agreement, Nexus, Shell and Osaka Gas were to form a new joint venture to develop the Crux field, in which the equity interests would be held in the following proportion: Shell 80%, Nexus 17% and Osaka Gas 3%.
(b) as part of the arrangements concerning the new joint venture, Nexus had acquired a 12-month option to sell 2% of its participating interest in the project to Shell for $75 million;
(c) the parties had agreed upon a development option, whereby Crux would become part of Shell's Prelude Floating LNG project. I was familiar with the concept of using floating platform technology from my time at Bechtel, and I regarded it as a very efficient and profitable new method of extracting and processing natural gas resources.
(d) the AFR described the Heads of Agreement as a "turning point for Nexus", and quoted and analyst from Goldman Sachs as saying that the deal was an "excellent outcome for Nexus";
(e) Nexus' share price had jumped 14.6% to 27.5 cents per share following the announcement; and
(f) Goldman Sachs had increased its 12-month price target for Nexus shares by 40% to 35 cents per share in the wake of the announcement.

45. Mr Greig said that, based on the information he had been given and the various discussions he had with Mr Foot, he decided to purchase Nexus stock in line with his Profit Target Strategy. In his first affidavit he stated (at [50]) that this decision reflected his view that:

(a) Nexus' shares were undervalued relative to the underlying value of the company's assets;
(b) the agreement between Nexus, Shell and Osaka Gas to develop jointly the Crux resource represented a material change in Nexus' circumstances, and presented a tangible scenario for realising the value of Nexus' stock in the immediate future;
(c) the joint venture would be formalised within a matter of months, which would enable the parties to begin immediately the process of extracting maximum value from the Crux resource;
(d) there was a reasonable likelihood that Nexus would be the subject of a takeover bid by an interested buyer;
(e) Nexus' share price, which at that time was approximately 22 cents per share, was likely to increase substantially over the coming

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months; and
(f) by purchasing shares in Nexus, there was a reasonable prospect that I would be able to make a profit by selling those shares upon a material increase in market value in the following months.

46. On 28 March 2012, Mr Greig instructed Mr Foot to purchase five million shares in Nexus. Mr Greig stated in his first affidavit that, at the time he acquired the shares between 28 and 29 March 2012, his intention was "to make a profit by selling those shares within a period of several months, upon a material increase in the shares' market value". He stated he was prepared to sell the Nexus shares even earlier if the share price increased as a result of Nexus announcing that it had become the subject of a takeover bid.

47. In early April 2012, Mr Greig became aware that Nexus had appointed a new Chief Executive Officer, Mr Lucio Della Martina. He read an article in The Australian concerning Mr Della Martina's appointment and considered it significant that Mr Della Martina "believed Nexus was in a strong position to take its key assets towards development and had the opportunity to capture substantial shareholder value". He decided to purchase more Nexus shares. Mr Greig said that decision reflected his view that:

(a) Mr Della Martina would not have accepted the appointment as Nexus' new CEO unless he believed that the company had the potential to be successful;
(b) with a skilled and experienced executive such as Mr Della Martina now at the helm, there was a greater likelihood that Nexus would be able to monetise its assets (particularly the Crux asset) more effectively and efficiently, which would likely cause Nexus' share price to increase in the short term; and
(c) by purchasing additional shares in Nexus, there was an excellent prospect that I would be able to make a profit by selling those shares upon a material increase in their market value in the following months.

48. Mr Greig said that, at the time he purchased the shares between 2 and 4 May 2012, his intention was to make a profit by selling those shares within a period of several months, upon a material increase in the shares' market value. As can be seen from Annexure A, approximately $2 million was spent on the purchase of Nexus shares during that period.

49. Mr Foot sent Mr Greig an email on 9 May 2012, attaching an article about Nexus from the AFR. Mr Greig read the article, noting in particular the statement that the joint venture to be formalised under the heads of agreement between Nexus, Shell and Osaka gas was "worth about $3.75 billion, valuing Nexus's 17 per cent stake at a massive $637 million, about double Nexus's market capitalisation". Mr Greig said that this statement reinforced his view that the Nexus shares were undervalued and that its share price was likely to increase within the following 12 month period. Mr Greig stated that, on 11 May 2012, he met with Mr Foot and Mr Kretschmer and said:

I've purchased a sizeable number of Nexus shares because I think the company is significantly undervalued and the share price is likely to go up in the next couple of months. When that happens, I'll sell, which will hopefully provide me with a decent stockpile of cash when I leave Bechtel.

50. On 18 May 2012, Mr Greig sent an email to Mr Foot in which he asked Mr Foot whether he thought he (Mr Greig) should "tough it out" by continuing to hold his Nexus shares despite the fact that the share price had dropped by 20% since his purchases in early May 2012. In fact, the email Mr Greig sent to Mr Foot asked: "Are you [Mr Foot] happy to tough it out?" As was explained in cross examination and in Mr Greig's second affidavit, the reason Mr Greig asked Mr Foot this question was that Mr Foot had an "economic stake" in Mr Greig's portfolio of shareholdings, which included the Nexus shares. FSS Advisory was entitled to charge a "quarterly portfolio management fee" of approximately 0.12% of the value of Mr Greig's overall share portfolio. In addition, if the total value of the shares in the portfolio increased by 10% or more in any given quarter, FSS advisory was entitled to charge a performance fee of 20% of the amount of the uplift. Mr Foot responded to Mr Greig's email, stating he was "more than happy to tough it out".

51. Mr Greig decided to purchase further shares in Nexus in light of these discussions. He

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stated that the further shares purchased between 22 and 28 May 2012 were undertaken "in line with my Profit Target Strategy" and that his intention was "to make a profit by selling those shares within a period of several months, upon a material increase in the shares market value".

52. On 26 June 2012, Mr Greig sent an email to Mr Foot in which he noted that the Nexus share price was continuing to decline and asking whether Mr Foot was still confident. In his first affidavit he said (at [73]):

I also stated [in the email to Mr Foot] that the alternative would be to sell my Nexus shares and claim a deduction for the 2012 financial year. I wrote those words because, given the ongoing decline in Nexus' share price, if Mr Foot advised me that he no longer believed there was a reasonable prospect of making a profit on the shares, I was prepared to sell them immediately and to find different stock that would enable me to advance my Profit Target Strategy.

53. In fact, there was no reference to claiming a "deduction". The email he sent stated: "Alternative is sell and take loss before 30 June - not that I need it this year". Mr Foot responded in an email on 27 June 2012 stating that he was "very confident" but suggested not buying more Nexus shares for the time being. Mr Greig decided not to sell his shares in Nexus and to wait and see whether the joint venture agreement between Nexus, Shell and Osaka Gas would be finalised.

54. On 3 July 2012, Mr Greig received an email from Mr Foot informing him that the Nexus shares had been placed in a trading halt. This email included an article from The Australian which stated: "Nexus Energy is set to announce it has finally signed a deal with Shell to combine the gas and liquids in the Crux petroleum field in the Browse Basin off the coast of Western Australia". On 6 July 2012, Mr Foot reported to Mr Greig that he had met with Mr Della Martina and other members of the Nexus board and that they were expecting to announce soon that the joint venture agreement had been completed. On 9 July 2012, Mr Foot sent to Mr Greig an email attaching a copy of an article from Energy News Premium. Mr Greig stated that he read the article and considered the following information significant (at [81]):

(a) Nexus had announced that it had successfully finalised the terms and documentation pertaining to the Crux joint venture;
(b) the expanded scope of the Crux project (in terms of the objective to develop a separate floating LNG facility at Crux to process gas from the joint venture) provided Nexus with an opportunity "to be part of a project with the potential to create much greater value" than previous deals with Shell; and
(c) Mr Della Martina was quoted in the article as saying that the joint venture was "transformational for Nexus" and that the Crux asset would be "very attractive to strategic investors".

55. Mr Greig's first affidavit stated that the contents of the articles he had been provided on 3, 6 and 9 July 2012 confirmed his view that the Nexus share price would likely increase in the following weeks and months "as the market came to terms with the news that the joint venture agreement had finally been concluded".

56. In around mid-August 2012, Mr Greig received an email from Nexus informing him that the company was planning to host a presentation for shareholders. Mr Greig telephoned Mr Foot to ask him to attend the presentation for him.

57. In around August 2012, Mr Foot provided to Mr Greig a copy of the slide presentation which had been provided to attendees at the Nexus presentation which had been held on 30 August 2012. Mr Greig read the slide deck and stated in his first affidavit that he "considered that the presentation demonstrated that Nexus management had a clear plan to deliver better value to shareholders, which [he] believed would make Nexus more attractive to potential investors and buyers".

58. On 26 September 2012, Mr Greig read an announcement from Nexus that it had appointed Mr Don Voelte as its new Chairman. Mr Greig was familiar with Mr Voelte, having spoken with him in his roles at Bechtel on several occasions when Mr Voelte was the

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Chief Executive Officer of Woodside Petroleum. Mr Greig regarded him as a strong leader and an experienced businessman. Mr Greig stated that Mr Voelte's appointment "gave [him] confidence that Nexus was heading in the right direction and would soon be delivering better results that would translate into a higher share price".

