G. Williams v. Federal Commissioner of Taxation.
Judges:Hogarth ACJ
Court:
Supreme Court of South Australia
Hogarth A.C.J.: This is an appeal against an assessment of income tax in respect of income derived by the appellant for the year ended the 30th June 1970. The appellant filed a return showing his taxable income as $7,728. He accompanied his return with a schedule which disclosed, inter alia, that in the year of taxation he had sold 650 shares in Poseidon N.L., (which I will call simply ``Poseidon'') the proceeds of which amounted to $43,666.41. He did not bring this item into account in the return in arriving at the amount of his taxable income. After an exchange of correspondence between the taxpayer and the Deputy Commissioner of Taxation in South Australia on the subject of the taxpayer's dealings in shares during the year of income and the previous three years, tax was assessed after an adjustment of the amount of taxable income to include $43,537, the profit made by the taxpayer on the sale of the Poseidon shares. The taxpayer gave notice of objection; but the objection was disallowed. Thereupon the taxpayer requested the Deputy Commissioner to treat the objection as an appeal and to forward it to the High Court of Australia. The Deputy Commissioner transmitted the objection to the South Australia Registry of the High Court; but before the appeal was heard that court upon its own motion ordered that the appeal be remitted to this court. Before the case came on for hearing, and without conceding that he was obliged to give the information, the Commissioner intimated that he relied on sec. 25(1) and on both limbs of sec. 26(a) of the Income Tax Assessment Act 1936-1969.
The case for the taxpayer was that the proceeds of the sale of Poseidon shares in the year in question were not income in the ordinary sense of the word, within the meaning of sec. 25; nor were they profit arising from the sale by him of property acquired by him for the purpose of profit-making by sale, within the first limb of sec. 26(a); nor were they profit arising from the carrying on or carrying out by him of any profit-making undertaking or scheme within the second limb of that section. The onus, of course, is upon him to prove that the assessment is excessive; and it follows that he bears the onus of establishing that the proceeds of the sale of the Poseidon shares in question are not taxable under any of these three heads.
Most of the argument was devoted to the question whether one or other of the limbs of sec. 26(a) applied in the circumstances. The Commissioner did not place emphasis upon the provisions of sec. 25. On my reading of
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the section, its purpose is to define in general terms the circumstances in which income is taxable, first in the case of a resident, and secondly in the case of a non-resident. It does not purport to define income but, assuming a certain receipt is income either because it falls within the natural meaning of the word or because it is deemed to be income by virtue of other provisions of the Act, it determines what part of that income is to be taxable. If the proceeds of the sale of the shares were income within the ordinary meaning of the word, then they would be taxable under sec. 25 without reference to sec. 26. If they are not income within the ordinary meaning of the word, then they are only taxable if they fall within the terms of that section.The taxpayer was formerly the superintendent of the Wool and Produce Department of Elder Smith Goldsbrough Mort Ltd.; he retired in July 1971. He had been interested in investment in the form of shares for many years, and had used that form of investment when he became a beneficiary in the estates of his mother and other relatives. He built up a portfolio of shares mainly in industrial stocks, but also to a smaller extent in the shares of mining companies. After World War II he was living in Melbourne with his wife, and both invested their surplus income in shares on the advice of two leading firms of sharebrokers in that city. He returned to Adelaide in 1962, and thereafter developed an association with the Adelaide sharebroking firm of F.W. Porter & Co. He found that a personal friend, Mr. Edgar Boys, was working for that firm, and from time to time he conducted share transactions through and on the advice of Boys.
In 1967 the taxpayer and his wife formed a family investment company, Sandacre Pty. Ltd., and both transferred their industrial investments to that company. Each kept separately the shares which they owned in companies other than industrial stock. Later, in April 1970, the taxpayer formed another company named Woodbank Ltd., for the sole purpose of dealing in shares.
Before I discuss the taxpayer's evidence of his share transactions in more detail I must review briefly the events which lead up to what I will call, for want of a better name, the Poseidon venture. These events were described in detail by Mr. Shierlaw who is a Bachelor of Engineering with considerable mining experience, and is now a sharebroker by occupation. Between 1960 and October 1968 he was a partner in the firm of F.W. Porter & Co. In June and November 1967 he made inspections of mineral fields in Western Australia in company with a Mr. Hume. In November they visited Kalgoorlie and the surrounding areas, paying particular attention to possible nickel deposits, in view of a recent discovery of nickel by the Western Mining Corporation at Kambalda. Mr. Shierlaw had previously had dealings with a Mr. Ives; and after his return to Adelaide from Kalgoorlie he received an offer of an option from Ives on behalf of two people named Gaddini and Utting, relating to a place called Bindi Bindi. The offer was accepted with the result that Gaddini, through Ives, gave Mr. Shierlaw a written option, known as a sampling option (exhibit A30). The option was to be exercised within six weeks of the date of its being granted, which was on the 29th November 1967. At the hearing before me objection was taken on behalf of the Commissioner to the admission of evidence on this topic generally, and to the admission of evidence on this topic generally, and to the admission of this document in particular, on the ground of relevance. Having considered the matter, I am of opinion that the general evidence on the topic and the document in particular are relevant as going to the nature of the property in which the taxpayer said he originally decided to invest. I therefore admit the evidence and the exhibit. Upon receiving the sampling option Mr. Shierlaw spoke to Hume and also had discussions with a Mr. Langcake, a member of the firm of chartered accountants, Muecke, Pickering & Co. The topic under discussion was the formation of a syndicate to raise funds to take up the option. The formation of a company was discussed, and indeed draft memorandum and articles of association were prepared, but this proposal did not proceed.
