Case G30
Judges: JL Burke ChRE O'Neill M
CF Fairleigh QC
Court:
No. 1 Board of Review
R.E. O'Neill (Member): In light of the facts as set out by my colleague, Mr. Fairleigh, I will confine myself to the bare bones of the case.
2. During the last six months of the year ended 30 June 1968 the taxpayer and his sister, who were born in Italy, bought as joint property shares in six mineral and oil exploration companies three of which were Barrier Exploration, Pioneer Mines and Australian Continental Petroleum Mines (ACP). In the same period they sold shares they had in Overseas Corporation and Wormalds.
3. During the year ended 30 June 1969 they bought shares in three other exploration companies but made no sales of any shares.
4. In the year ended 30 June 1970 they bought shares in 24 exploration companies and sold the shares acquired in 19 of those companies and in that year they also sold the shares they had bought in 1968 in Barrier, Pioneer and ACP. That profit or loss was respectively returned as assessable income or claimed as an allowable deduction and likewise with profits and losses on the other 19 companies. It was however claimed in the return that profit on Barrier was not assessable in terms of sec. 26(a). The Commissioner assessed on the basis that all profits and losses, including the Barrier profit, are assessable under the first limb of sec. 26(a) or allowable under sec. 52.
5. The only matter in issue is the assessability of the Barrier profit as calculated by the Commissioner -
Profit on shares sold $3,768
Proceeds of sale of rights 1,600
--------
$5,368
--------
and which the Commissioner maintains is assessable as to one-half ($2,684) to each of the taxpayer and his sister. (The actual assessment under review includes $2,747 being one-half of $5,494 because of a mistake in the return showing the total outlay as having been $1,304 whereas it was $1,429. I understood the Commissioner's representative to say that the assessment would be appropriately amended.)
6. Details of outlays made in acquiring shares in Barrier and of proceeds from their sale are -
7. Under date 2 April 1969 shareholders in Barrier were offered a 2 for 5 issue of shares of 50 ¢ each payable 10 ¢ on acceptance. Shareholders on the register on 19 March 1969 were entitled to participate in the issue. Acceptances were to be lodged with the company's office not later than 30 April 1969. Rights to the issue were renounceable and quotation of rights commenced on 19 March and ceased on 30 April. The ``high'' and ``low'' prices of the rights during the month of April were 47 ¢ and 35 ¢ . The entitlement to 1,000 shares in the new issue was accepted. The shares thus acquired in April 1969 were sold: 400 on 7 October 1969 and 600 on 8 January 1970.
8. Another new issue of shares of 50 ¢ each payable 10 ¢ on acceptance was offered by notice dated 17 December 1969 on the basis of 1 for 1 (both 30 ¢ paid and 10 ¢ paid shares) to shareholders on the register on 2 December 1969. Acceptances were to be lodged not later than 27 January 1970. Rights to the issue were renounceable and quotation of rights on the Stock Exchanges commenced on 2 December 1969 and ceased on 27 January 1970. The taxpayer and his sister had rights to take up 2,100 shares in this new issue but they sold those rights on 8 January 1970 for net proceeds of $1,600.
9. The summary here given in paras. 2-7 of the share transactions indulged in during the three years 1968-1970 demonstrates that there is no scope on the facts of this case for concluding that the activity constituted the carrying on of a business of dealing in shares so as to warrant assessment involving the application of such general provisions of the Act as sec. 25, 51 and the trading stock provisions
-
see the judgment of
Stephen
J. in
A.C. Williams
v.
F.C. of T.
72 ATC 4157
;
(1972) 128 C.L.R. 645
and the cases there cited. The only applicable provision is the first limb of sec. 26(a) which brings into the assessable income of a taxpayer ``profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale''.
10. In relation to the Barrier shares such objective facts as the length of time they were held and the making of additions to the holding by buying more on the market at higher prices than the original acquisition had cost, and the continued holding of those shares through times of sustained and significantly higher prices than their cost do support the claim that they were not acquired for the purpose of profit-making by sale. (I note that sec. 6D inserted by Act No. 46 of 1972 and amended by No. 165 of 1973 provides that where there is no change for a period of at least 18 months in the ownership of a share in a listed company acquired after 12 April 1972 and before 22 August 1973 the owner ``shall be treated as not having acquired the share for the purpose of profit-making by sale''. The successor to sec. 6D, which is confined to shares, is sec. 26AAA which includes in assessable income profit arising from ``property'' bought and sold within 12 months.) On the other hand acceptance of inclusion in the assessment of the profit on shares in Pioneer Mines which were bought on the same day as Barrier and not sold until December 1969 and of the allowance of the loss on ACP which were held from June 1968 to December 1969 is difficult to reconcile with the claim made for Barrier. There are also such considerations as those mentioned by Mr. Fairleigh in para. 13 of his reasons. Like him I
ATC 177
think that taxpayer has failed to discharge the onus of proving that the shares were not bought for resale at a profit.11. In relation to the applicability of the first limb of sec. 26(a) to the $1,600 realized on the sale of the rights to take up 2,100 shares in the second new issue, it seems to me to be doubtful whether such rights constitute ``property'' in terms of that provision. Such rights are I think contractual rather than proprietary: although not directly relevant see generally the Law Dictionary definitions of ``option'' and the extracts from
Abbott
v.
