Case G30

Judges: JL Burke Ch
RE O'Neill M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 8 May 1975.

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C.F. Fairleigh Q.C. (Member): The taxpayer (in business as a fruit packer) and his sister lodged a partnership return of income for the year ended 30 June 1970 which contains several annexures one of which has the heading ``Item 44: Share Trading'' and another has the heading ``Shares on Hand, 30th June, 1970 (Purchased for Speculation)''. For a reason which is in para. 13 I mention that the return was prepared by a firm of registered tax agents and consultants and each annexure was signed by the taxpayer.

2. The annexure to the return, ``Item 44: Share Trading'' lists 20 purchases of parcels of shares totalling 82,500 shares (ranging from 200 to 2,500) for an outlay of $54,314.85 and 20 sales (in the subject year) including Barrier Exploration N.L. shares and rights for a return of $59,654.75 with a profit of $5,339.92 (sic). The sale of Barrier shares and rights is shown

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as resulting in a profit of $5,493.63. That annexure after setting out those particulars is as follows -

      ``Less Profit from Barrier

       Exploration                5,493.63

               Net Loss             153.71
            

Profit from Barrier Exploration considered a Capital gain. The Shares were purchased in February, 1968 for the purpose of Investment. The Shares were sold in October, 1969 on Brokers' advice and no other dealings took place during this period.''

(During the hearing it was agreed that the sum in issue was one-half of $5,368, viz. $2,684.)

3. By and large all the shares listed in that annexure (``Share Trading'') were in companies engaged in exploration or prospecting for oil or minerals.

4. The other annexure (``Shares... (Purchased for Speculation)'') shows a total of 61,090 shares (including 240 rights) at a cost of $21,380.66. There are 18 parcels of shares which could also be described as in para. 3 hereof. Shares in Omega, Tasminex and Hawkstone appear on each of those two annexures.

5. The Commissioner adjusted the partnership income to include ``Profit on sale of Barrier Exploration shares considered to be assessable income $5,494'' (scil. shares and rights) and one-half thereof was carried forward in the assessment of the income of the taxpayer.

6. The taxpayer by letter from the same agents duly objected that the aforesaid increase should be excluded as it was a profit derived from the sale of shares originally purchased as an investment at a time when the taxpayer ``held investments with such companies as Anthony Hordern, Producers Distributing Society, Wormalds Ltd., Taubmans Industries and Plastic Sheeting Ltd. and that Barrier Exploration shares were to form part of his investment portfolio''. The letter of objection further states that ``had the `share boom' not commenced when it did (a considerable time after these shares were acquired) he would still own them. The boom itself caused (the taxpayer) to become interested in the share market, particularly as he and his partner already owned the shares now in question.... (The taxpayer) and his partner subsequently... bought and sold other shares and in their accounts such transactions have been treated as speculative as the motive is quite clear cut in respect of the acquisition of these shares. However, that is not the case with the Barrier shares... Had we felt that they were speculative at the time of purchase, we feel we would have suggested the inclusion of an election under the proviso of Section 52, in the 1968 partnership return.'' (It is of only passing interest but in fact the last mentioned action was not consistent with what was shown to have occurred.)

7. The objection was disallowed and the Commissioner's decision thereon was duly referred to a Board for review.

8. There are no particulars available to the Board of the taxpayer's activities on the share market prior to 2 February 1968 although it is known that he purchased some ``investment'' type shares prior to that time.

9. The purchases of shares in Barrier commenced on 2 February 1968 and extended to 14 May 1968 and the sales of Barrier commenced on 7 October 1969 and extended to 8 January 1970. This interval of time between the first purchase and first sale is but one of many factors and whilst trading in shares may oft-times have the characteristic of celerity to take a substantial rise even a dealer is not necessarily impatient to receive a quick turnover when a high profit margin becomes available. The reasons for allowing a year or so to pass by may be less obvious in the case of shares than for example paintings or vintage cars. The passage of say 18 months would no more disentitle the trader to a claim for a deduction than it would enable him to escape tax on a profit. Obviously the persons who buy shares or other property with the purpose of profit-making do not always exercise business acumen even in respect of time of purchase or time of sale. All that I see necessary to add on this aspect is that the taxpayer had earlier opportunities for sale at a profit than the one which he exercised.

10. The opening address of counsel for the taxpayer was as follows -

``The case which we are putting is not a positive case but rather a negative case. What we are saying is the shares in question were purchased without any fixed ideas at all as to their ultimate disposition. We say that there was an absence of any intention

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to make a profit from the sale of the shares and our case is that the taxpayer bought them without any significant thought about what he would do with the shares in the future and that is the simple point that we are putting.''