Towards the end of December 1967 Mr. Shierlaw again visited Western Australia, and spent several days making an inspection at Bindi Bindi. He took samples and brought them to Adelaide; and following an analysis,
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it was decided to proceed with the formation of the proposed syndicate. The original sampling option was varied by the inclusion of certain additional claims, and the amount originally agreed to be paid on the exercise of the option and as a deposit on the purchase money ($30,000) was increased to $35,000. The purchase price itself (originally $300,000) was increased under the varied agreement to $350,000. The three men in Western Australia, Ives, Gaddini and Utting, called themselves the Bindi Bindi syndicate, but they are referred to here as the Western Australian syndicate to distinguish them from the South Australian syndicate which also called itself by the name of Bindi Bindi.While Mr. Shierlaw was in Western Australia in December 1967 he discussed with members of the Western Australian syndicate what they would do with the $35,000. The South Australian syndicate contemplated raising a sum of about $50,000; and the payment of $35,000 out of this amount would have left only $15,000 to do the geological work which Mr. Shierlaw said would not have been sufficient. He came to an agreement with the members of the Western Australian syndicate would reinvest the money with the South Australian syndicate providing the South Australian syndicate was operating through the medium of a mining company which was listed on the Stock Exchange. This led Mr. Shierlaw to cast around in search of a dormant listed mining company, and his search led him to the Poseidon company. He described Poseidon as an ``inactive company with no funds''. He eventually came to terms with Poseidon which, in outline, were that the South Australian syndicate would subscribe about $50,000 to enable Poseidon to become active. This was to be brought about by Poseidon issuing to Mr. Shierlaw or his nominees at par 421,225 20¢ shares paid to 12¢ (which would require $50,549.40); and as part of the deal, the South Australian syndicate would surrender its rights in the sampling option to Poseidon. With the moneys so subscribed Poseidon would take up the option; and the members of the Western Australian syndicate were to use the money to subscribe for fully paid shares at the then current market price to a total of $35,000. It followed that before the six week period expired, it was necessary for Poseidon to be put in funds to the extent of $35,000, and to pay that amount to the Western Australian syndicate in order to take up the option.
I am satisfied from the evidence as a whole, including documentary evidence, that certain cheques of syndicate members which had been collected by F.W. Porter & Co. were passed on to Muecke, Pickering & Co., so that the necessary funds could be paid to Poseidon on behalf of the syndicate by that firm; and that they were negotiated by that firm; and that on the 12th January 1968 a cheque of F.W. Porter & Co. for $8,300, the amount necessary to make the total of the funds in the hands of Muecke, Pickering & Co. up to $35,000, was forwarded to that firm. Then, as cheques which had been promised by syndicate members were received at the office of F.W. Porter & Co., they were paid into that company's bank account in reimbursement of the amount which had been advanced in this way. These transactions are recorded in a ledger account of F.W. Porter & Co. entitled ``Poseidon Placement A/c''. This shows an initial debit of $8,300 on the 12th January, and subsequent credits for the amounts of cheques received from syndicate members and paid into F.W. Porter & Co.'s bank account.
It was necessary for Poseidon to increase its nominal capital. Accordingly, at a meeting of the directors of that company on the 22nd January 1968 they approved in principle the agreement whose main terms I have recited, and approved the issue of 233,333 fully paid shares to Ives, Gaddini and Utting at a discount of 5¢ share; and it was resolved than an extraordinary general meeting of the company be called for the purpose of increasing the nominal capital of the company to $400,000 by the creation of 1,000,000 further shares of 20¢ each, and by the issue of 421,225 partly paid shares to Mr. Shierlaw or his nominees. On the 30th January 1968 an agreement was entered into between Mr. Shierlaw on behalf of the members of the South Australian syndicate
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of the one part, and Poseidon of the other, to give effect to these arrangements; and about a week later Mr. Shierlaw was appointed a director of Poseidon. At the meeting a decision was made also to offer to him on behalf of his nominees the balance of the unissued shares at that time, namely 187,892 20¢ shares paid to 12¢ at par.At a meeting of Poseidon held on the 23rd February 1968 the nominal capital of the company was duly increased, and an issue of the balance of the shares required to make Mr. Shierlaw's holding up to 421,225 was made.
The taxpayer's involvement in the purchase of Poseidon shares arose from recommendations made to him by Mr. Boys in January 1968. At that time he had some knowledge of the importance of nickel from two sources. He was a shareholder in Western Mining Company, and used to receive the reports of that company; and he had read somewhere that the price of nickel was going up quite sharply on the London Metal Exchange, owing to shortages brought about by industrial troubles in America. Furthermore, at about this time the price of shares in the Western Mining Corporation rose significantly.
According to the taxpayer, his first association with Poseidon arose from a telephone call which he received from Mr. Boys on the 12th January 1968. He said that Mr. Boys told him that a group of the clients of F.W. Porter & Co. and other were forming a syndicate to take up a nickel lease in Western Australia and asked whether the taxpayer would be interested in joining it. He said that he would, and Mr. Boys replied: ``Well it will cost you $500 for a syndicate share or part of a share''. The taxpayer agreed, and Mr. Boys asked him to make out a cheque payable to Muecke, Pickering & Co. The taxpayer said that he made out a cheque and took it around to Mr. Boys and gave it to him at lunchtime the same day. He said that when he handed the cheque to Mr. Boys, Mr. Boys told him that the proposition had arisen out of a trip by Mr. Shierlaw to Western Australia and that Mr. Shierlaw had been instrumental in selecting leases which the syndicate intended to take up; and that the people who currently held the leases were two Italians. He said that he did not discuss the matter with Mr. Boys at length as he was in a hurry. He did not make any enquiry of Mr. Boys as to the number of people who were to comprise the syndicate, nor who they were. He was merely told by Mr. Boys that they were clients of his firm and friends, and that the project arose out of Mr. Shierlaw's investigation.