Philbin
(1960) 39 T.C. 82
and other references cited in my reasons at pp. 121-122 in
Case
B25,
70 ATC 115
. See also the decision of Board No. 2 in
18 T.B.R.D.
Case
T77 at pp. 388-389 where the Board denied the application of the first limb of sec. 26(a). Although it was a second limb case the circumstance that the rights of the taxpayer in
Clowes
v.
F.C. of T.
(1954) 91 C.L.R. 209
;
10 A.T.D. 316
were contractual and not proprietary did I think carry weight in the opinions of
Dixon
C.J. and
Kitto
J. which prevailed in favour of the taxpayer. However, I need not seek to resolve my doubt because the taxpayer must I think succeed on a more simple argument.
12. In
Bernard Elsey Pty. Ltd.
v.
F.C. of T.
69 ATC 4126
;
(1969) 121 C.L.R. 119
, Elsey who completely controlled the company attended a land auction with a view to buying lots 12 to 17 so that he might build a motel and service station in juxtaposition. To Elsey's surprise lots 11 to 17 were put up together as one lot. He bid but the land was passed in. After the auction an offer of lots 11 to 17 was made to Elsey and accepted. After the contract note was signed Elsey discovered that he had more land than he thought
-
lot 11 had a frontage of about 100 feet more than the sale plan had shown which meant that there was more land than was needed for the motel and service station now in mind. ``As soon as he realized this he began to consider how he might advantageously use or dispose of the surplus at the western end. But it cannot be said that this had been `acquired by him for the purpose of profit-making by sale' within the meaning of sec. 26. After he had acquired the land he found it was a larger area than he had thought. It cannot be said that a person who acquires something unexpectedly, as Elsey did, acquired it for the purpose of selling it. Elsey's main and dominant purpose throughout was to acquire land on which to set up a motel alongside or above a service station. If the Commissioner's claim with respect to the shops is to be upheld, it must be on the basis of `a profit-making undertaking or scheme' evolved by Elsey after his purchase of lot 11, and carried out by him for the taxpayer company.''
per Windeyer
J. 69 ATC p. 4130; 121 C.L.R. p. 127. His Honour went on to hold that the building of shops on the land and their ultimate sale amounted to a profit-making undertaking in terms of the second limb and that, in calculating the profit arising, the value of the land embarked in the scheme was to be determined as at the time the scheme was conceived, 14 months after the purchase, in which time it had changed from swampy land distant from buildings to firm land alongside a flourishing motel in a street which had become a built-up commercial area.
13. In
F.C. of T.
v.
N.F. Williams
72 ATC 4188
;
(1972) 127 C.L.R. 226
the taxpayer was given in 1962 by her husband a one-third interest which he had acquired in 1959 in 10 acres of suburban land held in common with two other persons. She was duly registered as the proprietor of that interest. In 1970 she received her share of the proceeds from sales made in subdivision. The Full Court affirmed the decision of
Stephen
J. that the profit was not caught by sec. 26(a) although, as
Menzies
J. said, it was clear that when the taxpayer received the gift from her husband her only concern with the land was its eventual sale. In relation to the first limb the view taken was that the acceptance of an unsolicited gift of property is not an acquisition ``for the purpose of profit-making by sale''. Such acceptance said
Barwick
C.J. is not ``purposive in any relevant sense''.
Menzies
J. held that only ``in very special circumstances'' can a gift be regarded as acquired for such a purpose.
Gibbs
J. thought it doubtful whether property the subject of a gift ``passively'' received could be so acquired
-
the dominant purpose in the case before the Court was to accept the bounty of the donor.