59. Mr Greig received a telephone call from Mr Della Martina in early October 2012 in which Mr Della Martina stated to him:

Andy, since you are a large shareholder, I'm letting you know that [PTT Exploration and Production Public Company Limited ( PTTEP )] from Thailand has been approaching a number of shareholders about buying a substantial stake in the company. I'm told that they've been offering people 25 cents a share. I would urge you not to accept that offer because Nexus' assets are worth a lot more than that. You'll end up getting a better price if you leave it to me and the Board to engage directly with PTTEP about a potential sale. We've had to put you behind a Chinese wall, which means you're not allowed to trade in Nexus stock until further notice. I'd also like to speak to Warwick Foot about this, can you ask him to get in touch with me?

60. Mr Greig stated that "my conversation with Mr Della Martina was very positive, because it suggested to me that there was a very real prospect of a sale of the whole of Nexus, which would immediately cause Nexus's share price to increase, perhaps substantially so".

61. Mr Foot reported to Mr Greig on about 4 October 2012 that he had met with representatives of PTTEP. Mr Greig stated he regarded this as "positive news, because if a company such as PTTEP was interested in buying a substantial stake in Nexus (or indeed the whole company) and the market became aware of that fact, it would very likely cause Nexus's share price to increase".

62. Mr Greig met with Mr Foot and Mr Kretschmer on 16 October 2012 and stated that he might be getting an offer from PTTEP to purchase his shares but that Mr Della Martina had said to him not to accept any offer around 25 cents because he would likely get a better price "if the shares were all sold in one go". Having regard to conversations with Mr Foot and Mr Kretschmer, Mr Greig decided to hold onto his Nexus shares pending a sale of the whole company. He said he did so "because [he] believed it provided the best chance of receiving the highest possible price per share, thereby maximising the amount of any profit that [he] would make upon the sale of those shares in the short term".

63. Mr Greig requested Mr Foot to attend the Annual General Meeting of Nexus on 22 November 2012. Mr Foot sent Mr Greig an email on 23 November 2012 attaching an article about Nexus in The Australian, which quoted Mr Della Martina as saying that Nexus had "received expressions of interest" and was "formally engaged with" a number of leading oil and gas companies regarding a potential sale of Nexus's interest in the Crux resource. Mr Greig considered that this news was significant and that a sale of that nature would likely be viewed positively by the market and cause Nexus's share price to increase in the immediate future.

64. Later on 23 November 2012, Mr Greig telephoned Mr Foot and had a discussion in which Mr Foot told him that Mr Della Martina had confirmed that Nexus was in discussions with a number of potential bidders regarding a sale of the whole company. Mr Greig stated that he gave instructions to purchase another $1 million worth of Nexus shares. Mr Greig stated that he "continued to believe that there was substantial value in Nexus assets, which would translate into the price of Nexus's shares if a method of realising the value of the company's assets could be found in the following months".

65. Mr Foot purchased on Mr Greig's behalf approximately $1 million worth of Nexus shares between 23 and 28 November 2012.

66. On 19 December 2012, Mr Greig sent an email to Mr Foot asking Mr Foot to confirm the total average price for which the Nexus shares had been acquired. Mr Foot responded by stating that he then owned 28,151,435 shares at an average price of 17.85 cents. Mr Greig responded to this email on 2 January 2013 noting that the share price was then 16.5 cents and stating "we're homing in on being back to break even". Mr Foot in turn responded to

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this email on 3 January 2013 noting that the share price was then 17.5 cents.

67. On 7 March 2013, Mr Greig instructed Mr Foot to purchase further Nexus shares in the order of $2 million. Mr Greig stated that this reflected his view that "the market was finally starting to appreciate that Nexus stock was undervalued, and that the share price would continue to increase in the following weeks and months".

68. Mr Greig instructed Mr Foot to purchase a further $100,000 worth of nexus shares in April 2013. In April and May 2013 Mr Greig read various research reports and announcements and formed the view that he should purchase additional shares because he considered that they remained undervalued and were likely to increase over the following 12 month period. On Mr Greig's instructions, Mr Foot purchased a further $1.5 million of Nexus shares in the second half of May 2013. Mr Greig stated that his purpose in acquiring these shares "was to make a profit by selling those shares within a period of several months upon a material increase in the shares' market value, in line with my Profit Target Strategy".

69. In his first affidavit, Mr Greig gave an account of a conversation with Mr Foot on 7 June 2013 (at [125]):

Greig: "I'm still feeling positive about Nexus, but the share price keeps falling. I'm thinking that it may be worth buying more shares and becoming a substantial shareholder, so that I can have a greater say in how the sale process is being conducted. Can you tell me how many more shares I would need to buy in order to become a substantial shareholder?"

Foot: "No problem, I'll find out and get back to you."

70. On 12 June 2013, Mr Foot informed Mr Greig of the number of shares he would need to acquire to become a substantial shareholder in Nexus; he required 66,491,060 shares in total, being an additional 11,681,571 shares. Mr Greig instructed Mr Foot to purchase additional shares sufficient to make Mr Greig a substantial shareholder. In his first affidavit he stated that his decision to become a substantial shareholder was not to exercise influence over the long-term strategic direction of the company but that his "sole focus was on bringing about quickly a sale of the company or its assets that would cause Nexus's share price to go up and enable [him] to make a profit upon the sale of [his] shares, in line with [his] Profit Target Strategy". Mr Foot purchased on Mr Greig's behalf almost 14 million shares in June 2013.

71. From late July 2013, Mr Greig met with Mr Foot every 3 to 4 weeks in connection with his Nexus shareholding. He continued to monitor Nexus's share price and read research. He remained of the view that Nexus's assets remained undervalued.

72. On about 22 August 2013, Mr Foot reported to Mr Greig that he, Mr Foot, had spoken with Mr Della Martina who had said that the sale process was continuing and he was confident that a deal would be reached. Mr Greig instructed Mr Foot to purchase an additional 500,000 shares. A total of 495,050 Nexus shares were purchased on 22 August 2013.

73. On 26 September 2013, Mr Greig met with Mr Foot and was provided with research by Macquarie Private Wealth. Mr Foot said that Macquarie was still valuing Nexus at 22 cents per share.

74. On 12 November 2013, Mr Greig saw that Nexus's share price had dropped to 6 cents. He considered that Nexus shares remained undervalued and that its share price was likely to increase in coming months. He considered there was still a reasonable prospect of making a profit on the sale of his Nexus shares in the short term.

75. On 9 December 2013, Mr Greig instructed Mr Foot to purchase another $1 million worth of Nexus shares. These were purchased between 9 and 30 December 2013.

76. In January 2014, Mr Greig asked Mr Foot to speak to Mr Della Martina regarding the status of the sale process. Mr Foot reported that Mr Della Martina had said that the sale process was continuing and would be completed.

77. On 13 February 2014, Mr Greig received an email from Mr Foot attaching an article about Nexus from The Australian. The information in that article caused Mr Greig to feel optimistic and he believed that the information in that article would be viewed

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positively by the market such that the share price in Nexus would "jump in the short term".

78. On 18 February 2014, Mr Greig was informed by Mr Foot that Mr Voelte had resigned from Nexus, effective immediately. Later, Mr Greig read an announcement by Nexus that it had halted production at its Longtom gas processing facility and was investigating the cause of the problem. Nexus made a second announcement on 21 February 2014 that it had requested an immediate trading halt to consider the implications arising from the stoppage at its Longtom plant.

79. By March 2014, Mr Greig believed that an announcement regarding a takeover for Nexus was imminent and he was concerned that, with the trading halt remaining in place, he would not be able to purchase additional shares before any announcement was made. He wanted to purchase more shares because he believed that Nexus's share price would increase upon the announcement of a takeover bid. On 31 March 2014, Mr Greig read an announcement by Nexus that Seven Group Holdings ( SGH ) had made an offer to purchase all of the shares in Nexus for two cents per share. That announcement included:

NXS [Nexus] faces an April 3 deadline to satisfy asset sale requirements, which it does not have a means of satisfying without the SGH proposal. Failure to do so could trigger the lenders to call for cash collateralisation of certain letters of credit and repayment of the Longtom Senior Debt Facility.

80. On 16 April 2014, Mr Foot emailed Mr Greig an article from The Australian entitled "Investors hammer Nexus board over debt crisis". This included:

NEXUS Energy shareholders have expressed anger at the board's handling of a debt crisis that has seen the company accept a takeover from Seven Group Holdings, run by recently departed chairman Don Voelte, which will deliver investors just one-third the price the shares last traded at.