The taxpayer said that several weeks later he had a further discussion with Mr. Boys. He was unable to say just when the second occasion was, but in cross-examination he said that it must have been some time about the middle of February 1968; following which he received the bought note on the 2nd March, and the scrip early in May. I will return to this topic later, after considering other evidence which suggests that Mr. Boys' discussion with the taxpayer was earlier than February. At this discussion he said that Mr. Boys told him that the vendors wanted to maintain an interest in the leases, and that they had demanded that they get part payment in shares; and that therefore an old mining company, Poseidon N.L., had been bought up, and that members of the syndicate eventually would be issued with shares in this company. Mr. Boys said that the shares would be 20¢ shares paid up to 12¢. The taxpayer was either told by Mr. Boys, or reckoned for himself, that he would be receiving 4,000 shares for his $500; but he eventually received only 3,750, the difference representing a deduction from the taxpayer's $500 as a contribution towards the expenses of Mr. Shierlaw and his firm in promoting the project. He was not given the alternative of either taking the shares or having his money back. It does not appear what would have happened if he had asked for his money back, or if he had objected to the investment in Poseidon. His absence of objection may, I think, be taken as an assent by him to the proposal which was put to him.
The next thing which occurred was the taxpayer's receiving a bought note from F.W. Porter & Co. dated 2nd March 1968, showing that he had been allotted 3,750 Poseidon shares paid to 12¢, at par. The price of the shares was $450, and commission and stamp duty accounted for a further $10, making a total cost of $460. At about the
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same time a document headed ``Transferee's Acceptance'' was produced to the taxpayer, and on the 8th March 1968 he signed it, accepting the shares which had been allotted to him. He received the scrip early in May 1968.The taxpayer's cheque of the 12th January 1968 was made payable to Muecke, Pickering & Co. or bearer, but in fact, as appears from other evidence, it was not passed on to that firm, but was paid into the account of F.W. Porter & Co. in part reimbursement of that firm's payment of $8,300 to Muecke, Pickering & Co. There is no evidence that the taxpayer had any knowledge of any of these transactions, or that he had any idea that his cheque was handled otherwise than by being passed on to Muecke, Pickering & Co.
Other evidence which bears on the circumstances in which the taxpayer first acquired his Poseidon shares is contained in a statement by Mr. Boys which (except for one paragraph) I admitted under the provisions of sec. 34c of the Evidence Act 1929-1972. I heard medical evidence which satisfied me that by reason of his bodily condition Mr. Boys was unable to attend the court as a witness, and I made a finding accordingly. His statement, which had been taken from him by the taxpayer's solicitor, was then tendered in evidence under either sec. 34c or sec. 45b of the Evidence Act. It was proved that the document had been read and signed by Mr. Boys on the 16th April 1974, shortly before the hearing.
Objection was taken on behalf of the Commissioner to the admission of this document under either section. It was argued for the Commissioner that his statement was not admissible under sec. 34c owing to the provisions of sub-sec. (3). That sub-section reads -
``(3) Nothing in this section shall render admissible as evidence any statement made by a person interested at a time when proceedings were pending or anticipated involving a dispute as to any fact which the statement might tend to establish.''
Mr. Matheson for the Commissioner argued first that Mr. Boys' statement was inadmissible under sec. 34c because Mr. Boys was a person interested in the outcome of these proceedings. From the contents of Mr. Boys' statement it appeared that he had become a member of the South Australian syndicate on payment of $500, as had the taxpayer; that he had received Poseidon shares in place of his interest in the syndicate, as had the taxpayer; and that he had sold some of these shares, including a parcel of 500 shares sold at about the same time as the taxpayer sold his first parcel of 400. I was told by counsel that he had been assessed for income tax on the basis that the profits he had made on the sale of his Poseidon shares were taxable; that he had objected, and on the disallowance of his objection, had appealed; and that his appeal is still pending. I have no doubt that in a non-technical sense of the word, Mr. Boys will be interested in the outcome of the taxpayer's appeal in this case; but I do not think that the close analogy between the facts of his case and those of the taxpayer's case, make him ``interested'' within the meaning of the section. As I see that position, Mr. Boys' statement is relevant only on the question whether profits on the sale of Poseidon shares by the taxpayer are brought to tax under one of the limbs of sec. 26(a). But the application of either limb of that sub-section depends upon the taxpayer's state of mind in the case of the first limb, or his activities, as constituting a profit-making scheme or undertaking, under the second. On identical transactions as between syndicate-member and syndicate or Poseidon, or in Poseidon shares, it is possible that one man would have the intention necessary to bring him within the section, or be engaged in a profit-making undertaking or scheme, and another man would not. It follows, in my view that although the background facts are closely analogous in the cases of these two men, it is the evidence regarding their respective intentions, and their respective activities either as constituting a profit-making undertaking or scheme, or as providing material from which inferences as to a state of mind might be inferred, upon which the court must ultimately base its decision. Consequently, an intention of Mr.