11. Some support to his counsel's opening is given by the taxpayer's initial answers, for example, that ``a fellow in Sydney by the name of... told me to buy a few shares in Barrier Exploration'' (presumably that is the person referred to in the letter of objection as a relative) and as to the intention with regard to the shares: ``I do not know myself. I just bought them and I thought it was for my old age they might come good and have a bit of a dividend. I did not have any intention at all.'' The taxpayer replied in the negative to the question ``Did you look forward to selling them quickly after you bought them?'' He said he made his own choices as to the shares to buy and when asked by his counsel how he did so he said: ``Just to do something, some other people have a share and I thought I would buy some to have a few if I have a few spare cash.'' He said also that he made up his own mind when to sell and that he read the financial pages of the newspapers.

12. Other passages in his evidence of some significance are -

``Did (the friend/relative) advise you to buy any other shares? - Yes on a few occasions, yes.

On the same day that you purchased Barrier shares you also purchased shares in Pioneer Mines? - Yes. That is coming from him too.

Did he give you the same advice on Pioneer Mines that he gave you on Barrier? - What he used to say is it is a good share if you want to put a few bob in and I buy.

Basically he gave you the same advice regarding Pioneer and Barrier? - I suppose so.

What advice did (the friend/relative) give you regarding Barrier shares? - Oh, not give me much but just say well buy a share of them and I bought.

Did he say they would go up in price? - No he never said anything about them going up. He said they could be good. I don't remember because it is too far away exactly what he say but I remember he understand about a share and always he is a friend of mine and when I come to Sydney he tells me and I buy some.

Now you purchased other shares such as Transoil. Did he give you advice on those shares too? - Yes mostly all the shares I bought, Transoil and Exoil they came from (the friend/relative).

Did (the friend/relative) advise you on all these shares (p. 10 of Ex. A - schedule `Share Trading') to buy? - Yes, most...

Do you acknowledge that all of those shares before you (p. 10 of Ex. A - schedule `Share Trading') with the exception of Barrier Exploration that you are disputing, all of those shares are acknowledged as purchased for resale at a profit...

(By the Chairman: What (the Commissioner's representative) is putting to you is do you understand that the return is made out on the basis that all of those shares were bought by the partnership to be sold at a profit - do you understand the question?) - Yes I do understand. I do understand the question. But I can't have an answer, because I never buy a share. Everything we buy we want to make a profit on. But this share of mine I did buy because I buy but I have not the intention to come in rich or make a lot of money just to buy and to be there because I have a few bob to spare and bought them.

So your accountant has prepared that partnership return on the basis that except for Barrier all those other shares were purchased for resale at a profit, do you understand that? - I understand, but... (sentence unfinished).

Then how do you distinguish between all those other shares that were purchased and are shown as purchased for resale at a profit, how do you distinguish between those and Barrier? - Well, I don't know exactly, because when I bought Barrier I bought that share to keep them and the other one is - as I had too many shares I have got to sell some.

Do you understand what speculation means? - I think I understand it, but I never put those words there.

What is your understanding of it? - I understand that it is to buy and sell for a profit.

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Did anyone advise you to sell? - No I do not think anybody advised me to sell. This (friend/relative) advise me but on the selling I sold probably because I was a bit scarce of money and I sell.

Did the broker advise you to sell those shares (p. 10 of Ex. A - schedule `Share Trading')? - Yes sometimes I phoned (the broker) I talked with him (from a country town) and sometimes he sell that share.

Can you recall him telling you to sell Barrier? - I cannot quite remember because it is a long time ago and I could not give a definite answer on that.

I put it to you that you sold 1,400, recouped your cost, made a profit and had the others going for nothing? - I do not know, no reason.

In later years you have sold other shares? - Yes.

And those other shares were purchased for resale at a profit? - Oh yes, could be.

Can you recall the reason why you made the earliest sales that you did? - I do not remember. It could be because I needed a bit of money. I do not remember why I sell.

Did you look at the newspapers to reach a decision what shares you should sell? - Yes, sometimes yes.

Can you recall how frequent your share buying transactions were prior to February 1968? - I don't remember. It is too far away for me to remember what I did and what the reason...''

