A.C. Williams v. Federal Commissioner of Taxation.Judges:
Stephen J.: This case concerns the provisions of sec. 77A of the Income Tax Assessment Act 1936-1968.
The taxpayer, Mr. A.C. Williams, by his return of income for the year ended 30 June 1969, disclosed a loss of $26,232. The Commissioner, however, by an assessment issued on 9 July 1970, assessed the taxpayer to tax on an assessable income of $30,913.
The difference between the loss claimed by the taxpayer and the assessable income asserted by the Commissioner, some $57,000, is, in large measure, attributable to the disallowance by the Commissioner of a deduction of $50,000 claimed by the taxpayer in his return in respect of application moneys paid by the taxpayer to Bridge Oil N.L. in respect of 500,000 shares of 25¢ each in its capital paid to 10¢ each which the taxpayer took up towards the end of the relevant year of income.
There were certain other items of a smaller value which also went to make up the discrepancy between the taxpayer's claimed loss and the substantial assessable income asserted by the Commissioner but these were not the subject of this appeal when it came to be heard before me; it was confined to the entitlement of the taxpayer to deduct the sum of $50,000 paid as application moneys on the allotment to him of these shares in Bridge Oil N.L.
As appeared from the taxpayer's return of income, he had, in the year ended 30 June 1969, made large profits from the purchase and sale of certain speculative mining shares; these amounted to some $80,000 in that year; Mr. Williams was also the managing director and major shareholder in a company engaged in the import and export business and from that activity derived, by way of fees and dividends, some $11,500. Early in 1969 Mr. Williams estimated that he would, were no steps taken to avert such a situation, have a taxable income of some $100,000 in that year of income and he decided to seek to reduce his taxable income by subscribing for shares which would entitle him to claim deductions pursuant to sec. 77A. He accordingly made arrangements, through his brokers, whereby he ultimately applied for one million 25¢ shares in Bridge Oil N.L. paid to 10¢, at a cost of $100,000, and half a million 25¢ shares in that Company paid to 1¢, at a cost of $5,000, and these shares were allotted to him on 14 June 1969. He said that he had originally arranged to take up a total of one million of the shares paid to 1¢ but had been asked to limit his application to only half of that class. Of these shares he sold, on 25 June 1969, the day before the shares were first quoted on `Change, half a million of the 10¢ paid shares in Bridge Oil N.L. for their cost price, $50,000, less $950 for brokerage and duty. It is in respect of these half million shares that the Commissioner has disallowed a deduction under sec. 77A.
There emerged three distinct grounds for disallowance of the claimed deduction; first that sec. 77A was inapplicable because at the date of allotment of the shares to the taxpayer he was not the ``owner'' of the shares and the ``beneficial owner'' was a non-resident; secondly, and in the alternative, sec. 260 operated to deny a
ATC 4160deduction by entitling the Commissioner to disregard altogether the payment by the taxpayer of the application moneys on the shares and to treat the shares as in truth being acquired initially by the non-resident which later purchased them from the taxpayer, thirdly, failing acceptance of either of these views, the taxpayer should be treated as a trader in shares, engaged in an adventure in the nature of trade, and entitled under sec. 82(1) either to a deduction of the cost to him of the shares under sec. 51 or to a deduction under sec. 77A but not to both.
This is a case in which, of the number of questions of law debated before me, few will arise for determination if the taxpayer's version of the facts be accepted. The primary contest on matters of fact relates to the circumstances in which the taxpayer came to be allotted shares in Bridge Oil N.L. and to sell them soon afterwards; upon the outcome of this contest will depend the applicability of sec. 77A and sec. 260. The secondary contest of fact is as to the status of the taxpayer as a trader in shares, on this is said to depend the operation of sec. 82(1).
In examining the circumstances in which the taxpayer acquired and sold the 500,000 shares in Bridge Oil N.L., it is useful, as a preliminary, to state shortly the opposing contentions. For the taxpayer, it is said that the situation was a simple and straightforward one. He wished to subscribe for about $100,000 worth of shares which would confer upon him a right to a deduction of that amount under sec. 77A; he enquired from his brokers and learned that they were shortly to underwrite an issue of suitable shares by Bridge Oil N.L.; he was told that he would be entered upon the broker's list of persons to whom shares would be allotted; he in due course received a prospectus and application forms, applied for a specified number of shares which he was told would be available for him and these were subsequently allotted to him. The disposal of half a million of the 10¢ paid shares, it was said, came about in this way; before receiving the prospectus he was asked by the brokers whether, after allotment and before Stock Exchange listing, he would be prepared to sell half a million of the 10¢ paid shares to unspecified buyers known to the brokers to be anxious to acquire shares in the company. He replied that he would consider the matter once he received the shares; he later was told that these, still unidentified, buyers were overseas residents. When the shares were allotted and he received the scrip, he was again asked if he would sell his half million shares and he agreed to do so and in fact did so, at no time being aware of the identity of the buyer.