Two groups purporting to represent 20 per cent of Nexus shares, including top 10 holders, have separately blasted the board's inability to restructure the company as debt deadlines loomed and called for suspended shares to trade again to test the value of the stock and encourage potential rival bidders. …

At the same time, the Australian Shareholders Association has declared Mr Voelte's decision to step down as chairman, only to return with a 2c per share bid, was "not a good look". Broker Warwick Foot, whose clients include top 10 holders that make up more than 15 per cent of Nexus's shareholding, said shareholders had been dismayed by the outcome of a strategic review process.

He said it was unbelievable that late last year the board said it was willing to consider acquisition proposals only to turn around this month and endorse a proposal 80 per cent below December 31 book value.

Mr Foot said statements from Nexus, which on March 14 said discussions with financiers were a priority over asset sales, indicated the board was too late in turning its focus from asset sales to recapitalisation and refinancing, given April 2 debt deadlines.

Nexus said Mr Voelte had excused himself from corporate sale discussions because [Seven Group Holdings] might have been interested. …

Nexus's two biggest shareholders, Bechtel Australia chief Andrew Greig and Dimensional Fund Advisors, both declined to comment. …

An ASX spokesman would not comment on why Nexus shares were not being traded but said there were other requirements beyond disclosure, mainly concerning a company's financial condition, that needed to be fulfilled for trading to occur.

Nexus has said shares should remain suspended until more information is known about an electrical outage at the Longtom gas operation in Bass Strait.

81. On 4 May 2014, Mr Greig gave Mr Foot instructions to buy more Nexus shares once trading resumed, which he then perceived to be likely. Mr Greig stated that he considered that the SGH bid significantly undervalued Nexus and its assets, that rival bidders would emerge and that, once the trading halt was lifted, those bidders would purchase substantial stakes in Nexus, causing the share price to rise. Mr Greig

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gave instructions on 4 May 2014 to purchase more Nexus shares on the basis that he considered there was still a "reasonable prospect of making a profit by selling his shares in line with his Profit Target Strategy".

82. On 7 May 2014, Nexus announced that a scheme of arrangement under which SGH would acquire all of the shares in Nexus would go to a vote on 12 June 2014 and that it had registered the Scheme Booklet. The Scheme Booklet indicated that the Nexus board believed the scheme was in the best interests of the shareholders and unanimously recommended that shareholders vote in favour of the scheme. Mr Greig stated that he was "very disappointed" to read that the scheme had received unanimous support and this strengthened his resolve to vote against the scheme. He read the Scheme Booklet which indicated that, if the scheme was not approved and absent an alternative proposal that provided adequate funding, Nexus would need to be placed into voluntary administration. It noted that SGH as secured creditor would likely enforce its security, which might include the appointment of receivers and managers to Nexus and that SGH "may seek to acquire all of the shares in Nexus or its assets through these enforcement or administration processes". The directors indicated that they expected shareholders were "unlikely to receive any return on their equity on an administration or receivership scenario". The Scheme Booklet contained an extensive identification of risks relating to the holding of the shares in Nexus. It was supported by an independent expert's report.

83. On 8 May 2014, Mr Foot sent an email to Mr Greig indicating that he had managed to buy around 20 million shares. He also reported that SGH had made a statement saying they would not increase their offer in the absence of an alternative offer. Mr Foot purchased almost 50 million shares at two cents per share over the course of 8 and 9 May 2014. Mr Greig considered that blocking the SGH bid represented the best chance of enabling Nexus to find an alternative buyer and negotiate a sale of the company that would provide a much better return to shareholders.

84. Mr Greig wrote a letter to Mr Voelte care of SGH on 9 May 2014, indicating his view that the proposed scheme materially undervalued the Nexus shares. Mr Greig spoke to a journalist from The Australian on about 12 May 2014 and, later that day, was provided with an article in which he was quoted and which referred to the letter Mr Greig had sent to Mr Voelte.

85. On 12 June 2014, a meeting of Nexus shareholders took place and the scheme was voted down. Mr Foot attended as proxy for Mr Greig (and certain other shareholders). Nexus issued an ASX announcement indicating that the scheme had been voted down and noting that the board of directors had consequently resolved to appoint voluntary administrators.

86. After an approach from Piper Alderman in early July 2014, Mr Greig decided to appoint that firm to act on his behalf in relation to claims against Nexus and SGH.

Involuntary disposal of Nexus shares in 2014

87. On 11 August 2014, Nexus's creditors approved a Deed of Company Arrangement ( DOCA ) which provided for the compulsory transfer of all Nexus shares to a third party for nil consideration to shareholders. Nexus's creditors commenced proceedings in the Supreme Court of New South Wales to effect the share transfer. Mr Greig was one of 17 defendants who contested the DOCA and resisted the involuntary disposal of Nexus shares.

88. On 24 December 2014, the Supreme Court approved the proposed DOCA pursuant to s 444GA of the Corporations Act 2001 (Cth), requiring the shareholders of Nexus to dispose of their shares in the company involuntarily for nil consideration. As a result, Mr Greig incurred a loss of $11,851,762 in the year ended 30 June 2015. In addition, he incurred legal fees of $507,198 in connection with his involvement in the proceedings.

89. As noted above, after these events, Mr Greig consulted his advisers, PwC, in relation to the treatment of the Nexus shares.

90. On 12 April 2016, Mr Greig requested a private ruling in relation to the deductibility of the share losses. The Commissioner issued a private ruling decision on 24 May 2016 to the

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effect that the share losses were not deductible under s 8-1 of the ITAA 1997.

91. Mr Greig subsequently lodged an income tax return for the year ended 30 June 2015, which did not include deductions in respect of the share losses or the legal fees. The Commissioner issued a notice of assessment on 23 June 2016.

92. On 20 October 2016, Mr Greig lodged an objection to the Commissioner's notice of assessment, claiming that the amount assessed was excessive on the basis that he was entitled to claim deductions for the share losses and legal fees. The Commissioner issued his objection decision on 9 May 2017, disallowing the objections in full.

93. Mr Greig appealed to this Court on 7 July 2017.

CROSS-EXAMINATION

94. Mr Greig was cross-examined. As noted earlier, the Commissioner filed written submissions shortly before the hearing stating there was little to distinguish Mr Greig's purchase of Nexus shares (contended to be held on revenue account) from his other shares (treated as held on capital account). After the Commissioner's written submissions were filed, Mr Greig swore a second affidavit seeking to distinguish the Nexus shares from the other shares in his portfolio. In that affidavit, Mr Greig referred to becoming a substantial shareholder in Nexus. He stated in cross-examination that he could not recall being a substantial shareholder in any other ASX-listed company.

95. In fact, he had become a substantial shareholder in MacPherson Resources Limited in April 2013, with 5.58% of the votes. As noted at [70] above, Mr Greig had become substantial shareholder in Nexus in June 2013. MacPherson Resources was also in the mining, energy and resources sector.

96. Having acknowledged that substantial shareholding, Mr Greig then stated he could not recall being a substantial shareholder in any other ASX-listed company. However, he then accepted he was the Chairman and a non-executive director of Elementos Limited, an ASX-listed company in the mining, energy and resources sector. He had become a substantial shareholder on 7 August 2013, with a voting power of 8.8%. His shareholding increased in 2014 to 19.32%. He was able to recall that his current shareholding was around 22%. The shares in Elementos did not appear in Annexure ACG-3 (see paragraph [10] above), which Mr Greig said in cross-examination was intended to set out all share acquisitions and disposals in the relevant period.

97. Mr Greig then also agreed that he was a substantial shareholder in certain overseas companies.

98. Mr Greig stated in his first affidavit that the Nexus shares were the only shares to fall within his claimed "business operation or commercial transaction" and, in his second affidavit, he sought to convey that the circumstances of his dealings in the Nexus shares were distinguishable from all of his other share purchases. However, that statement and those circumstances were not based on a clear recollection of all of the events, and omitted significant events relevant to the position he sought to convey.

99. In addition to his failure to recollect his other substantial shareholdings, Mr Greig explained in his second affidavit that he was personally involved in researching and monitoring the Nexus shares, which was stated to be "unlike the other stocks" recommended to him by Mr Foot. However, this statement in his affidavit was not a reliable basis for distinguishing his Nexus shares from the remainder of his portfolio. For example, he read research given to him by Mr Foot in relation to other significant investments he had, including Marengo Mining Limited. He agreed that he took time to read and understand research reports sent to him by Mr Foot in relation to other shares in his share portfolio.

100. It is also relevant to note that Mr Greig agreed in cross-examination that he had never sold any shares in any company in which he held a substantial interest, namely MacPherson Resources, Elementos, Nexus or his substantial shareholdings in overseas companies. He stated that the main reason for not selling these shares was that he saw value in the stock and wanted to "hang on" to that stock. Mr Greig agreed that he hoped or expected that the stock in respect of which he had acquired a substantial interest (including the Nexus shares) would

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rise, including in the long term or any term. He agreed he had the same hope or expectation with respect to the smaller shareholdings in his portfolio.