McTiernan
J. dissented but on the ground that the profit came within the second limb of sec. 26(a).
14. In
14 C.T.B.R. (O.S.)
Case
25, the taxpayer was a director-shareholder in A Pty. Ltd. from which he received two interim dividends in the form of distributions in specie of 50
¢
shares in a listed tin-dredging company, B Ltd. When the first distribution was made
ATC 178
the shares were at a premium of more than 20 ¢ . The face value of the shares (600 and 240 from the respective distributions) was brought to tax by the Commissioner. In a later year the taxpayer sold all of the shares at much less than their face value. His claim for a deduction under sec. 52 of the loss was denied by the Board for reasons given by Mr. R.R. Gibson who said at pp. 248-249 -``The taxpayer's evidence shows that his idea of selling shares in B Ltd. as soon as he could after getting them was concerned only with the 600 shares which he received out of the first distribution and that his purpose of selling these shares was only formed when, by the passing of the resolution by which that dividend was declared, he acquired the right to receive them.... It appears to me that the crucial fact is that all of the taxpayer's shares in B Ltd were distributed to him in consequence of resolutions which were not within his control notwithstanding his status as a director and shareholder of the distributing company. In my opinion shares received in such circumstances cannot properly be said to be property acquired by the receipient for the purpose of profit-making by sale even if he formed that purpose immediately he became aware that the shares would be distributed to him by way of dividend.... The taxpayer did not get his shares in B Ltd. as the result of doing anything either in the exercise of his own will or in pursuance of a purpose of selling the shares after receiving them: he was merely the passive, though naturally not unwilling, recipient of shares distributed to him at the will and by the ordering of the directors of the distributing company.''
15. So here it seems to me that the taxpayer and his sister were merely passive recipients of rights bestowed on them at the will of Barrier to take up new shares on the terms and conditions announced by it. The rights could either be exercised, or renounced and transferred, or simply allowed to lapse with the effluxion of time. Having instructed a broker to sell the rights they had as transferors to sign Part 1 of Form A in the Third Schedule to the Marketable Securities Act 1967 (Security Renunciation and Transfer Form) stating: ``We hereby renounce and transfer the above Rights in favour of the transferee(s) named in Part 2 hereof or to the several transferee(s) named in Part 2 of the Broker's Renunciation and Transfer Forms relating to the above Rights.'' The purchaser's broker had to complete the prescribed Forms requesting that the new shares be allotted by the company to the transferee and the transferee had to complete the Form in the Fourth Schedule (which has to be completed by a transferee of rights to shares in respect to which there is an uncalled liability after payment of application moneys) agreeing to accept the shares to which the rights related subject to the terms and conditions on which they were offered for subscription and to become a member of the company and to be bound by the memorandum and articles on becoming the registered holder of the shares.
16. I cannot see how it can reasonably be said in the ordinary usage of language that by thus renouncing and transferring rights to new shares there has been ``property acquired'' by the vendor/shareholder. But even if I were to concede that point in favour of the Commissioner I would still think that it is wrong to say that the rights were property acquired ``for the purpose of profit-making by sale'' in light of such observations as those quoted from the cases I have cited. This conclusion, it may be noted, accords with the decision of Board No. 2 in
Case
F41
74 ATC 227
where it was held that the proceeds of a sale of rights in a new share issue by Murchison Central Mines were not caught under sec. 26(a).
17. The conclusion that the proceeds of the sale of rights in January 1970 are not within the terms of sec. 26(a) prompts me to consider whether the Commissioner has correctly applied the first limb of that provision in quantifying the ``profit arising'' from the sale of the 1,000 shares taken up in April 1969 in the 2 for 5 new issue (see para. 7). The rights in that issue could have been sold for around 40
¢
each and if they had been sold then on the conclusion reached by me in relation to the rights sold in 1970 the proceeds would not have been taxable. In light of observations in such cases as
F.C. of T.
v.
Becker
(1952) 87 C.L.R. 456
;
10 A.T.D. 77
and of the decision by
Kitto
J. in
Excutor, Trustee
&
Agency Co. of S.A. Ltd.
v.
F.C. of T. (Bristowe's case)
(1962) 12 A.T.D. 520
to the effect that in quantifying the ``profit arising'' one must deduct from the ultimate sum received the amount or value of all that in fact it has cost the recipient to get that ultimate sum, should the ``profit arising''
ATC 179
from the sale of the shares acquired in terms of the 1969 rights issue be reduced by the value of the rights that were then exercised?18. In Bristowe's case the taxpayer acquired 88,400 shares in Santos Ltd. during the three years ended 30 June 1955-1957 and he sold 87,100 of them in 158 transactions during the four years ended 30 June 1956-1959. Kitto J. held that the first 26,500 had not been acquired for the purpose of profit-making by sale, but he found to the contrary in respect of the remaining 61,900 shares. All but 2,800 of those 61,900 shares were acquired in rights issues made in 1956 and in 1957. As well as being a shareholder when those issues were made Bristowe was one of a syndicate to which Santos had by a deed dated 8 September 1954 granted options (a) of taking up at par shares in the company, not exceeding 200,000 in number, after 12 months from the date of the deed (the first option), and (b) of taking up at par such number of shares in any further issue or issues as should be equal to the number the syndicate would have been entitled to apply for therein if the first option had been totally exercised and the 200,000 shares allotted to the syndicate (the continuing option). In events that happened Bristowe's entitlement under the first option was to take up not more than 30,000 shares and his entitlement under the continuing option was geared to that figure of 30,000. It was found by Kitto J. that ``the options were capital assets in their hands'' (p. 523).
