CASE 1/94
Members:BH Pascoe SM
Tribunal:
Administrative Appeals Tribunal
BH Pascoe (Senior Member)
This is an application for review of the decision by the Commissioner of Taxation to disallow an objection lodged by the applicant against an assessment of income tax in respect of the year ended 30 June 1990.
2. The applicant had lodged his return of income for the year ended 30 June 1990 in November 1991. A notice of assessment issued on 19 December 1991, assessing taxable income as shown in the return lodged. On 25 November 1992 the applicant lodged with the Commissioner a notice of objection to the assessment. The objection was accompanied by an application under section 188(1) of the Income Tax Assessment Act 1936, as amended (``the Act'') requesting the Commissioner to treat the objection as having been duly lodged.
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Although no decision in writing and in accordance with section 188A appeared to have been given on this application, the Commissioner appears to have accepted the application by advising the applicant by letter dated 22 January 1993 that the objection had been considered and disallowed in full. Mr Murphy, counsel for the Commissioner conceded that there was no issue which would arise regarding the late lodgement of the objection.3. The core question in this application is whether the applicant is entitled to have shares in a mining company regarded as trading stock and valued at market value pursuant to section 31 of the Act.
4. The evidence showed that the applicant acquired 1,435,342 partly paid shares in ``B Mining Ltd'' in May 1989 at a cost of $287,068.40. Options to take up a further 1,435,342 shares were acquired at the same time for no cost. In October 1989 the applicant exercised the options by paying 25 cents per share at a total cost of $358,835.50. As a result he owned, at 30 June 1990, 2,870,684 shares at a cost of $645,903.90. In August 1990 he paid a further 15 cents per share on the partly paid shares involving expenditure of a further $215,301.30. No particular reference to the shareholding was made in the return of income for the year ended 30 June 1990 but, given the minimal information required under the self- assessment regime then in force, it would not be expected. The return of income for the year ended 30 June 1989 included a ``balance sheet'' which, under the heading ``Investments'', listed ``Shares B Mining Ltd - $287,069''.
5. The notice of objection of 25 November 1992 stated:
``I claim that the assessment is erroneous, capricious, arbitrary in that it failed to:
- (a) allow a deduction for the purchase of Trading Stock being shares in B Mining Ltd amounting to $645,904 pursuant to section 51(1) of the Act;
- (b) include as assessable income the amount of $229,655 being the value of stock on hand at the 30th June 1990 under the provisions of section 28, 29 and 31 of the Act.''
The notice further described the $229,655 as the market selling value of the stock and that this value had been adopted pursuant to section 31 of the Act. It also stated that the taxpayer is carrying on a business of trading in land and shares and that the shares referred to form part of the assets of this business.
6. The notice of objection was accompanied by two other letters of the same date. One was the application for extension of time for lodgement of the objection which set out some comments relating to the preparation of the relevant return, a change of tax agent and a realisation that the previous tax agent had erred in the calculation of taxable income shown in the return lodged. The other letter provided additional facts relating to the purchase of the shares and a brief history of the applicant's dealings in real estate.
7. In his evidence before the Tribunal the applicant stated that his occupation is estate agent, builder and developer. The first of these was the occupation shown on his income tax returns. Over a period of some 15 or 16 years he had dealt with a Mr ``R'' in various joint ventures involved in buying, developing and selling land. Most of these appeared to have been conducted in the name of ``O'' Pty Ltd, although the applicant was extremely vague about the legal structure of the joint ventures. He explained the lack of knowledge in the terms of ``R had a job to look after the finance, look after the legal work and my part of it was to get out and buy and sell it and make the money. That was my job''. In balance sheets for 30 June 1989 and 1990 the largest asset was ``Equity in Joint Venture - `O' Pty Ltd'' and included under the general heading of investments.
8. From the somewhat vague details provided by the applicant in his evidence, the evidence of his accountant and tax agent, who prepared and lodged the relevant income tax return, and the evidence of ``R'', it is clear that the applicant acquired the shares in question on the recommendation of R. R was a director of B Mining Ltd and, in May 1989, was in a position to acquire rights to a new issue which another shareholder and director did not wish to take up. He suggested that he and the applicant should take them up between them. The mining company was about to commence drilling a shaft and the expectation was that the share price would increase. The funds for the purchase of the shares came from the joint venture. In his evidence the accountant, stated that he had obtained the details of the purchase
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of the relevant shares from the accounts of the joint venture where the purchase price had been debited to the applicant's loan account in the joint venture.9. The applicant stated that he first became aware of a possible deduction for a revaluation of shares as trading stock after reading an article in the newspaper and then seeking advice from a Sydney accountant from whom he and his joint venture partner occasionally sought advice. It was put to him by counsel for the respondent that the idea for the claim only arose after action was commenced by the respondent to recover some $600,000 payable on the assessment issued in December 1991. Here there was some conflict between the evidence of the applicant and that of his accountant. The applicant denied any memory of receiving an assessment for such an amount or having been told that such an amount was owing. On the other hand, the evidence of the accountant was that the notice of assessment was sent direct by the respondent to the applicant at his home address. Subsequently, the applicant sent a copy by fax to the accountant, it was discussed over the telephone and the applicant had been annoyed about it.