101. Mr Greig was, understandably, significantly affected by the circumstances in which his Nexus shares were transferred. The idea that he might have been engaged in a "business operation or commercial transaction" or business of "dealing" in Nexus shares (but not others) was first considered after the Nexus shares were compulsorily transferred for nil consideration when he sought advice. I formed the view that there was a tendency to exaggerate the idea that there was a business operation with respect to those shares. I do not find that the exaggeration was purposeful; rather, it was a consequence of focussing on the specific events concerning the Nexus shares after they occurred, in the context of a disappointing loss, and doing so without as focussed attention on other events.

102. I recognise that, ultimately, the question is whether the Nexus share losses are deductible and that does not turn on the deductibility or otherwise of other share transactions which Mr Greig engaged in or whether or not those transactions were correctly dealt with for tax purposes. However, my view that there was a tendency to exaggerate the idea that that there was a business operation with respect to the Nexus shares does have some significance because it is relevant to the question of whether, objectively, there really was a "business operation" (s 81(1)(a)) or a business of "dealing" in Nexus shares (s 8-1(1)(b)).

CONSIDERATION

103. The availability of a deduction turns on s 8-1 of the ITAA 1997, which provides:

(1) You can deduct from your assessable income any loss or outgoing to the extent that:
- (a) it is incurred in gaining or producing your assessable income; or
- (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
- (a) it is a loss or outgoing of capital, or of a capital nature;
- (b) it is a loss or outgoing of a private or domestic nature; … or
- (d) a provision of this Act prevents you from deducting it.

104. As noted above, Mr Greig claimed that the share losses and legal fees (totalling $12,358,960) were deductible under s 8-1 of the ITAA 1997 on one of two bases:

(1) First, the share losses and legal fees were "incurred in gaining or producing" assessable income and were therefore deductible under paragraph (a) of s 8-1(1) because the shares were acquired with a profit-making purpose in a "business operation or commercial transaction" falling with the Myer principle.
(2) Secondly, the amounts were losses or outgoings "necessarily incurred in carrying on a business" of "dealing" in Nexus shares for the purposes of paragraph (b) of s 8-1(1).

Issue 1: The Myer Issue

105. The relevant principles in Myer were succinctly summarised by Middleton J in Visy
Packaging Holdings Pty Ltd v Commissioner of Taxation (2012) 91 ATR 810 at [185] :

The principle of law which is at the centre of this case is clear: if the intention or purpose of the relevant entity in entering into a transaction or upon acquiring an asset was to make a profit or gain, that profit or gain will be income, even if the transaction was extraordinary by reference to the ordinary course of that entity's business: see Westfield Ltd v FCT (1991) 28 FCR 333; 21 ATR 1398; 91 ATC 4234; 99 ALR 510;
FCT v Cooling (1990) 22 FCR 42; 21 ATR 13; 90 ATC 4472; 94 ALR 121;
FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 61 ALJR 270; 87 ATC 4363; 71 ALR 28;
FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692; 56 ALJR 240; 82 ATC 4031; 39 ALR 521;
FCT v Visy Industries USA Pty Ltd (2012) 205 FCR 317; 2012 ATC 20-340; 90 ATR 148. Similarly, if the intention or purpose was to make a profit or gain but a loss was ultimately in fact sustained, then a deduction

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in the amount of that loss would be permitted.

106. The Myer group of companies carried on a business of retail trading and property development. The head company, Myer Emporium, also carried on business as a financier. Myer Emporium entered into various related-party financing arrangements, including an agreement to loan the amount of $80 million to its subsidiary, Myer Finance. Myer Emporium subsequently assigned its interest in the loan to a third party, Citicorp, for consideration of over $45 million. The case concerned the character of that receipt.

107. So far as is presently relevant, the High Court held that the amount was derived from an isolated commercial transaction entered into by Myer Emporium otherwise than in the ordinary course of carrying on its business, but with the intention or purpose of making a profit or gain. The High Court held that a receipt of that nature constituted ordinary income. At 211, the High Court stated:

The important proposition to be derived from [
Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes) (1904) 5 TC 159] and [
Ducker v Rees Roturbo Development Syndicate [1928] AC 132] is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.

108. It is relevant to note four aspects of this statement of principle: first, that the taxpayer has an ordinary course of business; secondly, that there is an "isolated business operation or commercial transaction"; thirdly, that the "isolated business operation or commercial transaction" is outside of the ordinary course of the taxpayer's business; and fourthly, that the transaction was entered into with the purpose of making a profit.

Business operation or commercial transaction

109. Where the owner of an investment, such as a share, chooses to realise it and thereby obtains a greater price for it than the original acquisition price, the enhanced price is not income unless "what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of a business":
Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604 at 607, per Starke J. Starke J stated: "The test to be applied is whether the amount in dispute is a gain made in an operation of business in carrying out a scheme of profit making", citing - amongst other cases - Californian Copper
Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes) (1904) 5 TC 159.

110. In Californian Copper, the Californian Copper Syndicate acquired copper-bearing land in Fresno, California. It sold the land in two tranches to the Fresno Copper Company Limited for a total of £300,000 payable wholly in fully paid up shares in Fresno Copper, allotted to the Secretary of Californian Copper in trust for Californian Copper. Californian Copper resolved to reduce its capital by rateably transferring to its existing shareholders most of the shares held by the Secretary in Fresno Copper. Californian Copper made no profit assessable to income tax unless the net gain derived by it from the sale of its land, represented in shares in Fresno Copper, was profit within the meaning of the Income Tax Act of 1842.

111. Californian Copper contended there was no income and that the two sales of land were transactions by which the company substituted for its capital in the form of land, capital in the form of shares, and that any benefit which might result was a growth of capital not income.

112. The relevant issue was whether Californian Copper carried on an adventure or concern in the nature of trade within the meaning of the first case of Schedule D of the Income Tax Act of 1842. The Lord Justice Clerk said at 166:

It is a quite well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the

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Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by realisation, the gain they make is liable to be assessed for Income Tax.

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

113. The Lord Justice Clerk looked to the purposes for which the company was formed and held that Californian Copper "was in its inception a Company endeavouring to make profit by trade or business, and that the profitable sale of its property was not truly a substitution of one form of investment for another": at 166-7.

114. The High Court in Myer distinguished profits derived in a "business operation or commercial transaction" from "a mere realization or change of investment or from an enhancement of capital". At 213, the High Court stated (citations omitted):

The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere": [Whitfords Beach Pty Ltd (1982) 150 CLR 355]. Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value: see the discussion by Gibbs J in [
London Australia Investment Company Limited v Federal Commissioner of Taxation (1977) 138 CLR 106]. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

115. It is relevant to note three of the matters referred to as to when profit on a realisation or change of investment would be income: first, the High Court spoke of a realisation or change of investments "initially acquired as part of a business"; secondly, those investments were so acquired "with the intention or purpose that they be realised subsequently in order to capture the profit arising from their expected increase in value"; and thirdly, the intention or purpose had to exist at the time of acquisition.

116. The High Court considered the fact that the taxpayer was engaged in business at the time of the isolated transaction to be significant in determining whether the profit made was one made in a "business operation or commercial transaction". At 215-216, the High Court stated (emphasis added, citations omitted):

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. Likewise, the need to distinguish capital and income for trust purposes and other purposes has focused attention on the difference between the right to receive future income and the receipt of that income, a difference which has given rise to the analogical difference between the

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fruit and the tree: see Shepherd v. Federal Commissioner of Taxation. Both the "ordinary usage meaning" of income and the "flow" concept of income derived from trust law have been criticized - see Professor Parsons, "Income Taxation: An Institution in Decay?": The 1986 Wilfred Fullagar Memorial Lecture. For present purposes it is sufficient for us to say, without necessarily agreeing with these criticisms, that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.

117. Mr Greig did not contend that he was engaged in any business outside of his acquisition of Nexus shares. His primary position was that the Myer principle applied to a "business operation or commercial transaction" and that the principle did not require that he be otherwise engaged in business.

118. The parties agreed that, although the facts of Myer were concerned with an isolated transaction which: (a) occurred in the course of business; and (b) was extraordinary by reference to the ordinary course of that business, the underlying principle was not confined to isolated transactions where a taxpayer was otherwise carrying on business.

119. In that context, Senior Counsel for Mr Greig drew attention to the obiter dictum of Edmonds J in
Blank v Federal Commissioner of Taxation (2014) 95 ATR 1 and of Pagone J on appeal, reported at (2015) 242 FCR 96. Edmonds J concluded that an amount paid to Mr Blank by Glencore International AG ( GI ) after the termination of Mr Blank's employment was assessable as ordinary income. The amount paid to Mr Blank was calculated by reference to his entitlement under profit participation arrangements made during the course of his employment. The precise mechanism of that participation is not central for present purposes; it is sufficient to note that the participation in GI's future profit was facilitated by the use of Genussscheine ( GS ). The Commissioner had argued, as an alternative to his contention that the amount received by Mr Blank was ordinary income, that the GS were revenue assets acquired by Mr Blank (or in which he had an interest) and that the gain on the realisation of the GS (or the interest in them) was ordinary income according to the Myer principle. Edmonds J rejected this alternative argument concluding that it could not succeed because Mr Blank was not carrying on a business: at [93].