19. The Company Review of Santos Ltd. published by the Sydney Stock Exchange states that the first of the two new issues was on the basis of 1 for 1 held on 27 April 1956 and that, in addition, 200,000 shares were taken up by the optionees in accordance with the deed dated 8 September 1954; and that the second was on the basis of 1 for 2 held on 7 June 1957 and that, in addition, 100,000 shares were taken up by the optionees. With that background I have prepared from details given in his Honour's judgment the following table summarizing Bristowe's acquisitions and sales of Santos shares -
September 1954 Allotted 1,500 director's qualifying shares
November 1954
"
25,000 in name of lender's nominee
--------
26,500
Sold 20,200 ex allotments
--------
27 April 1956 On register 6,300
Allotted 6,300 1 for 1 N.I.
"
30,000 under continuing option
--------
42,600
Sold 10,800 ex allotments
Held at 30 June 1956 31,800
March/May 1957 Bought 2,800
--------
34,600
Sold 19,000 ex allotments
--------
7 June 1957 On register 15,600
Allotted 7,800 1 for 2 N.I.
"
15,000 under continuing option
--------
38,400
Sold 800 ex purchases
--------
Held at 30 June 1957 37,600
Sold 16,500 ex allotments
--------
21,100
Sold 2,000 ex purchases
Held at 30 June 1958 19,100
Sold 17,800 ex allotments
--------
Held at 30 June 1959 1,300
--------
ATC 180
20. It will be noticed that there is no mention of the syndicate members having exercised the first option. However, although it made no public issue, Santos did in 1959-1960 make an issue of 200,000 shares at par (Company Review). The probability is that that issue was in accordance with the first option as it is stated by his Honour (p. 525): ``In April 1959 he was still selling at prices over 25s. Then, with 1,300 Santos still in hand and 30,000 for which scrip had not issued, he ceased selling altogether. The scrip for 30,000 was issued to him in December, only a few days before he died'' on 26 December 1959.
21. At p. 527 his Honour stated his conclusions: ``In the result, I am of opinion that the assessments are excessive to the extent that they treat as assessable income profits arising from the sales of the first 26,500 shares, and that though they are correct in principle in treating as assessable income the profit arising from sales of the shares acquired in the two later issues they are excessive to the extent that they fail to recognize as part of the cost of acquisition of those shares the value of Bristowe's rights in respect of the new issues as at the respective dates of exercise.''
22. It seems unlikely that the 29,800 shares sold after 27 April 1956 and before 7 June 1957 did not include the 6,300 shares left at 27 April 1956 out of the 26,500 which had not been acquired for profit-making by sale. In any case the majority, if not all, of the 15,600 shares held at 7 June 1957 were shares which had been acquired for the purpose of profit-making by sale. Hence the rights exercised in taking up the 7,800 shares in the 1 for 2 new issue made in 1957 related mainly or wholly to shares acquired for profit-making by sale. Nevertheless, in terms of his Honour's conclusion, the value of those rights was to be recognized as part of the cost of acquisition of those 7,800 shares no less than was the value of his rights under the continuing option to the other 15,000 shares.
23. The decision of Kitto J. leaves no room to doubt that the Commissioner has wrongly calculated the ``profit arising'' on the sales in October 1969 and January 1970 of the 1,000 Barrier shares that were taken up in the 2 for 5 rights issue made in April 1969, in that he has not recognized as part of the cost of acquisition of those shares the value of the rights in respect of that new issue. I would, if the point was available to the taxpayer on a fair reading of the objection and notwithstanding that it was never adverted to at the hearing, be bound by Bristowe's case to reduce the profit of $1,192 (see para. 6) included in the assessable income by the value of the rights on 14 April 1969 when they were exercised. On the basis of information before us in an exhibit prepared by the Commissioner showing the ``high'' and ``low'' for the rights in April 1969 to have been 47 ¢ and 35 ¢ I would fix at $400 the value of the 1,000 rights that were exercised and reduce the ``profit arising'' accordingly. However, the letter of objection cannot be read as being wide enough to allow the point to be taken and so the action I would otherwise take cannot be taken.
24. I have opted to analyse
Bristowe's case
because it seemed to me not to be irrelevant in the context of this reference and because I have long thought that the decision has more far reaching implications than, perhaps, others have thought it has, What I said in paras. 47-54 of my reasons in
Case
E6,
73 ATC 24
must now be read subject to what I have here said as to the scope of
Bristowe's case
.
25. In the result I think that the assessment is excessive to the extent of the sum of $800 included in the taxpayer's assessable income, that amount being his one-half share of the proceeds of $1,600 from the sale of rights in January 1970. I would amend the assessment accordingly.
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