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Boys to acquire the Poseidon shares as a long-term investment would be of no assistance to the taxpayer, and vice versa. Any decision on these topics in the present case would not affect Mr. Boys' appeal, where the facts would have to be relitigated. No finding of fact which I might make in the present case would be in any sense binding upon Mr. Boys or the Commissioner in relation to Mr. Boys' appeal. And, a ruling on a point of law in this case does not make Mr. Boys an interested person within the meaning of sec. 34c merely because the same point of law may arise in his case. In my opinion, therefore, Mr. Boys is not an interested person, from a technical point of view, in spite of the similarity of the facts of his case when compared with those of the taxpayer's case. For these reasons I ruled at the hearing that Mr. Boys was not an interested person, and that his statement was not inadmissible under sec. 34c(3).Mr. Matheson argued further, however, that I should exercise a discretion to exclude Mr. Boys' statement. He based his argument on the suggestion that Mr. Boys' statement might be inaccurate as tending in part to have been dictated by self-interest, in view of his own pending appeal, and in part because it was taken in its present form so long after the events to which it relates. But in my opinion I have no discretion in the matter. Section 34c(1) provides that if the necessary conditions are fulfilled, the statement shall be admissible. There is in sub-sec. (5) a limited discretion given to a judge to exclude a document; that is to say when the proceedings are with a jury. In such a case the section provides that the court may in its discretion reject the statement, notwithstanding that the requirements of the section are satisfied in other respects, if for any reason it appears to be inexpedient in the interests of justice that the statement should be admitted. This, I think, is a clear case for the application of the principles summarised under the maxim expressio unius est exclusio alterius. Even had sub-sec. (5) not been enacted, my interpretation of the remaining parts of the section would indicate to me that the evidence is made admissible without a judge having a discretion either to admit or to reject it if the circumstances and conditions are appropriate. Sub-section (5) merely underlines this situation, by providing for a limited power of discretion which is inapplicable to the circumstances of the present case. This view is supported by Cross on Evidence (Australian edition, 1970) p. 613.
To the extent to which Mr. Boys might have given evidence of the facts contained in his statement, therefore, I ruled that the statement was admissible under sec. 34c. I did not therefore need to rule whether it would also have been admissible under sec. 45b. I did not consider the facts in paragraph 16 of the statement relevant to these proceedings, and therefore I did not admit that paragraph in evidence. I admitted the rest of the statement.
This brings me to a consideration of the contents of the statement. As to the weight to be given to it I bear in mind first that counsel for the Commissioner was not able to cross-examine Mr. Boys; secondly that in a broad and non-technical sense of the word, he is no doubt interested in the outcome of this appeal; and thirdly, that so long had gone by between the events narrated in the statement and its being made by Mr. Boys.
According to Mr. Boys it was either in the first week or early in the second week of January 1968 that Mr. Shierlaw spoke to him and invited him to contact clients of the firm who might wish to join the syndicate. Mr. Boys said that on that occasion Mr. Shierlaw said that subscriptions should be either of $500 or $1,000; that $50,000 was required by the following Friday (the 12th January) if the sampling option were not to lapse; and that cheques for subscriptions were to be made payable to Muecke. Pickering & Co., for payment into that firm's trust account. Mr. Boys said that he spoke to several clients by telephone early in January 1968, and that one of the clients whom he spoke to in this way was the taxpayer. He does not now recall the exact date but said that ``it would have been within two or three days prior to the 12th of January 1968''. He sets out his recollection of the terms of the conversation which varies slightly from the version given by the taxpayer, but in my opinion not to any significant extent.
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Mr. Boys went on to say that he received the taxpayer's cheque for $500 ``on or before the 12th of January 1968''. The cheque in fact was dated the 12th January 1968, and I have no reason to doubt the evidence of the taxpayer to the effect that he handed it to Mr. Boys on that day; and I so find. Mr. Boys said that some days after the delivery of the first batch of cheques to Muecke, Pickering & Co., Mr. Shierlaw again spoke to him regarding the syndicate and told him that the subscribers would not be receiving a share in a prospecting syndicate, but instead would be receiving shares in ``a company known as Poseidon N.L.'', which would be paid to 12¢. He said that Mr. Shierlaw went on to explain the reason, in terms which are substantially as I have already indicated. Mr. Boys said: ``Some time after Shierlaw advised me of the fact that I would be receiving shares in Poseidon I informed Graham Williams of the same. I do not recall exactly how long after receiving such information from Shierlaw that I told Williams of this change but it most probably would have been within a week or two''. He said that he received his own shares in Poseidon late in March 1968.
A somewhat different picture emerges from the evidence of Mr. Shierlaw. He said that it was in a telephone conversation with Mr. Ives on or about the 4th January 1968 that he was told that the Western Australian syndicate was willing to reinvest the $35,000 providing the reinvestment took the form of shares in a listed mining company; and he said that Ives said that if he. Shierlaw, were unable to obtain a listed company, the Western Australian syndicate would enter into negotiations with another group of investors. Mr. Shierlaw said that a considerable amount of money was already in hand at that time. On the day following his conversation with Ives he approached a Mr. Jenson who was a director of several inactive listed mining companies, and asked whether any would be available to become active again. One of these companies was Poseidon. Mr. Jenson recommended that Mr. Shierlaw speak to a Mr. McArthur who was an alternative director of Poseidon. As a result of this suggestion Mr. Shierlaw spoke to Mr. McArthur on the 8th January, with the result that the transaction was arranged as I have already described. According to Mr. Shierlaw, his discussions with Mr. McArthur continued over several days, but were concluded on the 11th January 1968. This was what Mr. Shierlaw described as a verbal understanding, not a binding document. The memorandum of agreement dated the 30th January (exhibit A34) refers to agreement having been reached on the 11th of that month; and Mr. Shierlaw said that this was correct. If any dispute had arisen as between Mr. Shierlaw or the syndicate, and Poseidon, it might have been difficult to establish exactly what binding arrangements had in fact been made by the 12th January 1968; but it is clear that on that day Muecke, Pickering & Co. received the balance of the monies necessary to bring the funds they were holding up to $35,000; that they paid that amount to Poseidon; and that Poseidon paid that amount to the Western Australian syndicate. The Western Australian syndicate's cheque by which the money was returned to Poseidon was dated the 17th January 1968. The fact that Mr. Shierlaw's discussions with Poseidon had been taking place prior to the 12th is supported by the fact that for bookkeeping purposes monies paid by his firm to Muecke, Pickering & Co. on account of subscribers whose monies had not yet been received were, as I have mentioned, debited to an account entitled ``Poseidon Placement A/c''. The formalities were dealt with in the following weeks, including the board meeting of Poseidon on the 22nd January to which I have already referred, the subsequent meeting of members of the company, and the issue of shares as arranged.