For the Commissioner it is said that the taxpayer at all material times knew that, of the total number of shares reserved for him by the brokers and later applied for by and allotted to him, he would be required to sell before listing those which he in fact sold; they were either ``pre-sold'' by him before allotment to him or were allotted to him only on condition that he should sell them to the overseas buyer which ultimately bought them. The Commissioner was not concerned to prove which of these two situations prevailed or what precise legal consequences would flow from either of them; it was sufficient that I should not be satisfied that the taxpayer's version of his mode of acquisition was true. I should then, instead, accept evidence tendered on behalf of the Commissioner of an interview in which the taxpayer described his acquisition of the shares in terms which should lead me to conclude that he was not the ``owner'' of the shares, as that term is used in the definition of ``money paid on shares'' in sec. 77A(1), or that the overseas buyer was, at the time of allotment, ``the beneficial owner'' of the shares within the meaning of that phrase in para. (c) of that definition. In either event sec. 77A would, it was said, be inapplicable. Even if this were not the legal consequence of the facts as allegedly described by the taxpayer in that interview, those facts would entitle the Commissioner to invoke sec. 260 and to treat the taxpayer as never having paid moneys on shares so as to attract the provisions of sec. 77A.
Evidence for the taxpayer consisted of the testimony of the taxpayer himself and of a Mr. Newman, a partner in the firm of brokers in question who had made all arrangements with the taxpayer for his
ATC 4161acquisition and subsequent sale of the shares. Mr. Newman also gave a quite full account of the reason for reducing the taxpayer's initial entitlement of 1¢ paid shares by half a million and for requesting him to sell before listing half a million of his 10¢ paid shares. He said that there developed an insistent pressure from the promoters of Bridge Oil N. L., as the issue date of the prospectus approached, for a greater allocation to their nominees of shares in the company, that his firm, as underwriters, eventually agreed to make available an additional two million shares of each class for this purpose and that, having agreed to do so not by original allotment but by sale after allotment and before listing, he then set about interesting those of his clients who had been offered shares in selling them at cost after allotment but before listing. It was also with a view to making more shares available for issue to others that he successfully suggested to the taxpayer that he reduce his application for 1¢ paid shares by half a million.
Each of these witnesses gave evidence in a clear and impressive manner supporting what I have described above as the taxpayer's version and I regard their testimony as unshaken in the course of a very thorough cross-examination. There were some not unimportant differences in the account by each of them of conversations with the other but these differences did nothing, in my eyes, to discredit either of them as witnesses of truth; on the contrary, they were the sort of discrepancies of recollection which might be expected to occur after the passing of some three years.
From the oral evidence given by these two witnesses viewed in isolation there could only flow one conclusion, namely that, subject always to the possible operation of sec. 82(1), the taxpayer was entitled to a deduction under sec. 77A.
A Mr. Thurlow was called on behalf of the Commissioner; he was, in 1969, a departmental investigator who had had an interview with the taxpayer late in 1969, some six months after the events in question, and who gave evidence of what was said at that interview. The taxpayer was cross-examined concerning the interview and described in some detail what took place; in effect he had given Thurlow much the same description of the whole transaction as he gave in this Court in his evidence in chief. Mr. Thurlow's version of the interview is significantly different and, were I to accept his evidence of the taxpayer's statements made to him in that interview as accurately describing the transaction involving the acquisition and sale of the Bridge Oil N.L. shares, there would immediately arise considerable doubt as to the taxpayer's entitlement to a deduction and the matters concerning the interpretation of sec. 77A and the applicability of sec. 260 which have been debated before me would become relevant.