120. On appeal, the Commissioner maintained that, if the amount was not assessable as ordinary income, it was assessable in accordance with the Myer principle. The majority (Kenny and Robertson JJ) concluded that Edmonds J was correct to conclude that the amount was ordinary income: at [92]. Their Honours noted (at [41]) the Commissioner's argument concerning the Myer principle but concluded it was unnecessary to consider it given their conclusion that the amount was ordinary income: at [93]. Pagone J dissented. What is relevant for present purposes is his agreement with Edmonds J that the Commissioner's alternative argument based on the Myer principle should be rejected on the basis that Mr Blank was not conducting a business.

121. Pagone J said at [140]:

The Commissioner's alternative submissions to support the assessments as ordinary income are to be rejected for the reasons given

ATC 20794

by his Honour at first instance. The Commissioner contended that his Honour ought to have concluded that the amounts payable to Mr Blank were ordinary income in accordance with the principles in
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 or as income from property in reliance on [
Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656]. His Honour rejected these grounds for upholding the assessment by saying at [93]:

I do not propose to consider the second and third grounds because, in my view, they have no arguable merit. It is sufficient to dispose of the second ground to say that the applicant was not carrying on any business to which the first, as distinct from the second, strand of reasoning in Myer Emporium might attach (see
S P Investments Pty Ltd v Commissioner of Taxation (1993) 41 FCR 282 at 297 per Hill J, with whom Burchett and O'Loughlin JJ agreed). It is sufficient to dispose of the third ground to say that the GH analogy is not only irrelevant, but wrong. The relevant company is GI and the applicant held no interest in that company, if it ever held such an interest, upon execution of the Declaration on 15 March 2007.

The principle to emerge from Myer Emporium may be seen to have two strands. The first is that a receipt from a transaction involving the acquisition of property may be business income from a transaction with a profit making purpose notwithstanding that the transaction is outside of the ordinary business activity of the taxpayer and that the transaction is not an incident of the business. That may be so where a profit making purpose is stamped upon the receipt by the transaction giving rise to the receipt. The receipt in Mr Blank's case, however, was from the disposal of the rights which had accrued through participation in plans from 1994 and not from the carrying out by him of any profit making scheme of the kind within the principles considered in Myer Emporium. The application of the first strand of the reasoning in Myer Emporium is also defeated in this case by the fact that Mr Blank, unlike the taxpayer in Myer Emporium, was not conducting a business.

122. Mr Blank was granted special leave to appeal to the High Court where the appeal was dismissed: (2016) 258 CLR 439. It was held that the amount, being "deferred compensation" payable under the relevant agreement (see [59]), was a reward for services rendered by an employee and assessable as income according to ordinary concepts: at [68], [74]. This rendered it unnecessary to consider the Commissioner's alternative submission in the High Court that the amount was assessable in accordance with the Myer principle: at [54], [75].

123. Senior Counsel for Mr Greig also referred to a number of authorities in which the Myer principle had, it was submitted, been applied where it did not appear that the taxpayer was otherwise carrying on a business, including Edwards (
Inspector of Taxes) v Bairstow [1956] AC 14;
Commissioner of Taxation v Haass (1999) 91 FCR 132;
August v Commissioner of Taxation (2013) 94 ATR 376.

124. Edwards v Bairstow was referred to by the High Court in Myer at 212-213. Mr Bairstow and Mr Harrison embarked on a joint venture to purchase a complete spinning plant, which they intended, even before they purchased it, to sell at a profit. Neither of them had ever engaged in any transactions in machinery. They had no intention of using the plant, holding it or deriving income from it. Lord Radcliffe concluded, on this basis, that this was "inescapably, a commercial deal in second-hand plant".

125. The High Court in Myer stated (at 212):

In rejecting the argument that the profit was not income because it arose from an isolated transaction, Lord Radcliffe observed [quoting Edwards
(Inspector of Taxes) v Bairstow at 38]:

"… that circumstance does not prevent a transaction which bears the badges of trade from being in truth an adventure in the nature of trade. The true question in such cases is whether the operations constitute an adventure of that kind, not whether they by themselves or they in conjunction with other operations, constitute the operator a person who carries on a trade. Dealing is, I think, essentially a trading adventure, and the

ATC 20795
respondents' operations were nothing but a deal or deals in plant and machinery."

126. The relevant statute in
Edwards v Bairstow charged income tax upon the profit arising from "trade, manufacture, adventure or concern in the nature of trade". The High Court stated at 212-213 (citations omitted):

The judgments in some of the English decisions naturally reflect the language of the United Kingdom statutory provisions, which have no precise counterpart in this country. However, over the years this Court, as well as the Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income: Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation; McClelland v. Federal Commissioner of Taxation; London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation; and see Whitfords Beach.

127. The taxpayer in Haass entered into a life policy in respect of which the death cover component had been reduced to zero in return for a discounted premium of $100,000 per annum. The taxpayer carried on business as a real estate agent but the policy "was obtained for private and domestic purposes, unconnected with his business": at [16]. Heerey J recorded at [5] that, in the course of negotiations for the policy, it was arranged that the taxpayer would pay $8,833.50 of the annual premium of $100,000 from his own funds and the agent would pay the balance. This unusual feature was facilitated by the fact that the agent was entitled to receive "extraordinarily high commissions". The policy had many other features not typical of a standard life policy which it is not necessary to set out for present purposes. Heerey J, referring to AAT Case 12,258 (1997) 37 ATR 1045 which involved an identical policy, concluded that the policy was not properly characterised as a life policy and that the taxpayer should be regarded as entering into a commercial transaction: at [17], [18].

128. The decision in August also turned on what were found to be commercial transactions. The trial judge had concluded that certain properties were purchased with an intention that they be developed, tenanted and sold for a profit. The Full Court (Siopis, Besanko and McKerracher JJ) considered that conclusion was open to the trial judge and stated at [149]: "Development of properties, the securing of tenancies and the subsequent sale of the properties is a scheme or commercial transaction".

129. Mr Greig also relied upon
Moana Sands Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1853. In Moana, the Tribunal concluded that land had been acquired by a company with a dual purpose: first of working and/or selling the sand and, secondly, holding the land for future sale at a profit either to an associated company set up for the purpose of subdividing the land or to a third party subdivider, whichever gave the greatest financial return to the company - see reasons of the Full Court at 1858.38-45. The land was ultimately compulsorily resumed by a government authority. The Full Court concluded that the proceeds from resumption of the land was assessable as income according to ordinary concepts under former s 25(1) of the ITAA 1936: at 1859.44-48. Although unnecessary to do so (at 1859.49), it also considered the proceeds were assessable under the second limb of former s 26(a), as income from a profit-making scheme: at 1860.42-47.

130. I proceed on the following basis. Where assets are acquired with a sufficient profit-making purpose, in a "business operation or commercial transaction", then absent other reasons supporting a contrary conclusion, the profit on disposal is ordinary income (and any loss incurred will generally be on revenue account) irrespective of whether the acquisition occurred in the course of an existing business. However, the circumstance that the taxpayer is engaged in business at the time of the relevant transaction or acquisition is relevant. As noted at paragraph [116] above, the High Court in Myer emphasised (at 215):

If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary,

ATC 20796
judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business.

131. Gordon J stated in
Visy Industries USA Pty Ltd v Federal commissioner of Taxation (2011) 85 ATR 232 at [80] and [81] :

80. The concept of a "commercial transaction" stands in contradistinction to a private, recreational or other non-business activity:
Federal Commissioner of Taxation v Haass (1999) 91 FCR 132 at [16]-[18] and
Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729; cf
Paramedical Services Pty Ltd v Ambulance Service of New South Wales (2005) 217 ALR 502 at [86];
Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 127-130 and
Lubidineuse v Bevanere Pty Ltd (1984) 3 FCR 1 at 11-12.
81. So, for example, where a transaction occurs in the ordinary course of, or is an incident of, carrying on a business, it will generally be stamped with the character of a commercial transaction: Myer Emporium at 209. Consistent with those principles, a one-off transaction entered into by a taxpayer may still be a commercial transaction or an adventure in the nature of trade. …

132. The fact that a taxpayer is not carrying on business when an asset is acquired is likewise a relevant circumstance in determining whether the acquisition of the asset is stamped as being on revenue account. The acquisition of an asset by a person carrying on business might be seen differently to the acquisition of the same asset by a person not carrying on business. It depends on the circumstances.

133. An asset will generally not be a revenue asset if a taxpayer acquires the asset pursuant to a private, recreational or non-business activity: Visy Industries at [80]; Haass at [16]-[18]. The purchase of an investment by a private investor, without more, does not have the quality of a "business operation or commercial transaction" and may be better described as an activity of a private, recreational or other non-business nature:
Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 378-9;
London Australia Investment Company Limited v Federal Commissioner of Taxation (1977) 138 CLR 106 at 129.