Mr. Shierlaw said that by the 4th January 1968 at least $35,000 had been promised by intending syndicate members; but he did not know whether the taxpayer was one of them. On the 12th January 1968 Mr. Shierlaw told Mr. Boys that agreement had been reached with Poseidon; and he then arranged for the operation of the ``Poseidon Placement A/c''.
Mr. Shierlaw said that it was later in the day, after the money had been forwarded to Muecke, Pickering & Co. on the 12th January 1968, that he told Mr. Boys that he was to receive Poseidon shares paid to 12¢.
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But it does not appear from the evidence whether he told Mr. Boys before or after Mr. Boys had spoken to the taxpayer on that day.One other piece of evidence is relevant as to the day when the taxpayer learned of the involvement of Poseidon. He had a book (exhibit R24) in which from time to time he made out a list of mining companies' shares which he held, with current valuations. On a page headed ``January 1968'' there appears an entry ``4,000 Poseidon cont.''. In the columns in which market values and value of holdings appear are ``60'' and ``2,400'' respectively. The evidence establishes that the only date about this time when Poseidon shares sold at 60¢ or thereabouts was on the 22nd January 1968. On the previous business day the last sale had been 50¢ and on the following day, it was at 99¢. The shares remained at 90¢ or above until the 30th January, and thereafter rose rapidly to prices of $1.35 and above, and remained above that figure throughout the month of February.
If the taxpayer's present recollection is correct, namely that he had no knowledge of the involvement of Poseidon in the venture until about mid February, the entry in his share record, exhibit R24, is inexplicable. I am satisfied that by the 22nd January he was aware that he was to receive Poseidon shares instead of an interest in an unincorporated syndicate.
I turn to review this evidence to determine at what stage the taxpayer knew that he was acquiring an interest in Poseidon. One date which stands out is the 12th January 1968. Had the taxpayer's cheque been received by Mr. Boys early on that day, or prior to that day, I have no doubt that it would have been forwarded to Muecke, Pickering & Co., instead of being paid into the bank account of F.W. Porter & Co. I accept the taxpayer's evidence to the effect that he handed the cheque to Mr. Boys at lunchtime on that day. I see no reason to doubt the evidence of Mr. Shierlaw to the effect that Mr. Boys did not know of the involvement of Poseidon until after his own firm's cheque had gone to Muecke, Pickering & Co. on the same day. If, therefore, Mr. Boys' recollection is correct, when he said that the taxpayer agreed to become a member of the syndicate within two or three days prior to the 12th January 1968 it follows that Boys could not have had the knowledge to tell the taxpayer then that he would be subscribing for shares in Poseidon. It may be that Mr. Boys is mistaken, and that the telephone conversation was actually on the 12th January 1968 as deposed to by the taxpayer. But if so, it would have been before lunchtime; and on the balance of probabilities; I find that Mr. Boys did not then know of the involvement of Poseidon in the venture. I accept the evidence of the taxpayer to the effect that it was on some day after he had handed the cheque over to Mr. Boys, that he learned of the involvement of Poseidon and the fact that he would be receiving shares in that company in lieu of his interest in the syndicate; and I so find. But I am satisfied that he is mistaken in thinking that the second conversation took place as late as February. In fact it must have taken place within 10 days of his paying the cheque to Mr. Boys.
To summarise these findings, I find that on or before the 12th January 1968, the taxpayer agreed to subscribe $500 to become a member of the South Australian syndicate; that he handed his cheque for $500, payable to Muecke, Pickering & Co., to Mr. Boys on the 12th January 1968, at a time when both he and Mr. Boys still believed that he would become a member of the syndicate; and that thereafter, on or before the 22nd January, Mr. Boys told him that instead of receiving an interest in the syndicate, he would receive shares in Poseidon. At that time the number of shares was not stated, and the taxpayer calculated that he would receive 4,000. In fact, as I have said, he received 3,750.
The taxpayer has claimed throughout, and still claims, that his investment in the syndicate was intended to be a long-term investment. Broadly, the Commissioner's answer is first, that an investment in a prospecting syndicate which has insufficient funds to exploit any minerals which it may find must of its very nature be speculative and must therefore fall within one or other of the limbs of sec. 26(a); and secondly, that in any event the proper inference to be drawn from the surrounding circumstances including the taxpayer's dealings with shares
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in Poseidon and in other companies is that the case falls within one or other of the limbs of sec. 26(a); or at least, that he has not established that it does not fall within either limb. This brings me to a consideration of the dealings which the taxpayer had with his Poseidon shares after they had been allotted to him.His first dealing was in the latter part of March and early in April 1968, when he sold 400 shares after speaking to Mr. Boys. He gave as his reason for selling the shares that he found himself in a different situation from the one which he had been led to expect when he first paid out the $500, and as the market value of the shares had risen considerably by this time, he thought that it would be prudent to get his $500 back. He said that Mr. Boys advised him not to sell too many, as if everybody started selling the market would decline; and that members of the syndicate to whom he had spoken had all agreed not to sell more than 400 shares. And so 200 shares were sold on the 20th March 1968 at $1.50, and 200 on the 2nd April 1968 at $1.46. The proceeds amounted to $579.