Mr. Thurlow impressed me as a careful and truthful witness although his cross-examination revealed, as will appear, matters which, while in no way discreditable to him, I find to be of importance in choosing between his testimony and that of the taxpayer. His evidence was that the taxpayer accounted for his acquisition of Bridge Oil N. L. shares by saying that he had approached his brokers, through Mr. Newman, to obtain a substantial number of oil company shares carrying tax deduction benefits. When asked how 500,000 of those shares came to be sold before listing, the taxpayer said that those particular shares were pre-sold to overseas interests when he acquired them; he was originally able to get only 500,000 shares paid to 10¢ and 500,000 shares paid to 1¢ but realised that this would be insufficient and it was then suggested to him that he could have an additional 500,000 shares paid to 10¢ on condition that they be resold back to the broking firm at cost before listing. When asked if there was anything in writing concerning this agreement the taxpayer said that there was not, it was a gentleman's agreement between them that he would resell them back to the firm at cost. Mr. Thurlow commented that if that was what had happened he doubted whether a deduction would be allowed, to which the taxpayer replied that he would vigorously contest any disallowance. That was all that Mr. Thurlow recalled of what was said at that interview about those shares.
Mr. Thurlow said that he had, during the
ATC 4162interview, jotted down short cryptic notes of the taxpayer's replies to his own questions which had been written out in advance; he had had to jot down words very quickly, he said, because the interview was going rather quickly. Next day he prepared a full report of the interview, in the course of which he added some ``extra notes'', ``extra words'' to his original notes to make good omissions in those notes as they occurred to his mind while preparing his report.
It is unfortunate that the practice of obtaining or seeking to obtain a signed record of interview, such as is in everyday use by police forces of this country, was not employed in this instance or that, at the least, a copy of Mr. Thurlow's report was not promptly supplied to the taxpayer for him to correct or otherwise respond to as he saw fit. As it is, I must determine from this conflicting testimony, aided by such matters as Counsel could draw attention to, whether the taxpayer has satisfied me that his version of the facts should be accepted.
The inherent probabilities of the matter do not much assist me; I do not regard the account given by the taxpayer and Mr. Newman as in any way wanting on this score. It is to be recalled that all this took place during that exuberant period now recalled as the mineral boom. This accounts in part for what might otherwise appear strange, namely the willingness of the brokers to obligate themselves to furnish to the nominees of the promoters of Bridge Oil N.L. two million issued shares of each class at their paid up value while, at the same time, having no firm, let alone binding, arrangement with allottees to make that total number of shares available. Again it is to be remembered that it was the 1¢ paid shares that were said by Mr. Newman to be in particular demand, the 10¢ paid shares being thought likely, as in fact occurred, to be quoted at no premium when first listed. Accordingly, 10¢ paid shares were likely to be readily available to be bought on the market after listing to meet any shortfall. The position might prove otherwise in the case of 1¢ paid shares but, at least in the taxpayer's case, the brokers had ensured availability of half a million of these 1¢ shares originally destined for him by requesting him to reduce his application for this class of share to half a million only. It is also not irrelevant that the brokers well knew that some allottees would readily part with the shares after allotment, being more interested in them as tax deduction earners than as providing an entry into the field of oil exploration. This made it likely that, having obtained their deduction, they would be quite willing to sell their shares at cost without running any risk of market fluctuations. Such was the case of the taxpayer, who, in fact, can be regarded as having indirectly made available one quarter of this total of four million, if, as appears to be the case, the half million 1¢ paid shares renounced by him went to swell the total available for those nominees of the promoters.
There are two additional possible sources of assistance in determining whether to accept the taxpayer's version of events, the first being the circumstances in which Mr. Thurlow came to take his notes of interview and prepare his report, the second the documentary evidence, upon which Counsel for the Commissioner placed some reliance.