10. It was submitted on behalf of the respondent that the objection lodged by the applicant was defective and did not properly draw the attention of the respondent to the issues being put to the Tribunal by Mr Flynn on behalf of the applicant. It was further submitted that the option available under section 31 of the Act was exercised in the return lodged and a different option to value trading stock at market value cannot be exercised by later objection. These submissions were additional to the basic submission that the applicant was not carrying on a business of trading in shares and that section 31 of the Act was not applicable.
11. It is appropriate to deal with this core question first. If the respondent is found to be correct in his view, then it is unnecessary to consider the subsidiary submissions. It is relevant to point out that the only reason given by the respondent in his letter disallowing the objection was stated as:
``It is considered that you are not conducting a business as a sharetrader and are therefore ineligible to value shares held under the trading stock provisions of the Income Tax Assessment Act.''
12. It was conceded by the respondent, correctly in my view, that shares can be trading stock. (
Investment & Merchant Finance Corporation Ltd v FC of T 71 ATC 4140; (1971) 125 CLR 249.) The question to be resolved in this case, however, is whether these particular shares were trading stock of this applicant. To answer that question, it is necessary to decide whether the applicant was engaged in trading in shares or engaged in a business of share trading. In a decision of the Full High Court in
John v FC of T 89 ATC 4101; (1989) 166 CLR 417 and in a joint judgment of Mason CJ, Wilson, Dawson, Toohey and Gaudron JJ it was said (at ATC page 4107; CLR pages 429 and 430):
``The Act defines `trading stock' in sec. 6(1) as including `anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock'. The definition looks to the nature of goods that may constitute trading stock and posits that they will constitute trading stock if acquired for any of the specified purposes, including sale. It presupposes that the person by whom they are produced, manufactured, acquired or purchased is or will be engaged in trade in those goods. But it does not render an inquiry into whether or not the person is or will be engaged in that trade irrelevant. A single transaction does not render a person a trader, although, of course, a single transaction may constitute an adventure in the nature of trade. Nor, we think, is a single item acquired for the purpose of manufacture, sale or exchange an item of trading stock, unless the purchaser is or will be engaged in trading goods of that nature. Thus it is relevant to inquire whether the person who acquires an item claimed to be trading stock is a trader in the sense that he is engaged or will be engaged in trading goods of the nature of the item acquired. It is for this reason that it is pertinent to inquire whether Malindi was a share trader or, as was put in argument, was engaged in the business of a share trader. For the purposes of the present case the terms may be used interchangeably, but that will not always be so. A person may be a trader notwithstanding that his business is described in more general terms. So much is implicit in the definition of `trading stock'.
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A person's business may be that of manufacturer or producer yet he may be a trader in the goods manufactured or produced. Thus the relevant issue is not the nature of the business carried on, but rather whether the person is a trader in the goods which are claimed to be trading stock.Whether or not a person is a trader seems to us to be a question of fact, albeit that in some cases the determination of that fact may depend on questions of impression and degree. If trading has not commenced or if there is no discernible trading pattern, the question of intention or purpose may be relevant in the sense that if there is an absence of intention or purpose to engage in trade regularly, routinely or systematically then the person may well not be a trader. A fortiori if some contrary or inconsistent intention or purpose is present. But if trading has commenced and the activities reveal a discernible trading pattern, then it seems to us that the motive for undertaking the activities or for undertaking a particular transaction cannot serve to characterize the person engaging in those activities as a non- trader, or as a non-trader in relation to a particular transaction.''
13. Section 28 of the Act contains provisions designed to bring into assessable income of a taxpayer, or to provide an allowable deduction, an amount equal to the difference between the value of trading stock on hand at the beginning of the year of income and at the end of the year of income. Section 31 provides that the value of each article of trading stock (not being livestock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced. Section 28 commences with the words ``where the taxpayer carries on any business''.
14. In balance sheets of the applicant for the years ended 30 June 1989, 1990 and 1992 produced in evidence, there appeared investments in four other companies in addition to B Mining Ltd. The amounts invested were relatively small. In the income tax return for the year ended 30 June 1989 a profit on sale of investments of $869 was shown and for the year ended 30 June 1990 a loss on sale of shares of $3922 was claimed. No details of the transactions involved in the calculation of these two amounts were provided in evidence. When asked by his counsel about other share transactions, the applicant was somewhat vague as the following extract from the transcript shows:
``Were there any other share transactions before B Mining? - I think they would have been very small at that stage, because I was mainly then sort of going again and sort of - I was concentrating on what I knew best, was developing land.
What about after B Mining? Did you buy shares after that time? - I don't think so, no. I can't really-
On the document in front of you there are some other companies noted. Do you recognise any of these names? - Yes, you've got Corporate Data Service and Pro Image and they were sort of - R would ring up occasionally and said, look, I've spent 20,000 on shares, you're half in it. I don't think any of them turned out any good.