134. Mason J in Whitfords Beach at 378-9 stated:

Unfortunately there is an element of ambiguity in the expressions "business deal" and "operation of business" as there is in the adjectives "business", "commercial" and "trading" which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts "business deal" and "operation of business" may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character.

135. In
McCurry v Federal Commissioner of Taxation (1998) 39 ATR 121 at 124, Davies J referred to Myer and Whitfords Beach and stated:

In a case such as the present where the taxpayers were not carrying on a business, the profit to be assessable must have been derived from a transaction that can be described as a commercial dealing.

136. It is important to emphasise that the relevant acquisition must be made "in an operation of business or commercial transaction". Here, there was a number of acquisitions. However, Mr Greig's case was that the acquisitions were all made in a single "business operation or commercial transaction" which existed from 2011 and which was described as being the acquisition of the Nexus shares in accordance with the "Profit Target Strategy" which had been developed in 2011, and the course of conduct which followed. It was said that the Nexus shares were acquired in circumstances of an expected or desired short-term profitable sale on the occurrence of a 'liquidity event', such as a takeover bid or asset sale.

137. In my view, the Nexus shares were not acquired as part of a "business operation or commercial transaction" such that, on acquisition, they were stamped as being acquired on revenue account. I accept that the Nexus shares were acquired as a whole with the desire that the shares would go up in value and

ATC 20797

would be sold for a profit. Purchasers of listed shares often make the decision to acquire shares with a view to profiting from dividends or an increase in the share price or both. That hope or expectation does not necessarily make the purchase of the shares a "business operation or commercial transaction". The purchase in such circumstances is an example of an ordinary investment engaged in by innumerable private investors each day and, without more, does not lend itself easily to the description of a "business operation or commercial transaction" (Myer) or a "commercial dealing" (McCurry).

138. This can be seen by an examination of the phase 1 acquisition of Nexus shares in 2011. Mr Greig acquired and disposed of one million Nexus shares in the income year ended 30 June 2011. His evidence was that this was pursuant to the same "business operation or commercial transaction" - defined by the "Profit Target Strategy" - as the subsequent (phase 2) acquisitions of Nexus shares from March 2012 to May 2014.

139. The 2011 acquisition is not appropriately described as a "business operation or commercial transaction" or a "commercial dealing". It was an acquisition of shares which it was hoped would appreciate in value. They might be disposed of if they went up sufficiently in value or if later events suggested that they should no longer be held. This did not have the flavour of a "business operation or commercial transaction" or a "commercial dealing". There was nothing in the nature of business or commerce that Mr Greig proposed to carry on when he acquired those shares. Like many investors he took an interest in the share price and reports from analysts as to whether the shares were undervalued or whether they recommended to buy, hold or sell. He took a similar interest in other shares he acquired. After holding the shares for a brief time, and given he could not see the share price going up, he disposed of the shares as many private investors would. He accounted for his losses appropriately, as a capital loss. There were numerous examples of short term holdings in his evidence, each treated - appropriately in my view - as a capital loss.

140. There is a question as to how useful it is to compare this case with the facts of others, such as
Edwards v Bairstow, upon which Mr Greig placed much reliance. That case turned on whether the relevant activity fell within the statutory test of "adventure in the nature of trade". As noted at paragraph [126] above, the different statutory language was acknowledged by the High Court in Myer. The real point the High Court was making by referring to the decision was that an isolated transaction could still be one which was a "business operation or commercial transaction".
Edwards v Bairstow concerned two people coming together in a joint venture in the nature of partnership, with a specific plan to acquire and quickly sell off plant. They had negotiations with various potential purchasers before the plant was acquired, and had agreed to sell part of it for £15,000 before the completion by them of its acquisition for £12,000. They engaged in significant activity after the acquisition to sell the remainder of the plant. They incurred travel and entertainment expenditure in seeking to sell the plant. They had to pay rent because of delays in moving the plant. Those facts readily showed an "adventure in the nature of trade". Mr Greig's acquisition and disposal of one million Nexus shares in 2011 do not readily show a "business operation or commercial transaction" or a "commercial dealing".

141. Mr Greig's acquisition and disposal of Nexus shares in 2011 is also easily distinguished from the facts in Californian Copper set out at paragraph [110] above.

142. Mr Greig contended that the later acquisitions of Nexus shares (phase 2) were made pursuant to the same "business operation or commercial transaction" as the 2011 acquisition (phase 1). Mr Greig submitted that the 64 individual Nexus share transactions entered into between March 2012 and May 2014 "comprised a consistent course of conduct pursued over a period of more than two years" in furtherance of a profit-making scheme, namely his "Profit Target Strategy". Mr Greig identified the "business operation or commercial transaction" as the acquisition of the Nexus shares in accordance with the "Profit Target Strategy" which had been developed in 2011, and the course of conduct which followed

ATC 20798

over the two-and-a-half year period from March 2012.

143. Mr Greig expressly did not put a case that sought to distinguish later acquisitions from earlier acquisitions or put an alternative case that particular acquisitions of Nexus shares were acquired in a commercial transaction which was different to that represented by the "Profit Target Strategy". There was no identification of any alternative "commercial dealing" related to specific acquisitions, nor what that "commercial dealing" was or which shares should be seen as acquired under it. Nor was I asked to find that Nexus shares which may have been acquired on capital account should be seen as having been held on revenue account at some point in time (cf Whitfords Beach).

144. In my view, the phase 2 acquisitions of Nexus shares were not made in a "business operation or commercial transaction" or a "commercial dealing". As Mr Greig submitted, each parcel of shares was acquired in the hope that parcel would increase in value. It is difficult to predict whether he would have sold them if the increase in value had eventuated given his retention of every other substantial shareholding he had - see paragraph [100] above. The acquisition in those circumstances was not a "commercial dealing" within the Myer principle.

145. Mr Greig contended, and I accept, that he was not in the business of share trading generally. He had a portfolio of shares under management by others, who treated them as held on capital account. That applied to all of his shares, including his Nexus shares. The portfolio was, by the standards of many, large. The Nexus shares were just one part of that portfolio of shares, albeit a significant part. The size of the portfolio, and of the Nexus component of it, whilst relevant, does not convert the nature of the Nexus share acquisitions into a business operation. Investors make large and small capital investments.

146. In support of his submission that the acquisitions constituted a "business operation or commercial transaction", Mr Greig relied upon the increasing activity of monitoring and research, which occurred over the period March 2012 to May 2104. He also relied on his communications with Nexus in the later period of phase 2 and the steps which he took in an attempt to protect the value of the substantial acquisitions of Nexus shares which he had made. Whilst it may be accepted that not every step which culminates in the making of a profit needs to be planned or foreseen (
Westfield Limited v Federal Commissioner of Taxation (1991) 28 FCR 333 at 344-5, per Hill J), the evidence did not establish that these later events were perceived as likely when he made his very substantial early purchases in phase 2, or that it was part of a business operation, whether planned or otherwise.

147. Whilst later events might be probative of the existence of an earlier intention, they cannot supply an intention which did not exist; nor can later events create a business operation which did not exist at the time of earlier acquisitions. As mentioned, it was not put by Mr Greig that the later purchases should be seen as having been acquired "in" a "commercial dealing" different to the "Profit Target Strategy" or the earlier purchases. These later events demonstrate that Mr Greig saw that the substantial investment position he had taken in Nexus was at risk and were entirely consistent with the steps one would expect to see of an investor seeking to protect his substantial capital investment, rather than one implementing a "commercial dealing" or business operation.

Profit-making purpose

148. A profit-making intention or purpose is to be determined objectively in light of the whole of the factual matrix in which the transactions occurred: Visy at [238]-[239]. As Middleton J observed in Visy at [232], the time for determining the existence of a profit-making purpose is when the relevant transactions were entered into - at [221]:

It is not a matter of looking back now to see whether profits (modest or otherwise) would have been possible. The court needs to determine whether there was an intention to make a profit or gain at the relevant time, and whether there was any abandonment of that intention by the relevant controlling minds.

149. It is not necessary that the sole purpose of the transaction be to obtain a profit; it is

ATC 20799

sufficient if a not insignificant purpose is to obtain a profit: Visy Industries at [81], per Gordon J.

150. The Commissioner submitted:

While the applicant contends that the objective circumstances in the period March 2012 to May 2014 are "only explicable" on the basis that he was pursuing a profit-making objective, the opposite is in fact true. The circumstances set out above are far more indicative of a passive investment in which the purchase of the Nexus shares at ever lower prices operated to lower the applicant's overall cost base in the stock through a process of 'averaging down' (an expression the applicant himself used at the time). Such an investor is more likely to achieve gains not from regular sales but through the accretion of value in the stock over the long term.

151. There are cases where a taxpayer is motivated to acquire shares for purposes other than profiting on resale - for example, profiting from dividends, or in a takeover context where the intention is to subsume the target company into the buyer group. A further example, as discussed in Visy at [251], may be where shares in some entities are acquired for the purpose of retaining the businesses of those entities in order to give the buyer group synergies and an ability to compete on a broader basis.