There were a number of significant facts which emerged in cross-examination relating to Mr. Thurlow's evidence of his interview with the taxpayer. First, he had refreshed his recollection by reference to the report he had compiled on the day following the interview and his evidence was largely based on his written notes rather than unaided recollection; it is perhaps significant that when this was put to him he replied ``Yes, to a large degree, but there is one word which does stick in my mind from that interview''. The word was ``pre-sold'', but his reply indicates the extent of his reliance on notes. Secondly, as already mentioned, the report which he said he used to refresh his recollection was itself compiled from ``short, cryptic notes'' of the taxpayer's replies the day before to questions asked of him. This note-taking was, as Mr. Thurlow said, necessarily very hasty since it occurred in the course of an interview that ``was going rather quickly''. Having heard the speed at which the taxpayer replied to questions in
ATC 4163cross-examination, I can sympathise with Mr. Thurlow in undertaking this task of note-taking. Thirdly, Mr. Thurlow did not apparently begin the interview with any particular interest in the history of the taxpayer's acquisition of the shares, the details of what number of shares were originally applied for or of what was their paid up value; this was, he agreed, regarded by him as only peripherally relevant to his enquiry. Fourthly, his account of the conversation differs in some respects from the version of it put to the taxpayer in cross-examination; this is so with respect to matters of brokerage and of the identity of the buyers as being overseas persons not interested in tax deductions. Fifthly that account attributes to the taxpayer the omission of all reference to his being asked to reduce his allotment of 1¢ paid shares from one million to half a million; it appears to me to be very probable that the request for this reduction was made, its invention by the taxpayer and Mr. Newman would seem purposeless, and yet Mr. Thurlow's account of the interview, unlike the taxpayer's account, not only omits it but has the taxpayer explaining his acquisition of shares in a manner substantially inconsistent with the reduction having occurred.
In the light of these considerations, I would hesitate to prefer Mr. Thurlow's evidence, extensively based upon a recollection of the terms of his report, which in turn was largely based on short notes of a fast-moving conversation, to the taxpayer's own version of the conversation, consistent as it is with his own evidence of the facts and with the testimony of Mr. Newman concerning the taxpayer's acquisition and sale of the shares.
The documentary evidence relied on by Counsel for the Commissioner consists of a list of proposed allottees, certain correspondence and records revealing how the burden of stamp duty was borne. It is not the list of allottees itself but rather ink notations made by Mr. Newman on that list that are relied upon but, as Counsel admitted, these notations are obscure in meaning and their interpretation in a sense favourable to the Commissioner's case not only involves a good deal of speculation but also leaves some part of the notations quite unexplained and, indeed, inconsistent with the proffered interpretation. No great reliance can be placed upon any inferences said to flow from notations appearing on this list.
The correspondence does not directly concern the taxpayer at all but is sought to be used against him in this way; it reveals two things, first that the overseas buyer of his shares believed itself to be an original allottee and not a purchaser of shares already issued, the brokers taking no steps to correct that impression and accepting its cheque for shares at a time when they had, according to Mr. Newman, no firm arrangement by which to supply themselves with shares to meet that buyer's requirements; secondly, that another allottee in the position of the taxpayer, that is to say, which also sold shares before listing, regarded itself as having, as early as the date of its application for shares, an ``undertaking'' from the brokers to buy back at cost the shares it was applying for. All this, it was said, supported the view that the overseas buyer had from the very beginning a beneficial interest in the shares it later acquired from the taxpayer, he being at all times committed to a sale of the shares at cost to the overseas buyer before listing.
I regard the understanding of the overseas buyer as of no weight. I accept Mr. Newman's evidence that it was not from him, he being unaware of that buyer's existence at the time, that it gained that understanding; it seems probable that that was derived not from the brokers at all but rather from the promoters of Bridge Oil N. L. at whose request it was that shares were made available to this overseas buyer. The failure of Mr. Newman to enlighten the buyer as to the true position and his letter to that buyer referring to shares ``recently purchased by you'' at a time when no firm arrangement had been made, at least with the taxpayer, for purchase was explained by Mr. Newman; even if that particular explanation be not accepted, and I did not find the explanation wholly satisfying, nevertheless, these circumstances cast little light upon the taxpayer's position although it may suggest some lack of accord, to say the least, as between the brokers and the foreign buyer.
The other allottee's letter, referring to an ``undertaking'', recorded an arrangement which, before this matter was ever put to him in cross-examination, Mr. Newman stated to have been the subject of negotiation by some member of his firm other than himself. Hence, even if that letter is to be regarded as incapable of being a layman's fair, though loose, description of a situation similar to that which Newman and the taxpayer say existed in the case of the latter's half million shares, it does not have much relevance to the present case. The precise nature of the arrangements with various of the allottees who were to furnish the shares to be sold to overseas buyers may well have varied somewhat depending upon which member of the broker's firm negotiated them.
The matter of stamp duty is of little significance. The stamp duty on the sale of the taxpayer's half million 10¢ paid shares was only, it seems, $100, and if the transaction was to entitle him to a deduction of $50,000, it is not unlikely that such a cost would have seemed to him paltry indeed, as would the receipt duty of $50 and even the seller's brokerage of $800. His willingness, without question, to accept these charges, although a vendor would not normally bear the stamp duty, and the broker's view that it was reasonable that he should do so can readily be attributed to his feeling of moral obligation to the brokers in having provided him with the opportunity for what he regarded as such a providential measure of tax alleviation.