The taxpayer's next transaction with Poseidon shares was in May of the same year (1968). 900 shares were sold on the 29th May at $1.80, and 100 on the 31st May at $1.90. These 1,000 shares realised $1,770.
The third transaction was a sale of 1,000 shares in February 1969, which realised $586. These shares were sold at 60¢, the price having fallen after an announcement by Poseidon that it had abandoned its interest in the Bindi Bindi leases; and the shares having been ``watered down'' in September 1968 by a new issue on the basis of two for five, at a premium of 30¢, of which the taxpayer took up his entitlement. (It would seem from Mr. Shierlaw's evidence (p. 180) that the new issue was in 1969; but I am satisfied that it was in 1968). This was the position at the 1st July 1969, the commencement of the financial year during which the sales in relation to this appeal were made. In November 1969, the 12¢ paid shares became fully paid on payment of the outstanding 8¢ per share.
Following reports of a discovery of nickel Poseidon shares started to move rapidly upwards in September 1969. On the 1st of that month fully paid shares were sold on the Adelaide Stock Exchange at 86¢. On the 30th of the month sales were at $6.90; on the following day at $11.70; and on the 2nd October at up to $18.30. By the 1st December 1969 they had reached $50; on the opening of the Stock Exchange in the New Year, on the 5th January 1970, they were at $218. In February 1970 they sold as high as $280 but then they started to fall until in May sales were in the range generally from $76 down to $56. By the 30th June 1970, the end of the financial year in question, they had risen again to $130.
There were two sales by the taxpayer during this financial year; 150 shares in December 1969, which brought $12,823; and 500 shares in May 1970, which brought $30,844. The net profit (according to the Commissioner's calculation) arising from the sale of these shares was the amount by which he adjusted the taxpayer's taxable income, that is to say by adding $43,537.
The taxpayer gave evidence and was cross-examined as to his purpose in investing in the syndicate and in the Poseidon shares, and as to his reasons for disposing of the various parcels of shares from time to time; and further as to his purchase and disposal of shares in other companies at about the same time. The evidence as to his disposal of his parcels in Poseidon shares and as to his dealings in shares in other companies is, of course, relevant as either tending to confirm or to cast doubt upon his evidence as to his state of mind at the time when he acquired the Poseidon shares; and it relates also to the question whether what was done with the Poseidon shares amounted to part of a profit-making undertaking or scheme.
The taxpayer said that at the relevant times he had a current account with the E.S. & A. Bank with an overdraft limit of $4,000. From time to time he would exceed this limit, on the authority of a temporary increase; and as he reached the end of the time for which he had the increased limit it was his habit to reduce the overdraft to bring it within his $4,000 limit, rather than to ask
ATC 4247
for an extension of time. In several cases he explained his sale of shares as being for the purpose of reducing his overdraft. Even where a shareholder's immediate purpose in selling shares is to reduce an existing overdraft, this tells little from the point of view of the questions to be answered in relation to sec. 26(a). Because in many cases it would be necessary to go beyond the surface, and to probe into the reason for the existence of the overdraft. A very different story might emerge if on the one hand the overdraft had been incurred to pay for some entirely unexpected expenditure or if, on the other hand, it had been incurred for the purpose of investing in other shares. It was put to the taxpayer in cross-examination, in effect, that his evidence as to reducing his overdraft related more to the result of his selling shares, than to his reasons for selling them. He replied that after six years it was hard to say what he had had in mind at any particular point, but that his whole policy has always been to keep his overdraft within manageable limits by reducing assets in some way; and he said that the selection of them had been fairly haphazard. It would depend on the state of the market at the time.Turning to the taxpayer's transactions in Poseidon shares, he does not claim that he sold his first 400 shares to reduce his overdraft. He said that his sole purpose in selling those shares was to recoup his outlay. In examination in chief he said that he sold the next parcel of shares, in May 1968, in order to reduce his overdraft which then stood at $4,179; but in cross-examination it became apparent that he had made a mistake, and that it was in May 1969 that the overdraft stood at that figure. On the 29th May 1968 it stood at only $937; and consequently his sale of 1,000 Poseidon shares on that day was not in order to reduce his overdraft. In cross-examination he gave a different reason; that he knew he would be called upon to make a payment of $5,400 in respect of the discharge of a mortgage in July 1968. This is confirmed by a debit of that amount in his bank account. I accept this reason.
In giving evidence in chief, the taxpayer said that when he sold 1,000 shares in February 1969 it was to reduce his overdraft; and that at the time of that sale he knew that he would shortly have to find funds for his income tax, a factor which he bore in mind in determining whether or not the overdraft was within manageable limits; and in April 1969 he would need $1,250 to pay on a call in respect of his Western Mining Corporation shares. Early in March 1969 the overdraft exceeded the $4,000 limit by $179. The greater part of the proceeds of the sale of shares in February 1969 went to settle his current indebtedness to F.W. Porter & Co. That indebtedness arose from his purchase of 500 shares in Petromin earlier in the month. After selling the 1,000 Poseidon shares in February 1969, he sold shares in other companies, and retained a credit with F.W. Porter & Co. until the 15th April 1969. During that period none of the money went towards reducing the overdraft. Nevertheless, the taxpayer maintained that his purpose in selling those shares when he did was to reduce his overdraft.