152. The relevant profit-making purpose must be examined at the time of the relevant acquisition said to be the acquisition made "in" a business operation or commercial transaction. Here, that requires finding that the relevant purpose existed in respect of each acquisition of Nexus shares over the period March 2012 to May 2014. It is tolerably clear that the early purchases is phase 2 were made in the hope or expectation that the share price would increase, resulting in profit. However, it does not necessarily follow that the later acquisitions were acquired with the same purpose. On balance, however, in my view there was a profit-making purpose with respect to each acquisition, even if it was perhaps objectively ill-founded with respect to the acquisitions in May 2014.

153. In relation to the Commissioner's submission that the purchases involved a process of "averaging down", that is relevant to the question of whether the shares were seen as an investment and to be treated as a capital asset rather than a revenue asset. However, in either case, the ultimate objective is profit.

154. The Commissioner identified five circumstances, which in his submission did not support the existence of the requisite profit-making purpose at the time Mr Greig acquired the Nexus shares.

(1) the absence of any contemporaneous documentary records evidencing the so-called 'Profit Target Strategy';
(2) the absence of any reference to the 'Profit Target Strategy' in any emails between the applicant and Mr Foot;
(3) the absence of any objective basis for distinguishing the Nexus investment from the applicant's multiple other shareholdings in the mining, energy and exploration sectors;
(4) the failure of the applicant to sell any Nexus shares in the relevant period, including so as to avoid a total loss on his investment; and
(5) the absence of any loss-limits or other strategies to minimise the extent of losses that might be incurred on the shares.

155. As to (1), (2) and (3), I accept that at the time of each acquisition of Nexus shares, Mr Greig had an objective of making a profit from a hoped for increase in share price, in particular over the purchase price of the particular parcel. I do not consider the purchases of Nexus shares were relevantly different to Mr Greig's other share purchases so far as purpose goes. That is, his share purchases were all made with a profit-making purpose even though it was recognised that the profit may or may not ultimately be achieved depending on movements in the share price. This is supported by the absence of documentary evidence articulating a particular strategy in accordance with which, or business operation under which, the Nexus shares were purchased but the other shares were not.

156. As to (4), this is not indicative of a lack of profit-making purpose attending the acquisition of the shares. It is relevant to an argument that Mr Greig should be seen to have intended a longer-term investment, but whether

ATC 20800

he saw the purchases as being long term or short term, he intended to profit from the acquisition and eventual sale of the shares.

157. Mr Greig was prepared to hold the Nexus shares for so long as it took for them to increase sufficiently in value or until he formed the view (as he did in relation to the 2011 Nexus shares) that his hoped for increase in value would not eventuate. If the value had continued to increase, he may well have held on to them long term as he did with all of the shares in the companies in which he was a substantial shareholder - see paragraph [100] above.

158. As to (5), the absence of a documented strategy to minimise losses does not suggest a lack of profit-making purpose. Mr Greig received advice in respect of his portfolio of shares, including his Nexus shares. He gave instructions to the managers of his portfolio of shares to sell when he considered it appropriate having regard to their advice or his views. For example, the Nexus shares acquired in phase 1 in 2011 were sold because it was perceived this would minimise losses. I do not regard the absence of a document setting out a loss minimisation strategy as of any significance in the circumstances of this case.

159. In my view, the objective circumstances indicate that Mr Greig intended to obtain a profit or gain from his acquisitions of Nexus shares.

Conclusion on issue 1

160. The Nexus shares were not acquired in a "business operation or commercial transaction" within the Myer principle; the share losses were not "incurred in gaining or producing … assessable income" and thus are not deductible under subsection 8-1(1)(a) of the ITAA 1997.

Issue 2: The section 8-1(1)(b) issue

161. Mr Greig's alternative case was that the share losses and legal fees were necessarily incurred in carrying on a business and were therefore deductible under subsection 8-1(1)(b) of the ITAA 1997. The relevant business, he contended, was a business of "dealing" in Nexus shares throughout the phase 2 period from March 2012 to May 2014. The purported business comprised his acquisitions of Nexus shares and the associated planning activities undertaken throughout this period. No Nexus shares were actually sold in this period; there were only purchases. As noted earlier, Mr Greig disavowed being engaged in share trading generally.

162. The starting point is to identify what constitutes "carrying on a business" for the purposes of s 8-1(1)(b). The term "business" is defined in s 995-1(1) of the ITAA 1997 to include "any profession, trade, employment, vocation or calling, but does not include occupation as an employee". In
Federal Commissioner of Taxation v Murry (1998) 193 CLR 605, Gaudron, McHugh, Gummow and Hayne JJ observed at [54]:

… A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions.

163. There is no definitive test for determining whether a taxpayer's activities amount to the carrying on of a business. The question is one of fact and degree to be answered based on a wide survey and the overall impression of the taxpayer's activities:
Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at [59];
Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474, per Webb J.

164. In
Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873 at 876-7, Bowen CJ and Franki J identified the following relevant matters:

Section 6 of the Income Tax Assessment Act defines "business" stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making, in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and

ATC 20801
even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial. [Citations omitted]

165. Factors which are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business include, but are not limited to:

(1) whether the taxpayer carries out its activities with a profit-making purpose, or whether the activities are better described as a hobby or recreation;
(2) the nature, size and scale of the activities, including the complexity of the activities and the amount of capital employed;
(3) the commercial character of the transactions;
(4) the repetition and regularity of the activities, including whether the activities involve a substantial effort over a period of time; and
(5) whether the activities are organised in a sophisticated, systematic and business-like manner, including whether a business plan exists and detailed business records are kept.

166. Each of these factors may be relevant, as might others, and no single factor is necessarily determinative: Spriggs at [59];
Evans v Federal Commissioner of Taxation (1989) 20 ATR 922 at 939 (Hill J);
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 22 ATR 344 at 357 (Hill J).

167. Mr Greig contended his business of dealing in Nexus shares was being carried on by him whilst he was otherwise carrying out his employment with Bechtel. This involved him travelling from Brisbane at least 200 days a year and sometimes over 300. Most of this travel was overseas. He was extremely busy in his role.

168. Mr Greig did not rely in the proceedings on any written business plans, methodologies or similar documents or seek to tender transactional accounts or records said to have been kept by him (personally) as records of his business of dealing in Nexus shares. There was no evidence he treated the Nexus shares as trading sock. Rather, such as they were, the records with respect to the transactions or dealings in Nexus shares were those of his advisors, maintained in their businesses, and these records did not relevantly distinguish the Nexus shares from the rest of Mr Greig's portfolio which they also managed.

169. It is difficult to conclude that Mr Greig intended to carry on the claimed business whether assessed subjectively or objectively. Of course, the question is whether objectively a business was carried on, not whether it was subjectively intended to be carried on. However, subjective intention can be a relevant matter. As Hill J observed in Radnor at 357:

While an intention to carry on a business must exist, this does not mean that the question is subjective. As Lord Buckmaster said in
J & R O'Kane v IRC (1992) 12 TC 303 at 347 : "… the intention of a man cannot be considered as determining what it is that his acts amount to".

Conversely, a man will be held to intend the natural and probable consequences of his acts, so that, albeit that he does not intend to carry on a business, if his acts amount to a business in fact, he will ordinarily be held to be carrying on a business.

However, intention may, nevertheless, be relevant, particularly in a case where the determination of business or no business it to be made at the time of commencement of a business, or in a time of business quietude, cf
Goodman Fielder Wattie Ltd v FCT (1991) 22 ATR 26; 91 ATC 4438 at 4446-7 and the cases there cited.

170.

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Mr Greig intended to purchase ASX-listed shares, including Nexus shares, with the assistance of FSS Advisory. That portfolio of shares was managed by his advisors. I do not conclude that Mr Greig had a subjective intention of himself carrying on a business of dealing in Nexus shares, as opposed to simply making the investment in those shares which he did. Indeed, Mr Greig did not contend that he subjectively intended to carry on a business of dealing in Nexus shares contemporaneously with the activities said to give rise to that business. It was accepted that he did not consider the issue at the relevant time and that it was only after the compulsory transfer of the Nexus shares for nil consideration that it was raised with him that he might have been carrying on business. So far as the evidence discloses, it was at that point in time, or later, that the position was taken that he had been in the business of dealing in Nexus shares, but no other shares.

171. Nevertheless, if the objective facts indicate that Mr Greig was in fact carrying on a business at the relevant time, his lack of subjective intention will not prevent the conclusion that he in fact carried on business.

Profit-making purpose

172. Mr Greig stated that the object of his acquisition of Nexus shares was to profit on their resale following the occurrence of a liquidity event. For the reasons given earlier, I accept that Mr Greig acquired the Nexus shares with a motive for profit. Mr Greig did not acquire Nexus shares as a hobby or recreation. However, I do not consider that his profit-making purpose is of great significance in determining the existence of a business for the reason that it is equally consistent with the motive one would ordinarily expect of an investor not engaged in business.