Having examined these various considerations, I am confronted with a position in which two witnesses the taxpayer and Newman give clear and consistent evidence in a convincing manner of the form which the transaction took; they are uncontradicted by such scant documentary evidence as is available and if they are to be disbelieved this cannot be on the score of mistaken recollection or the like; they must, on the contrary, have concocted an elaborate and untrue version of the transaction. On the material before me I am not prepared to reject their evidence. If, then, I accept the taxpayer's version of the facts it must follow, as Counsel for the Commissioner conceded in argument, that the taxpayer has satisfied me that he was the ``owner'' of the shares and that there was no ``beneficial owner'' who was a non-resident, using those two terms in the sense in which they are employed in sec. 77A(1). The taxpayer did accordingly qualify, under sec. 77A(4), to a deduction in respect of the $50,000 subscribed by him for half a million 10¢ paid shares in Bridge Oil N. L. which he later sold before listing. It also follows that no question arises of sec. 260 having any application to this situation.
There remains the question of the applicability of sec. 82(1) which provides that where, in respect of any amount, a deduction would be allowable under more than one provision of the Act it shall be allowable only under whichever provision of the Act the Commissioner considers is most appropriate. The Commissioner contends that it applies in the present case so that if the taxpayer is entitled to a sec. 77A deduction in respect of the moneys payable on application for the shares, he is also entitled to a sec. 51 deduction in respect of the same amount, being the cost to him of the shares, and that, in view of sec. 82(1), one only of these two entitlements can be availed of. The taxpayer, on the other hand, claims that sec. 82(2), not 82(1), is applicable to his case and then relies upon sec. 82(3)(c), which qualifies the operation of sec. 82(2), but not 82(1), and which, he says, produces a result favourable to him.
It will be convenient to set out in full sec. 82(1), (2) and (3) as they stood at the relevant time, before the amendment made in 1969, which repealed sec. 82(3)(c).
``82. (1) Where in respect of any amount, a deduction would but for this section be allowable under more than one provision of this Act, and whether it would be so allowable from the assessable income of the same or different years, the deduction shall be allowable only under that provision which in the opinion of the Commissioner is most appropriate.
(2) Where the profit arising from the sale of any property is included in the assessable income of any person, or where the loss arising from the sale is an allowable deduction, and any expenditure
ATC 4165incurred by him in connexion with that property is an allowable deduction under this Act or has been allowed or is allowable as a deduction in assessments under the previous Act, that expenditure shall not be deducted in ascertaining the amount of the profit or loss.
(3) The reference in the last preceding sub-section to expenditure incurred by a person in connexion with property shall be read as not including a reference to expenditure that has been allowed or is allowable as a deduction -
(a) under section seventy-five or section seventy-six of this Act (including either of those sections as in force at any time before the commencement of this subsection);
(b) in assessments under the previous Act by virtue of a provision of that Act corresponding with section seventy-five or section seventy-six of this Act; or
(c) under section seventy-seven A, section seventy-seven C or paragraph (b) of sub-section (1.) of section seventy-eight, of this Act.''
Section 82(1) is general in character, dealing with the case of double ``deductions'', that is, where, in respect of one amount, the right to two distinct allowable deductions is conferred by different provisions of the Act. Section 82(2) is more specific in its application; it takes as its subject matter those cases in which assessable income is affected by the inclusion of a profit or the allowance of a loss arising from the sale of any property. It then requires that, in the calculation of that profit or loss, expenditure incurred in connexion with that property be not deducted if it be expenditure which is itself an allowable deduction. Thus, unlike sub-sec. (1), it does not prevent advantage being taken of two allowable deductions in respect of the one expenditure; but instead it imposes a rule upon the process of calculation of profit or loss on the sale of property, the operation of the rule being (to take the case of a profit) that if in calculating the profit any debit item to be deducted from the sale price is itself an allowable deduction under the Act it is not to be deducted. As the Chairman of the No. 3 Board of Review points out in Case D24,
72 ATC 150, what it operates on is what he describes as the ``property deduction'' as distinct from any allowable deduction a right to which is conferred by the Act.
