Jacob v. Federal Commissioner of Taxation

Gibbs J

High Court

Judgment date: Judgment handed down 26 October 1971.

Gibbs J.: The question for decision in this case is whether a profit of $37,209 made by the appellant on the sale of 9,000 shares in Endurance Mining Corporation No Liability, known as Endurance Tin, was rightly included in his assessable income. That question itself depends on whether the shares were acquired by the appellant for the purpose of profit-making by sale within sec. 26(a) of the Income Tax Assessment Act 1936, as amended (Cth).

The appellant is a bookmaker and derives a substantial income from that occupation. For some years - since 1959 - it has been his custom to invest a portion of his savings in shares and by 1968 he had acquired a substantial holding of shares in number of companies of different kinds. He did not trade in shares; since 1959, the only shares he has sold, except for those in Endurance Tin, were in a company whose take-over rendered the sale necessary. On or about 9 December 1968 the appellant's broker bought on his behalf 5,100 fully paid shares and 3,900 contributing shares in Endurance Tin for a total purchase price of $13,286. The appellant paid for these shares by cheque on 16 December 1968. On 6 January 1969 he instructed his brokers to sell the shares and they were sold for a total consideration of $50,495. The proceeds of sale were credited to the appellant's account with the brokers and on 24 February 1969 he was paid an amount of $45,399 which represented the balance due to him after deducting $5,095 in respect of purchases made on his behalf on 7 February and 13 February 1969 of some shares in another company, Tennant Creek Metals.

Endurance Tin had been formed in 1922 and had carried on the business of sluicing for tin in Tasmania. In December 1968 it acquired from Attunga Mining Corporation Pty. Ltd. an option over a scheelite deposit in New South Wales and in February 1969 it took over Attunga Mining Corporation Pty. Ltd. It subsequently appeared (in November 1969) that the scheelite deposit contained no major economic ore body but it was no doubt the expectation or hope that this deposit would prove valuable that caused the shares to rise between 9 December 1968 and 6 January 1969.

The account which the appellant gave in evidence of the circumstances in which he purchased the shares in Endurance Tin was as follows. He said that he had an acquaintance in Melbourne, named Dunham, with whom he was in the habit of discussing racing matters. In the course of one of these discussions Dunham told him that he had received ``a tremendous tip for

ATC 4193

shares'' and suggested that if the appellant was thinking about them he should ``buy them quick and lively''. Dunham went on to say that he had been ``given advice'' and that he had heard that the company was already producing tin but was getting into other metals and was going to advance tremendously and that in time it would be paying ``terrific dividends'' out of the money it would make. The appellant then decided to buy some of the shares, hoping, he said, that he might obtain from the dividends they produced a substantial income, part of which at least might be tax free. He said that he thought he had another conversation with Dunham before he finally bought the shares and that Dunham again urged him to buy quickly. He then instructed his brokers to buy 10,000 shares but when a sale note for 9,000 arrived he decided to leave it at that. Dunham was not called as a witness and his absence was not explained.

The crucial question is with what purpose the appellant acquired the shares, but since the sale of the shares followed so quickly on their purchase the reason why they were sold may throw some light on why they were bought. The explanation for the sale given by the appellant's solicitors in a letter written to the Commissioner on 19 June 1970 was as follows -

``The sale of the Endurance shares was undertaken on the advice of his broker to whom he had referred a sudden demand for some ready cash and his broker advised that there was no prospect of a dividend in sight from these shares and that of his portfolio of holdings that was the most suitable share to sell.''

The appellant gave evidence that properly to conduct his business as a bookmaker he needed a substantial working capital. He said that sometime late in December 1968 or about the beginning of January 1969, and possibly just before Christmas 1968, he found that his ready cash position was quite low and that his bank account was overdrawn, although no arrangements for an overdraft had been made, and he then thought it advisable to sell some shares to get some ready money. He called on his broker to seek advice but the broker with whom he usually dealt. Mr. Manning, proved to be unavailable and he saw another partner in the firm, Mr. Day. He told Mr. Day that he needed capital and was looking for information, presumably as to what shares to sell, and after some discussion he eventually asked Mr. Day if he knew anything about Endurance Tin. Mr. Day seemed reluctant to volunteer information and the appellant formed the opinion that he was not happy with the company. The appellant then said that he needed money and asked Mr. Day what he would do if they were his shares, to which Mr. Day replied that he thought he would sell them. The appellant said that he thought the matter over, formed the opinion that the Endurance Tin shares were not as good as he had been led to believe and decided to sell them.

Mr. Day who was called as a witness thought that he probably did give some advice to the appellant concerning Endurance Tin but was quite enable to remember the details of any conversation he had with the appellant.

