Nixon v. Federal Commissioner of Taxation.

Hunt J

Supreme Court of New South Wales

Judgment date: Judgment handed down 26 July 1979.

Hunt J.: This is an appeal from Taxation Board of Review No. 1, instituted by the taxpayer against that Board's decision to uphold the decision of the Commissioner of Taxation disallowing his objection against an amended assessment in respect of his income during the year ended 30 June 1970.

The assessment and the appeal relate to a profit of $26,747 gained by the taxpayer on shares he held in Tasminex N.L. which the Commissioner included within his amended assessment as a profit arising from the sale by him of property acquired by him for the purpose of profit-making by sale: Income Tax Assessment Act 1936, sec. 26(a).

The taxpayer's case is that, prior to December 1969, he was anxious to obtain what he described as a ``grass roots'' opportunity to invest in an Australian mining company, one which he believed was not merely speculative but which actually had mineral deposits in the ground.

The shares were purchased by the taxpayer following a conversation between his niece (who had an interest in geology) and a geologist she had met casually, by whom she was informed that he had just come from the Tasminex field or had just seen a recent assay report from that field and from whom she received the advice to put money into that company. Miss Draper, the niece, recalled the advice as having been based on a statement that Tasminex company ``will go up like Poseidon''.

Miss Draper related this conversation to her uncle (although he has no recollection of any reference of Poseidon). The taxpayer, armed with what he believed to be inside information, telephoned his broker as soon as possible, on 24 December, and placed an order for 2,100 shares, for which he paid $3.55 a share. He says that he did not at that stage have any intention to resell them, believing that his investment was in a company which actually had mineral deposits in the ground.

The taxpayer in fact sold 1,000 of his holding on 29 January 1970. The shares had, two days earlier, started to rise steeply in price (hitting a high the previous day of $90 a share) and then to fall, following a well publicised dispute between the company and its consulting geologists as to the value of the company's prospects.

The taxpayer says that he sold the shares because the dispute cast doubt upon the belief he had held when he purchased them that Tasminex actually had mineral deposits in the ground. He says that he was initially undecided as to whether he should sell all or only a part of his holding and decided, in effect, to cover himself by selling approximately half. He received a price of $31 a share, and it is in relation to his profit on that resale that the appeal arises.

Before the Board of Review, the taxpayer gave evidence, but did not call his niece. The Commissioner relied to a large extent upon a

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letter written on behalf of the taxpayer by a taxation consultant which asserted a number of matters concerning the purchase and sale of the shares in question which were contrary to the taxpayer's evidence. That taxation consultant was not called to explain how the letter came to be written.

Based upon the evidence which was given, the Board of Review upheld the Commissioner's decision to include the profit on the sale of the shares within the taxpayer's assessble income.

Mr. Harrowell came to the conclusion (78 ATC 462, para. 21) that ``it was obvious that the taxpayer was convinced in his own mind'' that his reason for purchasing the shares was ``as a long term investment''. He went on to say, however, that ``section 190(b) places the onus on him to also convince others''. In his view, the taxpayer had not discharged that onus of proof (para. 23).

Mr. Fairleigh Q.C., in his reasons (78 ATC 462, para. 24) acknowledged that the taxpayer was influenced in his decision to purchase the shares in Tasminex because of his belief that the company ``had passed the point of being a mere exploration company and was one with proven mineral resources''. He also accepted that the taxpayer was ``convinced of the absence at all material times of any idea of profit-making by sale'', although his acceptance of this conviction is limited to a conviction in the taxpayer ``at the time of giving evidence''. Mr. Fairleigh went on to say that he was not himself convinced, nor did he find the taxpayer's denial of such an intention ``acceptable as recollection or re-presentation''. He posed as the ``crucial'' question ``whether the taxpayer's statement as to purpose is acceptable on the civil standard as in Briginshaw v. Briginshaw'', when regard was had to the absence of corroboration, the failure to call the niece or the taxation consultant and what was seen as the out-of-character nature of the transaction.

The Chairman, Mr. Stevens, agreed with the conclusion of each of his colleagues and found it unnecessary to give additional reasons of his own for that conclusion.

Before an appeal lies to this Court from the decision of the Board of Review, that decision must be found to involve a question of law: Income Tax Assessment Act 1936, sec. 196(1). The Commissioner argued that no such question of law was involved in this case.

The taxpayer submitted, firstly, that in every case involving sec. 26(a) of the Act, a question of law arises as to the proper construction to be placed on that section in relation to the facts of that particular case. Reliance was placed upon
F.C. of T. v. Miller (1946) 73 C.L.R. 93, at p. 97, and upon
Hayes v. F.C. of T. (1956) 96 C.L.R. 47, at p. 51.

Such a submission was rejected in
Lombardo v. F.C. of T. 78 ATC 4621; however, the submission itself was considered to be a point of law and to be one of sufficient importance as to warrant the grant of leave to appeal to the Federal Court: 79 ATC 4079. That appeal has not yet been determined.

The point is not an easy one and, in the view which I have formed as to the taxpayer's second submission, it is unnecessary for me to decide it myself.

The second submission is that, simply, a mere reading of the reasons given by the two members of the Board who expressed them, and in particular those given by Mr. Fairleigh (with whose conclusion the Chairman agreed), demonstrates that the Board's decision involves at least a question of law, if not several.

I accept this submission. Mr. Fairleigh's reasons quote from or cite over 30 reported decisions. They do so in many cases not just for the purpose of attributing a source to the statement of principle which he intended to apply to the facts, but often they are quoted or cited for the purpose of arguing that principles relied upon by the taxpayer were either irrelevant or, in at least one case, based upon an incorrect decision.