13. The inference I draw from the whole of the taxpayer's evidence is that the last answer is equally true of what happened in February 1968 and in the following months. I am left in doubt whether the taxpayer is able to recall that he had any different purpose in purchasing Barrier shares than in purchasing say Pioneer Mines shares and in the latter case it seems to me that the purpose was to buy with a view to profitable sale at some indeterminate future date though not with a view to a quick sale at the first opportunity. His counsel submitted that the taxpayer was put in an unfavourable light ``by what perhaps was a wrong statement of the categories into which those other shares ought to fall''. No evidence was called to suggest that any error was made in the instructions taken down by the tax agent and when this was pointed out to counsel for the taxpayer he did not seek to reopen his case nor to give any explanation for the failure to give that evidence. The failure of the friend/relative to give evidence is also a matter of some importance. Counsel was asked how far he would go in classifying some shares listed as trading or speculative and he took up the position that he could not say what was included in it but only would say that Barrier shares were excluded. He agreed that there was no contemporary record put before the Board to support the contention that Barrier shares bore any different character in the taxpayer's eyes from the shares in Pioneer Mines. The taxpayer's counsel conceded that there had been share trading in 1969 and possibly in 1968 and said he was unable to say where the line should be drawn.

14. My conclusion is that the taxpayer has failed to discharge the onus of proving that shares in Barrier Exploration N.L. were not bought with the purpose of resale at a profit.

15. There was an issue of rights (2 for 5) by Barrier Exploration N.L. in April 1969 and these were taken up by the taxpayer and the new shares were sold by him in the year ended 30 June 1970. If the original shares were acquired by a speculator and he takes up the new shares upon a rights issue he is not necessarily taking up the new shares with a view to profitmaking by sale. Similarly it does not follow inevitably that if the original shares are taken up as an investment that new issues are taken up as an investment. The question is to be decided on the evidence. In the present case the taxpayer has failed to discharge the onus of proof in respect of the purpose of acquisition of the new shares.

16. Where new shares are taken up and sold as in the present case then, in calculation of the profit, account is to be taken of the value of the rights as being part of the cost of acquisition of the new shares (
Executor of R.F. Bristowe v. F.C. of T. (1962) 12 A.T.D. 520 at p. 527 ; see also
Bouch v. Sproule (1887) 12 App. Cas. 385 at p. 407 per Lord Bramwell and cf. Case E6,
73 ATC 24 per the member Mr. O'Neill at paras. 9, 23, 26, 51 and 56). In Bouch v. Sproule Lord Bramwell deals with the value of the shares on the basis of the shareholder's interest in the company before and after the new share issue and the diminished value of the old shares.

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17. In or about November 1969 Barrier Exploration N.L. increased the issued capital by a new issue of 4,900,000 shares at par. These were offered to the shareholders (holders of 30 ¢ and 10 ¢ paid shares) on a 1 for 1 basis payable 10 ¢ per share with the balance of 40 ¢ subject to calls in accordance with the articles of association and the new shares ranked equally from the date of issue with the other issued shares of the company. The taxpayer sold this ``right to shares'' in the year in issue.

18. The question remains whether the sum of money (or any part thereof) which arose from the ``sale of rights'' is assessable. Very probably at the time of purchasing the Barrier shares the taxpayer gave no thought to the possibility of a later share issue.

19. When a company resolves to make a further issue of shares those shareholders to whom the offer is made to participate in the new issue are enabled to receive something which will allow them to retain their proportionate equity. A new issue which involves a liability or an outlay has the consequence that each existing shareholder has to decide whether to take up his full allotment and so maintain his present position vis-a-vis other shareholders (to whom the offer is made) or whether to suffer a diminution (which is counterbalanced to some extent - not readily ascertainable at the outset - by the influx of new capital) and to offset any loss by a ``sale of rights''. Each of the alternatives requires positive steps by the shareholder. The second course is frequently called a renunciation although the form in common use ( Australian Company Law, Paterson & Ednie, 2nd Ed. Vol. 4 p. 4052.2 et seq. ) nominates a purchaser to receive the share issue and it is in substance an assignment of a species of property for valuable consideration. (The third course is to ignore and thus abandon the company's offer and this is the only occasion when the shareholder remains passive. This is not a case where consent is no more than non-dissent - Bouch v. Sproule (1887) 12 App. Cas. 385 at p. 407.) As there is not a gift by the company in the circumstances now being discussed neither the first nor the second course of action comes within the principle that the acceptance by the donee of a gift is ``not purposive in any relevant sense'' (per Barwick C.J. -
F.C. of T. v. N.F. Williams 72 ATC 4188 ; (1972) 46 A.L.J.R. 611 ). There may be cases in which the share issue involves a gift to some class of shareholders but there is here no evidence of a gift.