Where did the money come from? - Used to come out of the joint venture funds of - that were going out of the land developing operation.''
15. The evidence provided by R was not of great assistance other than to confirm that there had been some share transactions over the years and that the applicant's involvement was solely at the instigation of R. The evidence of both the applicant and R confirmed that no outside advice was sought. Whilst accepting the applicant's evidence that the shares in B Mining Ltd were purchased for resale and the dominant motive was profit-making by sale, there was no evidence of any regular, routine or systematic trading in shares. The purchase of any of the shares, including those in B Mining Ltd, appeared to have been made on a very spasmodic basis, in most instances as a somewhat passive participant with his associate in joint venture land development projects, and with no indication of any businesslike approach. The words used by Stephen J in his decision in
A.C. Williams v FC of T 72 ATC 4157; (1972) 128 CLR 645 are appropriate to this case where he said (at ATC page 4168; CLR page 656):
``Those speculations were, I think, viewed by him as, and indeed had the character of, individual forays in particular stocks which he bought with a view to resale. To regard such shares as trading stock to which might
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appropriately be applied the provisions of secs. 28 to 31 is to give both them and the whole of the taxpayer's speculative activities a colour which they never bore.''
16. Mr Flynn sought to rely on the decision of the High Court in the case of
Blockey v FC of T (1923) 31 CLR 503. This was a decision on a case stated by Knox CJ for the opinion of the Full Court and involved profits from a joint venture undertaken by the appellant and two other persons to buy wheat scrip for the sole purpose of reselling such scrip. It was decided under the Income Tax Assessment Act 1915-1921 and was solely concerned with whether the profit on purchases and sales over a period of less than four months was taxable. The Court had no hesitation in deciding that the profit was taxable but was then concerned with whether it was ``income from personal exertion'' or ``income from property''. Such distinction was particularly relevant at that time given the then differing rates of tax applicable to the two forms of income. The learned Judges were concerned with answering the specific questions asked in the case stated and were not required to consider whether the wheat scrip constituted trading stock. My attention was drawn to the comment by Isaacs J (at page 508), where he said:
``The all-important fact is that there were a series of transactions connected by a common purpose, that of dealing in wheat scrip, and consisting of all the characteristic operations found in a business of that nature, buying and selling; the scrip itself being treated, not as an investment, but as stock- in-trade, a mere medium for successfully carrying through the profit-making scheme.''
17. Mr Flynn sought further support from the decision in
FC of T v St. Hubert's Island Pty. Ltd. 78 ATC 4104; (1978) 138 CLR 210. The respondent taxpayer in this case had purchased two small islands on the north coast of New South Wales with a view to carrying out necessary development works to enable the land to be subdivided and residential blocks sold. After substantial work had been done, but there remained significant additional work required before development permission would be available, the company was placed into liquidation and the land distributed in specie to the then sole shareholder. The question to be resolved was whether the transfer by the liquidator was a disposal of trading stock to which section 36(1) of the Act applied. My attention was drawn to the comments of Jacobs J who was among the majority who found that the land was trading stock. His Honour, after finding that the acquisition of the land was an isolated or ``one-off'' transaction, said (at ATC page 4118; CLR page 236):
``The purchase in a one-off transaction of land or of a commodity which is personal property in bulk with the intention of reselling it in bulk is not of itself the commencement of a business of trading in that land or that commodity and neither the land nor the commodity is trading stock of a business. The concept of trading in this connection involves at least repeated acts of selling, and the business of trading cannot be commenced unless at least there are intended to be repeated acts of selling.''
Mr Flynn argued that the question of dollars involved and the number of shares acquired in B Mining Ltd meant that it was always likely that the shares would be sold through a series of transactions and in fact were sold by a number of transactions between July 1991 and April 1992. He submitted also that the shares were acquired through a series of transactions. This latter point is not accepted as it appeared clear that there was one decision to acquire a parcel of shares and options for an amount of money with an expectation or obligation of making two further payments. I am unable to see that the decision in the case of St Hubert's Island (supra) provides any real assistance to the applicant. The basic findings of the majority were that the company had commenced a business and that the land acquired was, in this sense, the raw material which would be converted by substantial expenditure into developed residential blocks. As Jacobs J said in the next sentence after that to which my attention was drawn and quoted above (again at ATC page 4118; CLR pages 236-237):
``Again, the purchase in a one-off transaction of land or of a commodity in bulk with the intention of breaking down the bulk at some indefinite time in the future and of selling in broken down parcels does not appear to me to be the commencement of a business of trading in that land or that commodity, and the land or commodity cannot be regarded as the trading stock of a business of trading in that land or
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commodity. There is not then that continuity of activity which characterises a business.''
18. Having come to the view that the applicant was not carrying on a business of share trading and that the shares in B Mining Ltd were not trading stock at 30 June 1990 so that the provisions of sections 28 to 31 of the Act did not apply, it is unnecessary to deal with the respondent's submissions in relation to alleged defects in the notice of objection and whether the applicant had exercised his option under section 31 of the Act in his return of income and which could not be changed by later objection.
19. The objection decision under review is affirmed.
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