Both Mr. Fairleigh and Mr. Harrowell found, as I have said, that the taxpayer was genuinely convinced - at least at the time he gave his evidence, according to Mr. Fairleigh - that he had no thought of resale at a profit when he purchased the shares. Both, however, inferred from various matters that, despite that evidence which they accepted, such an intention existed at the time of the purchase. The matters relied upon by those

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two members to draw that inference depended to a large degree upon the principles discussed by Mr. Fairleigh.

How can it be said that a question of law was not involved in this decision? In this Court, the Commissioner was driven to the submission that most of Mr. Fairleigh's stated reasons for his decision were either irrelevant to that decision or unnecessary for its purposes. In my view, that is neither a permissible nor an acceptable approach in this case. The reasons given by Mr. Fairleigh (with whose conclusion the Chairman agreed) demonstrate that in his decision a number of very real questions of law were involved and not only colourably so: for example, as to whether evidence of the taxpayer's other share transactions was relevant to a determination of his intention to purchase these particular shares and the weight to be afforded that evidence; as to whether the decisions at first instance and on the first appeal in
, 4544McCormack v. F.C. of T. 77 ATC 4141, 4544, were correct; and as to whether the purpose of a payment becomes an attribute of a transaction rather than a state of mind in some actual person (see para. 20).

In addition, the taxpayer argued that the Board (and Mr. Fairleigh in particular) had misdirected itself upon the first and third of these examples (the second having been resolved in any event in the High Court: 79 ATC 4111 at p. 4115). It is unnecessary, in my view, to go this far. Whether correctly directed or not, it is clear that the directions themselves involved questions of law, and those questions themselves need not be resolved for the purpose of determining whether this Court has jurisdiction.

I am satisfied that a question of law was involved in the Board of Review's decision. This Court therefore has jurisdiction, and in those circumstances the whole decision of the Board is open to review:
Ruhamah Property Co. Ltd. v. F.C. of T. (1928) 41 C.L.R. 148.

The material before the Board was tendered before me. The taxpayer gave evidence himself, and on this occasion so did his niece and his taxation consultant. I accept the evidence of all three.

The taxpayer remained convinced in his own mind that he did not acquire the Tasminex shares for the purpose of profit-making by sale. As was the Board of Review, I was invited by the Commissioner to infer that such an intention nevertheless existed at the time of the purchase because of a number of inferences open on the evidence which, it was submitted, suggested that existence. In the alternative, I was invited to hold that the taxpayer had not discharged his onus of proving that such an intention had not existed. Of course, two of the substantial mainstays upon which the Board relied have now been removed, in that both the niece and tax consultant gave evidence - the one substantially confirming the taxpayer's evidence and the other explaining the conflict between his letter and the taxpayer's evidence.

The Commissioner did not really tread any new ground in his submissions. Emphasis was placed upon the out-of-character nature of the transaction, which was also said to be out of proportion to the taxpayer's investments at the time.

When examined in the light of all the evidence (and in particular that of the taxpayer's financial position at the time, in Exhibit B), however, the Tasminex transaction was not so far out of proportion as the Board thought. I am unimpressed with arguments, based mainly on hindsight, that what investors did in those heady days of Poseidon and the mining boom generally was so out-of-character as to warrant disbelief in their evidence.

In my view, the taxpayer's other transactions are of more assistance in determining his intention than the Board was prepared to allow. It is a very familiar principle of the general law of evidence that subsequent behaviour may be regarded in order to indicate motives or animus, or state of mind generally, that existed at an earlier time:
Herald & Weekly Times Ltd. v. McGregor (1928) 41 C.L.R. 254 at p. 265.

Despite subsequent huge increases in price, the taxpayer has not sold any of his B.H.P. shares. Nor did he claim a loss in relation to the loss he suffered on the sale of shares he had purchased in VAM, this loss occurring before the Commissioner had made his amended assessment in this case. Moreover, he subsequently took up his issue entitlement

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in Tasminex, again before the issue of the Commissioner's amended assessment.

I accept that a person's sworn testimony as to his intention in these circumstances must be tested closely. I also accept that the taxpayer bears the onus of proving that the assessment is excessive: sec. 190(b), as explained by the High Court in McCormack v. F.C. of T. 79 ATC 4111. But I gained the distinct impression that both the Commissioner and the Board of Review had in this case overlooked the circumstance that the degree of satisfaction for which the civil standard of proof calls may vary according to the gravity of the fact to be proved.
Rejfek v. McElroy (1965) 112 C.L.R. 517 at p. 521.

Juries in civil cases every day are directed by reference to a pair of scales in which the evidence and the arguments of the plaintiff are placed on the one side and on the other are placed the evidence and arguments of the defendant. The juries are told that if the plaintiff succeeds, in their estimation, in weighing down those scales ever so slightly in his favour then he has discharged the onus of proving to their reasonable satisfaction that whatever he asserts is more probably correct than not. I do not see why a similar degree of proof is not applicable where the taxpayer is obliged to establish the absence of a particular intention in purchasing shares.

Yet the approach of the Board of Review to the discharge of the taxpayer's onus in this case (and presumably that of the Commissioner also) appears to have placed a weight upon the taxpayer similar to that placed upon Atlas, who carried the whole weight of the heavens as well as the globe of the earth upon his shoulders.

I am satisfied by the evidence of the taxpayer and of his witnesses, viewed against the background of the evidence as a whole, and taking into account all the matters urged by the Commissioner, that he did not acquire the Tasminex shares for the purpose of profit-making by sale.

It follows that the profit of $26,747 gained by the taxpayer on the sale of his Tasminex shares was wrongly included by the Commissioner in his amended assessment in respect of the taxpayer's income during the year ended 30 June 1970.

I uphold the taxpayer's appeal. I order the Commissioner to pay the taxpayer's costs.

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