Sub-section (2) thus presupposes a method of assessment under which the profit or loss of which it speaks is included in, or allowed as a deduction from, assessable income; secs. 26(a) and 52 provide an example of such a method, although not the only example, e.g., sec. 43, which contains in sub-sec. (2) a provision somewhat akin to sec. 82(2). As a matter of convenience, I shall refer to it as the sec. 26(a) method, in contradistinction to the conventional method of assessment where income is assessable under sec. 25(1) and deductions are allowed under sec. 51. The effect of sub-sec. (3)(c) is, then, to exclude from the operation of sub-sec. (2) cases where a ``property deduction'' is also an allowable deduction under (inter alia) sec. 77A. In such a case the calculation of profit or loss under this method of assessment may proceed unaffected by the rule created by sub-sec. (2).
Is then the taxpayer, in respect of the relevant year of income, a person to whom the sec. 26(a) method is applicable? If so, he obtains the benefit of sec. 82(3)(c); if not, he is, by sec. 82(1), denied a double deduction. He was in fact treated by the Commissioner, in the assessment at present under challenge, as a person to whom this method was applicable but the Commissioner is not now, of course, estopped from asserting the contrary.
Since the benign effect of sec. 82(3)(c) is limited to cases to which sec. 82(2) applies but will not aid a taxpayer to whom sec. 82(1) applies, it becomes necessary to determine whether in a particular case, and this is such a case, sub-sec. (1) or sub-sec. (2) is the appropriate provision. It would seem that this is to be determined by whether or not the sec. 26(a) method of assessment, as distinct from the conventional method, is applicable. But such a determination presupposes that as between the two methods one only will, in any given case, be properly applicable. There are, however, a
ATC 4166number of passages in judgments in this Court which suggest that sec. 26(a) may be applied to ascertain the assessable income of a taxpayer in situations to which the conventional method of assessment is also applicable. It suffices to refer to the joint judgment of Latham C.J., Dixon J. and Williams J. in
Colonial Mutual Life Assurance Society Ltd. v. F.C. of T. (1946), 73 C.L.R. 604, the judgment of Webb J. in
Producers' and Citizens Co-operative Assurance Co. Ltd. v. F.C. of T. (1956), 95 C.L.R. 26, at p. 33, and that of Kitto J. in
F.C. of T. v. McClelland (1970), 118 C.L.R. 353, at p. 377, with which Menzies J. and Owen J. both expressed agreement. However, in none of these cases was there an issue such as here arises; in those cases the issue was whether amounts received were assessable at all and it mattered not under which provision, if any, the receipt in question was assessable.
On the other hand, there are to be found in the cases a number of statements to the effect that sec. 26(a) has a quite distinct field of operation from that covered by the conventional method of assessment. In
Australasian Catholic Assurance Co. Ltd. v. F.C. of T. (1959), 100 C.L.R. 502, Menzies J. said at p. 509 -
``... I am not disposed to rely upon sec. 26(a) at all because I doubt whether it applies to the taxpayer's life assurance business as a whole and, if it does not, I doubt, further, whether it would be proper to extract from such business a series of transactions such as the purchase and sale of the flats and to label them `the carrying on or carrying out of' a `profit-making undertaking or scheme'. It is to be observed that in the definition in sec. 6 of the Act of `income from personal exertion', the `proceeds of any business carried on by the taxpayer' and `any profit... from the carrying on or carrying out of any profit-making undertaking or scheme' are mentioned separately, and I am disposed to think that the former description is that which is applicable to a case such as the present and the latter is concerned with some special venture rather than with anything that falls within the category of ordinary business.''
In F.C. of T. v. McClelland (1967) 118 C.L.R. 353, at p. 358, Windeyer J., at first instance, described the operation of sec. 26(a) as that of bringing to tax profits which, because of the singular or isolated transactions out of which they arose, might not otherwise be income of the taxpayer; the Chief Justice, on appeal, distinguished, at p. 371, between the application of sec. 26(a) and liability to tax on that which is income according to ordinary concepts. The majority in the Judicial Committee (70 ATC 4115; 120 C.L.R. 487) regarded sec. 26(a) as introducing no new element into the problem not already requisite to be considered in determining whether the taxpayer's receipt was income according to ordinary concepts; but I do not understand any of their Lordships to imply that a particular receipt could appropriately be brought to tax under either head.
``In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within sec. 26(a). The business must be regarded as a whole its receipts being assessable income from which the permitted deductions are to be deducted. Section 26(a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income.''