173. It may be that in a particular case, where the evidence is that the relevant taxpayer did not intend to profit from the activities carried out, the absence of a profit-making purpose would weigh heavily against the existence of a business. However, the reverse proposition does not necessarily follow.

Nature, size and scale of activities

174. Mr Greig's activities were substantial, involving 64 separate transactions conducted over a 25-month period.

175. As to the capital employed, expenditure of $11.8 million was substantial. However, size and scale are relative concepts. Mr Greig had significant amounts of employment remuneration at his disposal. The amount expended on Nexus shares was obviously significant; its size relative to Mr Greig's financial position was not disclosed. Mr Greig had the capacity to make, and did make, large capital investments in shares in circumstances which were not contended to amount to transactions occurring in the context of any business. The quantum of capital alone does not transform the share purchases and associated activities into the carrying on of a business. Nor in this case does it suggest that a business was being carried on, rather than the making of a substantial capital investment.

Commercial character of the transactions

176. For the reasons outlined above with respect to "business operation and commercial transaction", Mr Greig's purchase of Nexus shares was not in the nature of a "commercial dealing" and was consistent with investment activity.

Effort, repetition and regularity of activities

177. Mr Greig made regular purchases of Nexus shares over the relevant period - see Annexure A. Those purchases and the associated activities outlined above involved repetition and regularity.

178. Mr Greig reviewed Nexus's share price, public announcements, media reports, research notes and market commentary. He engaged an experienced stockbroker, Mr Foot. That was not an engagement which was specific to a business of dealing in Nexus shares. Mr Foot carried out his own research and analysis on Nexus and provided advice to Mr Greig in relation to purchasing Nexus shares. However, that was all part of Mr Foot's business and Mr Foot carried out research and advised Mr Greig on a series of other share purchases and disposals. The engagement of Mr Foot and FSS Advisory by Mr Greig was in relation to shares generally, not specifically in relation to "dealing" in Nexus shares. All of those

ATC 20803

activities together determined the profit Mr Foot or FSS Advisory would make from the portfolio management fees and performance fees they charged Mr Greig for managing his "portfolio" of shares.

179. In the later period, Mr Greig instructed Mr Foot to attend Nexus shareholder briefings and presentations and to communicate with Nexus's senior executives on his behalf in order to obtain information. That information informed Mr Foot's recommendations and Mr Greig's decisions. These actions, seen in context, were consistent with protecting a capital investment and not indicative of a business of Mr Greig's of dealing in Nexus shares.

180. Mr Greig did not himself conduct any of the significant record-keeping, tax and accounting functions of his dealings in Nexus shares or his other share activities.

181. In my view, the effort, repetition and regularity of Mr Greig's activities were consistent with investment activity and do not demonstrate a business of his of dealing in Nexus shares.

Business-like manner and sophistication of activities

182. Mr Greig submitted that his activities were organised and conducted in a business-like manner. I disagree. Mr Greig did not carry out his "dealing" in Nexus shares in an especially business-like manner. He did not register as a business for the purposes of conducting his dealing activities and nor did he form an entity to conduct the activities, not that either of these is a prerequisite. He did not keep separate records. Rather, the Nexus shares were dealt with or managed by FSS Advisory together with the remainder of Mr Greig's portfolio. That Mr Greig took an increasing interest in Nexus because of his increasing exposure to that particular shareholding does not create a business of dealing in Nexus shares.

183. Mr Greig did not tender any contemporaneous documentation demonstrating that the Nexus shares were held on revenue account in a business of dealing in Nexus shares, in the way one might ordinarily expect if such a business had in fact been carried on. Rather, the Nexus shareholding was dealt with by his advisors together with all of his other shares. Those advisors were not shown to have treated the Nexus shares any differently to Mr Greig's other shareholdings in terms of their records. So far as the evidence discloses, the whole share portfolio, including the Nexus shares, was treated by the advisers as being held on capital account.

184. Mr Greig relied upon documentary records produced by his advisors in which his Nexus share transactions were recorded. One of these was a document prepared by FSS Advisory for the year ended 30 June 2011, which included a "Tax Summary", a "Realised Report" and a table entitled "Income Transactions Taxable" (amongst other things). The "Tax Summary" read with the "Realised Report" treated the Nexus shares as assets held on capital account (together with the shares Mr Greig disposed of in Lynas Corporation Limited and Pryme Energy Limited) - see paragraph [34] above. FSS Advisory typically prepared such reports each financial year and these were provided to PwC to facilitate the preparation by PwC of Mr Greig's income tax return for that year. The Court was also taken to a "Tax Report" prepared by Macquarie Investment Manager, which set out Mr Greig's acquisitions of Nexus shares between March 2012 and May 2014 and the "Cost base/proceeds information" and accumulated "capital losses" recorded in respect of the Nexus shareholding.

185. Mr Greig submitted that such third-party documents constituted "business records". I accept, in principle, that records produced and maintained by third parties may constitute business records and that they might be probative of whether the particular taxpayer was carrying on business. However, I do not consider that the particular records relied upon by Mr Greig support the existence of a business of his dealing in Nexus shares. The records were created by advisers in their business of providing services to Mr Greig. They are consistent with the records one might expect to be maintained on behalf of an individual investing in shares or receiving advice, rather than a person in the business of dealing in a particular nominated share.

Conclusion on issue 2

186. Mr Greig was not engaged in a business of "dealing" in Nexus shares. Accordingly, the

ATC 20804

share losses and legal fees are not deductible under s 8-1(1)(b) of the ITAA 1997.

CONCLUSION

187. As noted at paragraph [5] above, the parties agreed that if Mr Greig was unsuccessful in relation to deductibility under paragraphs (a) and (b) of s 8-1(1), he would be unsuccessful under s 8-1(2). That is the result.

188. It was also agreed that the result in relation to the legal fees would follow the result in relation to the share losses.

189. It follows that the appeal must be dismissed.

Annexure A

Date	Number of shares	Cost
28 March 2012	2,000,000	$430,473
28 March 2012	553,891	$119,217.85
29 March 2012	1,446,109	$311,255.44
29 March 2012	900,000	$193,712.85
2 May 2012	2,596,041	$518,843.73
3 May 2012	4,900,000	$981,078.00
3 May 2012	2,503,959	$496,722.93
4 May 2012	16,500	$3,303.63
22 May 2012	3,390,557	$581,410.75
23 May 2012	667,952	$120,348.91
24 May 2012	243,725	$43,162.38
25 May 2012	1,105,774	$196,158.67
28 May 2012	326, 998	$58,924.39
23 November 2012	2,695,288	$347,168.01
26 November 2012	4,024,641	$523,778.85
28 November 2012	780,000	$101,511.54
7 March 2013	216,907	$32,571.84
8 March 2013	1,256,693	$201,292.06
11 March 2013	479,493	$79,038.19
12 March 2013	81,177	$13,002.61
13 March 2013	3,134,619	$502,090.73
14 March 2013	711,407	$133,950.32
15 March 2013	211,887	$36,651.63
18 March 2013	458,313	$74,420.13
19 March 2013	1,466,855	$234,954.97
20 March 2013	1,890,556	$302,821.70
21 March 2013	500,000	$80,088.00
22 March 2013	1,000,000	$160,176.00
25 March 2013	900,000	$144,158.40
8 April 2013	817,617	$114,592.29
22 May 2013	2,200,000	$257,956.24
23 May 2013	2,300,000	$264,790.95
24 May 2013	1,558,009	$171,569.51
27 May 2013	2,616,675	$283,011.30 ATC 20805
28 May 2013	2,179,947	$229,146.23
29 May 2013	2,668,899	$293,527.76
13 June 2013	4,225,031	$349,439.13
14 June 2013	20,024	$1,884.33
14 June 2013	1,274,969	$114,311.82
17 June 2013	314,304	$28,853.40
18 June 2013	621,750	$57,388.38
19 June 2013	602,516	$56,035.31
20 June 2013	721,799	$64,310.81
21 June 2013	1,719,607	$147,188.16
21 June 2013	2,022,878	$174,361.28
24 June 2013	264,163	$22,690.11
25 June 2013	1,712,959	$147,305.11
25 June 2013	301,626	$25,666.41
26 June 2013	75,189	$6,398.10
26 June 2013	47,662	$4,055.73
22 August 2013	495,050	$35,000.03
01 December 2013	5,628,919	$349,940.45
10 December 2013	5,700,000	$350,364.67
11 December 2013	303,405	$18,406.56
12 December 2013	671,569	$40,405.71
16 December 2012	376,689	$23,795.23
17 December 2013	252,932	$16,053.51
18 December 2013	1,501,730	$95,615.14
19 December 2013	100,000	$6,657.32
24 December 2013	1,219,424	$81,913.31
30 December 2013	132,320	$9,537.52
8 May 2014	28,258,814	$571,455.25
9 May 2014	21,404,735	$428,565.60
Total	134,893,686	$11,851,762.49

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