Turning to the state of the taxpayer's bank account at the time of the sale of the first parcel of shares in the financial year in relation to which his income tax was assessed, that is on the 16th December 1969, the overdraft stood at approximately $7,420. On the following day, on payment into the bank of the proceeds of the sale of the 150 Poseidon shares for $12,823, the bank account was in credit to the extent of $5,402.83. It remained in credit for the rest of the financial year except for one day - the 18th May 1970 - when it was in debit to the extent of $194. On the following day it was restored to a credit of $2,334; and after that did not drop below a credit of $2,256. The proceeds of the sale of the second parcel of Poseidon shares in question in May 1970 ($30.844) was included in a cheque paid into the bank account on the 10th June 1970, which brought the account to a credit of $33,347.
Although it appears that the proceeds of some of the Poseidon shares sold in December 1969 were used to pay off the overdraft, that clearly does not provide an explanation for the sale of all the shares sold at that time. The shares at that time had made a fairly sudden rise since the beginning of the month (when they sold for $50) and in
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the absence of any other explanation it seems to me that the taxpayer probably considered that a suitable time had come to take the opportunity of paying off the whole of his overdraft and of creating a credit; and I so find.The taxpayer's explanation for selling the Poseidon shares in May 1970 was that he was losing faith in the project at that time. He said that he deposited the proceeds with Finance Corporation of Australia Ltd. and ultimately spent part of the money to finance a world trip with his wife. I have already recounted some of the fluctuations in value of Poseidon shares and it is true that in May 1970 the shares dropped to as low as $56 before starting to climb again. The taxpayer's sale was at about $61. After January 1970 the shares had stayed at prices of over $200 - up to $280 - until mid March, when they dropped below the $200 mark; and from then until the time of the sale there was a fairly steady decline in value, with some fluctuations from day to day. I think that the proper inference to be drawn from this is that the taxpayer felt some alarm at the future prospects of the company, and that for that reason he decided to turn some of his Poseidon shares into money before the value declined further; and I so find.
Before assessing the taxpayer the Commissioner asked for particular of all shares sold during the during the year ending the 30th June 1967, 1968, 1969 and 1970. This information was provided by the taxpayer in schedule form. It disclosed sales of shares between November 1967 and May 1970. Apart from those in Poseidon, the schedule included sales of shares of Western Mining Corporation Ltd., Vam Ltd. and Nickel Mineral Search N.L., and Surveys and Mining Ltd. Particular emphasis was placed by Mr. Rice for the Commissioner on the taxpayer's transactions in the Nickel Mineral Search Ltd. He bought 500 shares in that company in September 1967 at a cost price of $100, and he disposed of them in November 1967 for $1,075. The explanation which he gave in the schedule is: ``Broker advised to sell as stock grossly overpriced''. He elaborated upon this in evidence. In cross-examination he was asked: ``Why did you sell them?'', and answered: ``Because Mr. Boys advised me to... he said he'd had very poor reports on their drilling results''. He said that at the time of his acquisition in September he was aware that no dividend had been made in respect of those shares. He relied entirely on the advice of Mr. Boys in investing in them and in selling them. He was asked whether his reason for selling them was to make a profit but answered that it was not; that he had sold them because he had ``lost confidence in them as an investment''. He said that to the best of his recollection the shares had started to decline in value before he sold them, and in answer to myself he agreed that he had a profit on paper and was afraid of losing it. His loss of confidence followed what Mr. Boys had told him about drilling results.
On two other occasions the taxpayer sold enough shares in a mining company to pay off his initial outlay, thereby insuring himself against loss, while maintaining an interest in the company. In December 1966 he bought 500 Vam Ltd. for $191; and in February 1968 he sold 100 for $415. In September 1968 he bought 600 Surveys and Mining Ltd. for $617. If it were shown that this was a widespread and regular practice on the part of the taxpayer, it would go a long way towards establishing that, at least so far as shares so sold are concerned, they were shares acquired for the purpose of selling at a profit and furthermore, as part of a profit-making undertaking or scheme. But the shares so sold in Poseidon do not form part of the transactions which took place during the year of taxation which is under review. And a taxpayer's intention with regard to one parcel of shares is not necessarily to be regarded as applying to the whole of his purchase or acquisition.
What, then, am I to make of the taxpayer's purpose with regard to the shares sold in the financial year 1969/70 when he first agreed to become a member of the syndicate and paid his cheque for $500? And to what extent is that original purpose to be regarded as qualified by his subsequent tacit agreement to accept Poseidon shares in lieu of his interest in the syndicate?
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The mere fact of acquisition of shares in a syndicate engaged in searching for minerals is equivocal. The search may fail. But if it succeeds the interest of the syndicate members is not likely to have any great value unless suitable arrangements can be made to exploit the discovery. Money is often found in such circumstances, which still leaves the original syndicate holders in a favourable position, perhaps as the holders of shares in an operating company. I feel unable to say that, as a matter of necessity, anybody who invests money in such a syndicate must for that reason alone bring the proceeds of the sale of his interest in the syndicate, or any part of it, to tax as part of his taxable income. I imagine that many investors who put their money into such ventures do so in the hope that one day they will strike it lucky; but unless there is something more specific I do not regard this as being a sufficiently formulated purpose to bring the investor within the first limb of sec. 26(a); and unless there is some continuity or reasonably frequent repetition of such activities, I do not think that they can be brought within the second limb. On my view of the evidence, this was the taxpayer's purpose when he invested his $500 on the 12th January 1968. He hoped that he was on to a ``good thing'' and that, if so, in some undefined way, he would benefit financially; and I so find.