Menzies J., in two passages at pp. 4146-4147, said:
``I do not think that every business that involves the buying and selling of stock in trade is to be fragmented into a large number of separate transactions and the dealer taxed on the aggregate of the profits derived from each transaction considered separately.''
And later -
``It is significant that sec. 26(a) defines but one item to be included in assessable income, and, in my opinion, the whole of the carrying on of a business of buying and selling is not to be comprehended within sec. 26(a), nor does the provision aptly apply to the particular dealings constituting, in total, the carrying on of a business.''
His Honour concluded on this aspect by referring to what he had earlier said in the Catholic Assurance case, stating that further consideration had confirmed his views as there expressed.
In a case such as the present the proper view appears to me to be that where share transactions are undertaken as part of a business of share dealing so that it is appropriate to apply to that business the conventional method of assessment laid down by the Act, then sec. 82(1) applies; the contrary will be the case when the circumstances are as referred to in the passages from the judgments of the Chief Justice and of Menzies J. in the Investment and Merchant Finance case. Cases in which it has been said that amounts were liable to tax under both methods of assessment are, I think, to be explained on the footing that it was there irrelevant to distinguish between the two methods; the relevant consideration was simply to determine whether or not a receipt was assessable income.
The position is somewhat similar to that considered by the Court in
Henderson v. F.C. of T. 70 ATC 4016, 44 A.L.J.R. 115, in which the Chief Justice, although in a quite different context, disposed of the proposition that there may be two different methods of arriving at taxable income, each producing a different result; as his Honour said, the Act, levies tax upon the amount of taxable income derived and there cannot be alternative figures for the assessable income which the Act requires to be ascertained and expressed as a figure and from which the amount of taxable income is derived. In
Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd (1938), 63 C.L.R. 108 (Carden's case), it was said by Dixon J., at p. 152, that although the question of whether one method of accounting or another should be employed in assessing taxable income derived from a given pursuit might be regarded as a question of law, it was a mistake to treat such a question as depending upon a search for an answer in the provisions of the legislation. His Honour indicated the proper approach when he said -
``The courts have always regarded the ascertainment of income as governed by the principles recognised or followed in business and commerce, unless the legislature has itself made some specific provision affecting a particular matter or question.''
In Carden's case, as in Henderson's case, the question in issue was quite different from that now arising but the approach of the Courts in these two cases does, I think, afford some guidance in determining which of sec. 82(1) or sec. 82(2), as qualified by sec. 82(3)(c), is here applicable. I should, I think, first decide whether the taxpayer's assessable income derived from his share transactions can more appropriately be ascertained by treating him as conducting a business of dealing in shares, his income being ascertained by the conventional methods outlined by Menzies J. at p. 436, of his judgment in the Investment and Merchant Finance case, or by the application of sec. 26(a).
The former course would involve treating as trading stock at least those shares which the taxpayer acquired as a dealer in shares; it would treat his transactions as having the character of a continuing business enterprise the results of which could meaningfully be reflected by the process of annual accounting. In particular, it would bring to account, as representing unrealised profits, any excess value of stock-in-trade at the close of a year as compared with its value at the beginning of that year - sec. 28. The provisions of sec. 29 and sec. 30 regulating valuation of trading stock would appear to me to be applicable - Investment and Merchant Finance case at pp. 432, 436 and 438 - and all notion of ascertaining a profit on a particular share transaction by deducting, in the year of sale, cost price from sale price would be cast aside.
To so state the matter appears to me to be to resolve the question in favour of the taxpayer. From his oral evidence and from an examination of those share transactions which are recorded in the books of his brokers, I conclude that such a method of assessment would have a gross air of unreality, whereas a basis of assessment founded upon sec. 26(a) will, I think, accord well with the facts of the matter. It will treat the taxpayer for what he was, a speculator in mining and oil exploration shares who, having had only very modest and infrequent share transactions before the onset of Australia's minerals boom, during the period of the boom, indulged in quite considerable stock market speculations and did so with remarkable success. Those speculations were, I think, viewed by him as, and indeed had the character of, individual forays in particular stocks which he bought with a view to resale. To regard such shares as trading stock to which might appropriately be applied the provisions of secs. 28 to 31 is to give both them and the whole of the taxpayer's speculative activities a colour which they never bore.