20. What is called a ``right to shares'' is an offer made by the company to (some or all) shareholders, and each has the opportunity (a) to accept the offer for himself by completing and dispatching one set of forms or (b) to accept the offer for his nominee/purchaser by completing and dispatching another set of forms or (c) to abandon the offer by failing to adopt course (a) or (b) within a stated period. If it is desirable to select expressions in lieu of ``right'' to describe the opportunity which the company affords to the shareholder I prefer to say that the company has conferred a ``privilege'' and has granted a ``power'' (cf.
Abbott v. Philbin (1961) A.C. 352 particularly per Lord Keith of Avonholm (dissenting) at p. 381; (1960) 2 All E.R. 763 at p. 776D; 39 T.C. 82 at p. 127 ).

21. In taking the positive steps of completing appropriate forms and instructing a broker to sell the rights it seems to me the taxpayer ``acquired'' property and achieved two results; first he thereby vested a right to shares in himself (without going on the share register) and secondly he assigned for a price that right to shares to another who would then go on the share register. In the circumstances I regard what is called a ``sale of rights'' as being a composite transaction comprising an obtaining of property by positive action (i.e. an acquisition) and a sale of that property. If (as in Case A35,
69 ATC 201 ) shares are acquired as a ``sound investment from the point of view of security of capital and prospects of income from dividends'' and the shareholder upon receiving the opportunity of participating in a rights issue proceeds to sell the rights there is a realization of part of that shareholder's capital and the profit, if there be a profit, is one of capital. A loss always results on a sale of rights when the outlay by the vendor is quantified by the market value of the rights ( Bristowe's case ) and brokers' charges are billed against the vendor.

22. If I may say so with due respect, I am fully in accord with the unanimous decision of the Appellate Division of the Supreme Court of the Union of South Africa in
I.R. Commr. v. Strathmore Consolidated Investments Ltd. (1958) 22 S.Af.T.C. 213 at p. 227 per Ogilvie Thompson J.A. - Schreiner A.C.J., Steyn J.A., A. Beyers J.A. and Smith A.J.A.

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concurring) that where there is a scheme of profit-making the sale of the rights may in some circumstances be regarded as an integral part of the scheme of profit-making and in consequence the proceeds of the sale of the rights will be liable to tax. As I see it this is also applicable to a sale of bonus shares as in
Bjelke-Petersen v. F.C. of T. (1962) 12 A.T.D. 487 and
McRae v. F.C. of T. 69 ATC 4066 ; (1969) 121 C.L.R. 266 (cf. Case E6,
73 ATC 24 per the member Mr. O'Neill at para. 56). McRae's case adopts an approach similar to that of Lord Bramwell (in Bouch v. Sproule supra ) in stating that the declaration of the dividend had the effect of subtracting an equal amount from the value of the original shares and that the same property which had been the asset backing for the original number of shares became the asset backing for the increased number of shares. As to a bonus issue of shares see also
Curran v. C. of T. (Commonwealth) 74 ATC 4296 ; (1974) 48 A.L.J.R. 439 .

23. Regrettably the conclusion that the taxpayer was not playing a completely passive role in respect of rights (and passivity results in abandonment of rights) may seem to be in conflict with the reasons of Mr. A.M. Donovan, Chairman, and Mr. G.R. Thompson, Member, in Case F41, 74 ATC 227, at para. 14 and with the reasons of Mr. R.R. Gibson, Chairman, in Case 25, 14 C.T.B.R. (O.S.) 243 at pp. 248-249; see also the reasons of the member Mr. O'Neill in Case E6, 73 ATC 24 at para. 56. In
E. Pooler Holdings Ltd. v. Minister of National Revenue (1961) 28 Can.TaxA.B.C. 130 coram R.S.W. Fordham, Q.C., it was said that ``... the right came into the possession of (the taxpayer) simply because (he) had held... the relevant shares for several years and was automatically entitled to the right ipso facto ''. In the circumstances of the present case I would respectfully amend the passage to read ``... the opportunity to take up the right personally or to assign it to a purchaser came to the taxpayer simply because he had held... the relevant shares... and was thus entitled to receive that opportunity''.

24. The entire holding in Barrier Exploration N.L. (shares and rights) was disposed of in the year ended 30 June 1970 and the Commissioner took into account the total outlay and the total return in arriving at the amount of $2,684 (one-half of $5,368) which is now in issue. I do not see the need for my departure from that amount of $2,684 whether by reason of Bristowe's case (supra) or otherwise.

25. In my opinion the appeal against the decision of the Commissioner fails except to the extent that there should be a correction of $2,747 to $2,684.

Claim allowed in part