The appellant had a current account with the Bank of New South Wales and four separate accounts with the Bank of New South Wales Savings Bank. The savings accounts were at all material times in credit to a total amount of $36,428. One of these accounts had been opened on 2 December 1968 with a deposit of $10,000. The appellant said that he kept these accounts as a reserve for the purpose of paying his income tax which, he said, generally amounted to between $30,000 and $50,000. In fact, his tax for the year ended 30 June 1968 was $21,792 and he paid that amount on 28 April 1969 without recourse to the savings bank accounts which still remain intact. On 9 December 1968, when he gave instructions to buy the shares, his current account was in credit to an amount of $12,650 which, of course, was less than the price that would have to be paid for the shares. Some moneys were paid into the account and after the payment to the brokers of $13,286 on 16 December 1968 the account was in credit to an extent of $1,095. The account went into overdraft on 20 December 1968, was in credit again on 23 December 1968, again became overdrawn on 24 December 1968 and remained overdrawn until 2 January 1969. A substantial payment on that date put the account into credit and it remained in that condition at all material times thereafter. On 6 January 1969 the credit balance was $16,408. The amount which the appellant normally drew from the account for the purpose of his bookmaking business each race day was $4,500.

Counsel for the Commissioner did not argue that the profit arising from the sale of the shares in Endurance Tin was a profit arising from the carrying on or carrying out of any profit-making undertaking or scheme within the second limb of sec. 26(a) of the Act. He submitted that the profit came within the first limb of sec. 26(a), as being profit arising from the sale by the appellant of property acquired by him for the purpose of profit-making by sale. It is now accepted that the purpose of which the section speaks is the main or dominant purpose actuating the acquisition of the shares:
Pascoe v. F.C. of T. (1956) 30 A.L.J. 402, at p.404;
Buckland v. F.C. of T. (1960) 34 A.L.J.R. 60, at p.62;
McClelland v. F.C. of T. 70 ATC 4115, 44 A.L.J.R. 422, at p.428;
McCarroll v. F.C. of T. 70 ATC 4129, at p.4130; and see
Evans v. D.F.C. of T. for South Australia (1935-36) 55 C.L.R. 80 at p.99.

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In the present case the appellant says, in effect, that his dominant purpose in buying the shares was to retain them for the benefit of the dividends they might produce. Section 190(b) of the Act casts on him the burden of proving that the assessment is excessive and, therefore, of persuading me that his purpose in acquiring the shares was not to make a profit by reselling them.

The appellant was a good witness; his demeanour was impressive and he was not shaken in cross-examination. However, as Fullagar J. said in Pascoe v. F.C. of T., supra at p.403:

``Where a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the `best' evidence, but, for obvious reasons, they must, as Cussen J. observed in
Cox v. Smail ((1912) V.L.R. 274, at p.283), `be tested most closely, and received with the greatest caution.''

The appellant might have corroborated his own evidence by calling Dunham to confirm that the latter did, in truth, say that Endurance Tin was expected to pay ``terrific dividends'' but he did not do so. The failure to call Dunham as a witness is quite unexplained and leads to an inference that his evidence would not have helped the appellant's case:
Jones v. Dunkel (1958-59) 101 C.L.R. 298, at pp.320-1.

The fact that the appellant resold the shares within a month of their purchase appears inconsistent with his story that he bought them to hold, unless it can be accepted that something occurred to make him change his mind in the meantime. Of course, a man who buys shares as a revenue-producing investment may subsequently decide to sell them simply because they have risen in the market to such a high price that it is prudent to realise them. This, however, was not the appellant's explanation; he said that he decided to sell some shares to gain ready money because his cash position was low. His evidence did not support the statement in his solicitor's letter that there was ``a sudden demand for some ready cash'', but it is possible that his solicitor misunderstood the instructions he was given. However, the known facts, although not necessarily inconsistent with the explanation given by the appellant of the sale of the shares, do cast some doubt upon it. Although it is true that the credit balance in his current account throughout January was considerably lower than that which was maintained during the latter part of the financial year, it was by no means insubstantial at the time when he gave instructions to sell (6 January 1969) and at that time was greater than it had been on 9 December 1968 when he had instructed his brokers to buy. At all material times he had $36,428 readily available in his savings accounts. These facts do not suggest that he was impelled to sell by a need for ready cash which had manifested itself between 9 December and 6 January. The fact that he used part of the proceeds of the sale of the shares in Endurance Tin to invest in other shares does not give strength to his statement that he sold to obtain ready cash. The known circumstances of the case thus tend to suggest that it was unlikely that he sold the shares in Endurance Tin because he had found that he was in need of ready cash and if the reason which he gave for selling the shares is not accepted it becomes difficult to accept his statement of the purpose with which he bought them. The failure to call Dunham adds to this difficulty. One obvious hypothesis that is open on the facts is that the appellant was told by Dunham that he had information that suggested that the shares would rise in price on the Stock Exchange and that he decided to buy them with a view to selling them at a profit when the price had risen. I would not be prepared to say, simply on the basis of my observation of the appellant in the witness box, that I do not regard him as a witness of truth. However, when I consider his evidence with the caution that the circumstances require and in the light of the facts I have mentioned, I am unable to say that I am persuaded of its truth. The appellant has not satisfied me that it is more probable than not that he bought the shares in Endurance Tin for the purpose of holding them as an investment rather than for the purpose of reselling them at a profit. It follows that he has failed to discharge the onus of proving that the assessment is excessive.

The appeal must be dismissed.


Appeal dismissed with costs. Usual order as to exhibits.

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