When later in the month he was told that he would be receiving Poseidon shares instead of his interest in the syndicate. I think it reasonable to infer that his initial state of mind continued and that he still hoped that the venture in its new form would prosper with financial benefits to himself. But he was now to become the owner of shares which were negotiable in parcels on the stock exchange, as contrasted with a single non-negotiable share in a syndicate. His previous actions in the case of the ventures which I have mentioned, and his actions in the present case, suggest that he may have had the intention at that time of recouping himself for his initial outlay at the first opportunity. He said that he first made up his mind to sell some shares in Poseidon when the market was around $1.50 and he saw that he had the chance to retain over 3,000 shares after recouping himself the whole of the outlay. He may well have thought it prudent to sell the second parcel in view of what then appeared to him an unexpectedly sudden rise in the value of the shares. It may be that the profits made on the shares sold in March and April 1968 should be brought to tax; but as this is not a topic which is formally before me on this appeal, I do not think it desirable to express my opinion any more definitely. I have already dealt with the circumstances of the sale in February 1969.
I am satisfied that the proceeds of the sale of the shares under review are not income within the ordinary meaning of the word; and the money is not taxable as such under sec. 25 simpliciter. I turn therefore to consider whether it falls within one of the limbs of sec. 26(a).
At the hearing many cases were cited as to the application of the law to the facts of such cases. I will not discuss them in any detail. The way in which courts have approached similar problems in the past may be of assistance as suggesting the approach to be adopted by a court in a later case; but it would be dangerous to assume that because an inference was drawn from certain facts in a previous case, that the same inference should be drawn from somewhat similar facts in the later case. In the present case, as I have already said, it may well be that on almost identical facts relating to other members of the syndicate, different inferences should be drawn as to their respective states of mind when they acquired shares in Poseidon, and as to whether such acquisition constituted a profit-making undertaking or scheme. I accept previous cases as examples of how judges have gone about solving problems which are similar to those which confront me, but not as rulings as to how I should apply the law to facts more or less similar to those of the previous cases.
So far as the law is concerned, it is well established that the onus is upon the taxpayer to prove to my satisfaction, on the balance of probabilities, that when he acquired the shares in Poseidon which he
ATC 4250
sold in the year of income under review, his main or dominant purpose in acquiring them was not to resell them at a profit; and furthermore that the profit he made on their resale did not form part of a profit-making undertaking or scheme. So far as the first limb is concerned, although the onus is upon the taxpayer to establish on the balance of probabilities that it was not his main or dominant purpose in acquiring the shares, to sell them at a profit, it does not necessarily follow that he must establish what in fact his main or dominant purpose was. If he can establish that it was some other specific purpose, so much the better for him. That is one way of proving that it was not the purpose of resale at a profit. But he may be able to prove the absence of that purpose by evidence which establishes that he had no particular purpose, but merely a vague general hope that the shares would be a good investment. In this case I am satisfied that that was the taxpayer's main or dominant purpose. He hoped to better his financial position in some vague and undefined way. This was his intention when he signified his intention to invest in the syndicate, and I think it should be accepted as remaining his intention when instead of receiving a share in the syndicate he received shares in Poseidon. I am satisfied that he had no defined purpose of selling the shares which he sold in the year under review either when he signified his intention of investing in the syndicate; or when by implication he assented to receiving the shares in Poseidon in lieu of his share in the syndicate; or when he was actually allotted the shares in Poseidon. I would emphasize that I am referring to the shares sold during the year under review, and I am deliberately refraining from making any comments with regard to shares sold in other years, in particular those sold during the financial year in which the shares were acquired. So far as the shares under review were concerned, therefore, I find that the taxpayer did not have the specific purpose of selling them at a profit when he acquired them. The nett proceeds of their sale are therefore not brought to tax under the first limb of sec. 26(a).The recent authorities on the second limb of the section are conveniently collected and discussed by Professor K.W. Ryan in an article ``Profit-Making Undertakings or Schemes'' in the Australian Tax Review Vol. 2 (1973), p. 183, when he points to the difficulties which beset the courts in applying the second limb.
The first problem involved is whether there was an undertaking or scheme at all. For present purposes this may be sought either as the undertaking or scheme of trading in shares in general; or as the isolated venture of the Poseidon syndicate. I do not think that the evidence discloses a sufficient degree of repetition of sales and purchases of shares to constitute these dealings an undertaking or scheme within the section. I have not found this aspect easy, but I have come to the conclusion that these dealings go no further than to constitute efforts by the taxpayer to improve the realisable value of his portfolio to an extent which falls short of its becoming a business upon which he has ventured. But even if his other purchases of shares had been made as part of an undertaking or scheme, there is a further difficulty in this case; because normally if property is acquired in the course of conducting an undertaking or scheme, one would expect to find the acquisition to be the result of some deliberation, some intent that the transaction should form part of the dealings which constitute the undertaking or scheme. But here the property in question, shares saleable on the stock exchange, were not acquired as the result of any positive act by the taxpayer; merely from lack of dissent on his part when he was told that this was what he would get instead of his interest in the syndicate.
Looked at as an isolated transaction, for similar reasons, I do not think that the acquisition of the shares constituted an undertaking or scheme. To embark upon an undertaking or scheme connotes some degree of planning and deliberation; and I am satisfied that that was lacking here. The taxpayer merely accepted shares as a result of decisions made by others. This comment does not relate to his acquisition of his interest in the syndicate, but that was not the property sold to produce the profit in question. I am satisfied that the taxpayer's
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acquisition of the shares in Poseidon, regarded as an isolated transaction, does not fall within the second limb of sec. 26(a).For these reasons, in my opinion, the profits made on the sale of the shares in question were not taxable as income either under sec. 25 or sec. 26(a). The appeal will be allowed. The assessment dated the 19th November 1971 will be amended by reducing the amount of taxable income shown therein for the year ended 30th June 1970 from $51,265 to $7,728, and by reducing the amount of income tax payable thereon accordingly, I will hear counsel on any incidental orders which are sought.
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