Case E24

Judges: FE Dubout Ch

G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 5 July 1973.

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G. Thompson (Member): This reference concerns the year ended 30 June 1970. During the course of that year, namely, on 31 October 1969, the taxpayer, a pharmaceutical chemist, acquired some 100 shares in Poseidon No Liability at a market price of $37 per share, thus paying a total of $3,700. Subsequently, on 15 January 1970, the taxpayer sold the said 100 shares at a market price of $218 per share, which resulted in a total consideration received of $21,800. The question for decision is whether the net surplus of $17,567, resulting from the sale of the said Poseidon shares is assessable income of the taxpayer under sec. 26(a) of the Income Tax Assessment Act 1936-1970.

2. Some years prior to the purchase of the said shares, the taxpayer commenced business as a pharmaceutical chemist, with the aid of his wife, in a country town, intending to build the business up and later return to the city. His business prospered, and during the course of discussions with his wife, it was decided to return to the city where education opportunities for the children would be better. It is obvious that the taxpayer was a hard working professional man who was careful in his dealings, and who was determined to build a sound financial future for his family. He set about doing this by building up his pharmacy business, and also as the result of talks with his parents and with a sharebroker, by investing in sound equity stocks. The evidence discloses that for some years both his mother and father were bona fide investors who invested in sound equity stocks which would be expected to yield, for the most part, good dividends. These stocks also had a future potential. The shares held by the parents included strong industrial stocks as well as, what one might describe as heavy weight mining stocks, and other sound equity stocks. The taxpayer's basic philosophy was himself to invest in sound

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stocks with a view to having a sound portfolio for the future. Since he was a professional man, he looked upon his portfolio as something in the nature of a superannuation fund for later years, and in particular for his retirement.

3. The evidence discloses that prior to the purchase of the said Poseidon shares, he had built up a sound portfolio of good equity stocks which did not include shares which one would normally term speculative. The shares which he held were income earning, and were sound shares with a good potential for the future. A part of his basic philosophy was also that, whenever for good reason he sold shares, he would reinvest the proceeds in other sound shares so as to maintain and increase his portfolio for the future. He also came to rely upon the advice of an expert sharebroker. This sharebroker gave evidence before the Board and it is obvious to me that the taxpayer's implicit trust in this sharebroker was not misplaced. Indeed, this sharebroker proved himself a very impressive witness, who was frank and forthright. He demonstrated a deep knowledge of the share market and high ability in the business of sharebroking. This being so, I have no hesitation in accepting the evidence of the taxpayer that he relied not only on the advice of his parents, who were sound investors, but upon the advice of this particular sharebroker, whose advice on the history of the evidence, appeared always, or at least in most cases, to have been sound. I shall now come to the events which led to the purchase by the taxpayer of the said 100 shares in Poseidon No Liability.

4. At the relevant time, the taxpayer was carrying on his pharmacy business in a country area, and on Monday, 27 October 1969, telephoned his sharebroker in the capital city and made an appointment with him for the following Thursday afternoon, 30 October 1969. He had asked the sharebroker whether he should purchase Poseidon stocks, but the sharebroker had told him that he thought the stocks were well promoted publicly, and were of a speculative nature. He advised against purchasing them. The situation altered dramatically by the afternoon of Thursday, 30 October 1969, when the taxpayer had a consultation with the broker in the capital city.

5. It transpired that this particular sharebroker, with his partners, had been to luncheon with another sharebroker and well known company director, and the latter gentleman had convinced the taxpayer's sharebroker and his partners that Poseidon had a very sound ore body and that it had tremendous potential for the future. An air of enthusiasm was rampant in the office of the sharebrokers, which atmosphere influenced the taxpayer, as I shall briefly show. Upon discussing what further stocks the taxpayer should buy on this occasion, the particular sharebroker mentioned advised him to buy 100 Poseidon. Despite what he had earlier said, he told him that he was now convinced that they had sound potential for the future and would be a good income earning stock. He said: ``It is another Western Mining Corporation''. There is contemporary documentary evidence before the Board showing the progress reports of drilling operations in the Poseidon ore which gave cause for optimism. This documentary evidence, coupled with the information which the taxpayer's broker gleaned from the other gentleman abovementioned, formed a sound basis at that particular juncture for advising the taxpayer to acquire the shares. In the circumstances, I have no hesitation in accepting the evidence of the taxpayer that upon the advice of his broker, he acquired these shares in Poseidon with a view to holding them in his investment portfolio. He was convinced that they had good future potential and would yield good dividends. He would hold them and wait until they became income earning and thus they would increase the worth of his investment portfolio. I am thus quite satisfied on the whole of the evidence that the taxpayer did not acquire the subject shares for resale at a profit or in circumstances whereby any resultant surplus on sale would constitute assessable income under sec. 26(a) of the Act.

6. I shall now come to the circumstances of the sale of these shares in the following month, January 1970. By this time, the taxpayer had obtained the services of a manager for his pharmacy business in the country and was negotiating the purchase of another pharmacy. For this purpose he needed to borrow substantial funds. He encountered difficulties in obtaining these

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funds and was ultimately successful only through the intervention of certain influential people. In the course of his inquiries and conversations, the taxpayer learnt that No Liability company shares were not regarded as sound security by banks or other financial institutions. The taxpayer had been convinced that his sound investment portfolio provided good collateral security and had influenced the borrowing of funds. He also had in mind that his Poseidon shares, which bore a high value, would thus add to the worth of this portfolio and be more useful to him as security for the obtaining of loan moneys. But he became disillusioned. I accept his evidence that he had not previously become acquainted with the term `No Liability' and that he had not previously known that such shares were not regarded as sound security.

7. In considering the matter, the taxpayer accordingly decided to ring his sharebroker in the capital city. The sharebroker advised him that the shares would, in his opinion, go higher, but the taxpayer asked him whether, in his particular circumstances, he should sell them. The broker accordingly advised him to sell them. The taxpayer accepted this advice and did sell the shares as mentioned at a substantial surplus. However, in accordance with his basic philosophy, and true to his intention of continuing to build up his investment portfolio, he asked advice of his broker how he should reinvest the proceeds. He was advised to invest these proceeds in shares which one would regard as sound investment stock.

8. In view of the very favourable impression I have formed of the taxpayer's credibility and reliability, coupled with the fact that his oral evidence was corroborated by other witnesses, and to a certain extent by contemporary documentary evidence, I have no hesitation in finding for the taxpayer. It is perhaps needless to add that this decison turns very much upon the special facts of the case.

9. Accordingly, I would uphold his objection and order that the assessment be amended to excise therefrom the said amount of $17,567 as assessable income.