I will shortly summarise the taxpayer's share transactions for the relevant year of income and the immediately preceding years. In doing so I will use only very approximate figures and will refer to shares by abbreviations since the details are unimportant. I omit reference to some isolated transactions involving quite small sums.
In 1966, the taxpayer bought shares in Amad and Vam two speculative mining companies (a term I will use to include petroleum exploration companies) for $1,900 and sold, for $1,700, shares in three others. In 1967, he on one occasion bought for $2,500, shares in Pioneer Mining and at the same time sold a very small parcel of shares in Vam. In 1968, in May, he bought $13,000 worth of shares in Vam, which had greatly appreciated in value, and also later in the month, sold some of them for $7,500 and also sold some of the shares in Pioneer Mining, which had also appreciated, for $1,300. In about October 1968 he again sold some Vam shares for $10,000 and one parcel of other shares for $3,600; later in that month he bought back for $8,300, a quantity of Vam shares when their price had fallen and also bought a large parcel of Surveys shares for $5,100, a few of which he sold in December for $500. In 1969, to the end of June, he bought only one small parcel of Surveys shares. He sold, on one day in February, Vam shares for $66,000 and on one day in March Surveys shares for $43,000. Later in March and again in May he sold very small parcels of various shares and of course sold in June his half a million Bridge Oil shares to the overseas buyer.
Looking then at the foregoing it is clear that in 1966 and 1967 the transactions call for no comment; the same may, I think, be said of the transactions undertaken in 1968. In all three years, they are consistent with the engaging in the occasional buying of shares with a view to their re-sale at a profit. No different conclusion flows, I think, from his share transactions in the first half of 1969. I have not set out his transactions during the second half of that year, after the close of the relevant year of income; that was a period of greater activity on his part but cannot I think serve to affect the characterisation of his earlier transactions. If it were thought that the sale of Bridge shares in June 1969 was itself of particular significance it would, I think, be proper to regard it as involving no trading activity in itself but rather a fiscal measure, a transaction ``when the fiscal element has so involved the transactions itself that it is moulded and shaped by the fiscal elements'': Lord Morris in
F. A. & A. B. Ltd. v. Lupton (1971), 3 All E.R. 948, at p. 955. I do not understand anything said in the judgment in the Investment and Merchant Finance case to gainsay this proposition, enunciated as it was by each of their Lordships although in somewhat different words. However, even if that transaction were to be included as proper for consideration in relation to activities in the year ended on 30 June 1969 it would not, I think, alter the conclusions which I have reached.
The taxpayer's evidence of how he undertook his stock exchange transactions indicated nothing in the nature of a system or
ATC 4169method or the carrying on of a business; he simply relied upon his own knowledge of the prospects of particular companies, gained very largely from his contacts with their managements in the course of the export and import business which he managed and which brought him into contact with a number of mining companies.
It is for the foregoing reasons that I have concluded that the taxpayer is properly assessable under sec. 26(a) and that, being entitled to a deduction under sec. 77A, the provisions of sec. 82(2) and (3)(c) apply, rather than those of sec. 82(1). In examining the taxpayer's share transactions I have restricted myself to those which were investigated in the course of the hearing. Passing reference was made, in the course of evidence, to the fact that the taxpayer did also on a few occasions employ two other firms of brokers; also the records which were subjected to close examination would not reveal the acquisition of shares by original allotment as distinct from purchase through brokers, although any subsequent sales of shares so allotted would be disclosed. However the scant evidence of dealings with other brokers suggests that those dealings would not be of a frequency such as to affect the conclusions which I have reached; there was very little evidence of the acquisition of shares by allotment and such as there was should also not, in my view, affect my conclusion. Accordingly I find that the taxpayer is entitled both to a deduction under sec. 77A in respect of the expenditure incurred by way of application moneys paid on the issue to him of 500,000 10¢ paid shares in Bridge Oil N.L. sold on 28 June 1969 to overseas buyers as well as being entitled, in calculating the profit on the sale of those shares, to deduct their cost from their sale price. This is, however, subject to the effect, if any, of sec. 82(4) upon the taxpayer's right to deduct that cost in calculating his profit. This matter was not adverted to in argument before me; it would appear to involve no more than some mathematical calculations upon which the parties may be able to agree. Failing agreement the matter can be mentioned to me hereafter. Subject to this aspect my order will be that the taxpayer's appeal be allowed, with costs, and that the assessment be remitted to the Commissioner so that it may be amended accordingly.