Case E24

Judges: FE Dubout Ch
G Thompson M

N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 5 July 1973.

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N. Dempsey (Member): This taxpayer, a professional businessman engaged in business on his own account, in his return for the year ended 30 June 1970, enclosed a schedule showing that during the year he had sold shares in six different companies. Four of the sales were made in November 1969 and the shares were acquired in 1962, 1964 and 1965. Two of the transactions resulted in losses of $72 and $165 respectively and two in profits of $98 and $72 respectively. The fifth transaction was in respect of shares acquired in 1966 and sold between December 1969 and March 1970 at a loss of $233. The five companies concerned would come under the category of commercial or industrial concerns.

2. The sixth sale was of shares in Poseidon. In October 1969, he purchased 100 shares in this company for $3,700 and these shares were sold in January 1970 for $21,267 net to return a profit of $17,567.

3. In his return for the relevant year, taxpayer furnished a statement indicating his reasons for purchasing these shares and the thinking that influenced him in selling at the time he did. He claimed that the profit was not assessable.

4. The Commissioner in raising his assessment disregarded the transactions in the five commercial and industrial companies but included the profit of the sale of the Poseidon shares. Taxpayer objected against this action and his objection having been disallowed he has appealed to the Board. The Commissioner defends his assessment on the ground that the profit is correctly assessable pursuant to the provisions of sec. 26(a) of the Income Tax Assessment Act 1936-1970.

5. Taxpayer gave evidence in detail in relation to his share transactions which commenced with gifts to him from his father of rights to take up shares whilst he was still at the University studying for his degree which he gained in 1959. He exercised these rights and paid for the shares from his own funds.

6. His oral evidence was supported by detailed schedules of all shares acquired and sold up to 30 June 1970 and details of the shares he still owned at 30 June 1970.

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Evidence was also given by his father, a retired school teacher and the sharebroker whose firm had handled the whole of the transactions of the father, his wife and their son, this taxpayer.

7. In my opinion the taxpayer, his father and the sharebroker were each reliable witnesses and I find no conflict in their evidence and consider that it should be accepted.

8. The evidence of the son was that his father, to encourage him to save and to invest prudently had made him the gifts of shares already mentioned. He purchased a business in a country town in July / August 1961, married about this time and took up residence in the town. He was then aged 23 years.

9. Bearing in mind the advice given by his father and aware of how his father had improved his financial position by wise investment largely based on the advice of the stockbroker already referred to, he placed himself virtually in the hands of this broker As he accumulated funds which he did not require to finance his business he would contact his broker either by phone or when he visited the nearby capital city and would discuss with his broker the amount the desired to invest and virtually accept the recommendation of his broker as to what shares to buy.

10. That the advice given to him and acted on was very sound is evidenced by the fact that at 24 March 1970 his portfolio of shares had a market value of $162,700. The cash cost to him was $44,370 but this does not include a substantial gift of right to 1873 shares in Western Mining Corporation received in 1968.

11. Over the period from his first acquisition and up to the end of March 1970, sales of shares in only 20 companies had been made and most of these sales were readily explained and were sales of shares which were not showing a dividend return or alternatively growth, and in fact at times losses were sustained to re-invest in a better stock.

12. Shares (apart from the transaction in dispute and which I will deal with fully later) were always acquired in commercial, industrial or established mining enterprises which were well established and which were showing a good return. This followed the pattern established by the father and followed meticulously by both him and later the wife when she became possessed of funds from the sale of a property which she desired to invest.

13. At the time of the hearing the father had a portfolio of shares in six companies, the cost of which was $13,643 and the market value $157,178, and he had banked a cash surplus from the sale of part of one holding and had reinvested the balance in a leading mining company. The wife had a portfolio of shares in thirteen companies costing $37,291 with a market value of $74,817. In addition she had sold for $17,751 certain leading shares, which no doubt returned a substantial profit, and gifted the proceeds to the son, this taxpayer, to enable him to buy a larger business in the city and set himself up there.

14. It is thus quite clear that the father, then the son and finally the mother have benefited in a very substantial way from accepting the advice and guidance of their sharebroker, which undoubtedly has been at all times to keep away from shares of a speculative nature.

15. I now propose to deal with the particular transaction which is in issue in this reference. This is the purchase and sale of the shares in Poseidon which resulted in a profit of $17,567.

16. As has been stated supra as taxpayer accumulated funds which he did not require to finance his business, he would contact his broker either by phone or by a direct visit and arrange to invest these funds. This occurred at regular times up until May 1969 at which date he purchased a further 300 shares in B.H.P.

17. His evidence, which has been corroborated by his broker, is that on Monday, 27 October 1969, he phoned his broker's firm, spoke to the member with whom he dealt with the intention of making an appointment for the following Thursday afternoon. A general discussion with a little by play took place and in the conversation he said to the broker, ``What is with these

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Poseidon Shares?'' His broker indicated that he considered they were probably just a well promoted stock at the moment, and that they were not the type of share for him, the taxpayer. He considered they were of a gambler's type of share.

18. On the following Thursday he called at the office of his broker at 2 p.m. to keep the appointment he had made. His broker was not available when he arrived and whilst waiting for him to arrive another member of the firm, with whom he had had a few transactions early in his association with the firm, came out of his office and a discussion on market aspects took place.

19. This second member of the firm was very enthusiastic about the market in general and told him of a luncheon the three partners of the firm had attended that day at which, from information there given to them, they had been convinced that Poseidon had a strong ore body under the ground. This member indicated that he and his partners were so convinced that they were then advising to buy the shares. Taxpayer was surprised because of what his broker had said on the previous Monday and remarked that he thought his informant must be joking.

20. The partner he usually dealt with then arrived and they entered his office. The information given him earlier by the other partner was confirmed and comparisons were made between the prospects of Poseidon and another mining company which had already been somewhat of a bonanza over a long period for taxpayer and his family.

21. He maintains the broker advised him to buy 100 shares. This was somewhat unusual as normally he would advise the broker as to the extent of the funds he desired to invest and it was then decided what shares would be acquired. Having made this recommendation, the broker then asked taxpayer if he held any shares in Consolidated Goldfields of Australia and on being advised that he did not, he suggested that he should invest in this company also.

22. Taxpayer mentioned that he had a lot of small holdings in various companies and the broker advised selling these and calculations were made from his records of the holdings and what they would realise. Apart from the sale of these shares he had roughly $4,000 available to invest. From the calculations it was decided to buy 100 Poseidon and 200 Consolidated Goldfields and this was carried out. The shares sold realised $1,618 which added to $4,000 gives $5,618, whilst the cost of the 100 Poseidon and 200 Consolidated Goldfields was $5,578.

23. About this time or shortly after, taxpayer was investigating business in the capital city with a view to selling his business and moving to the city. He had discussions with his bankers in relation to finance and indicated what his shareholdings were. He subsequently learned that Poseidon was a no liability company and as such was not regarded as suitable security by bankers against which funds would be advanced.

24. It is well known that the shares in Poseidon rose in price fantastically and naturally taxpayer was aware of this. He claims that realising that the shares would not be regarded as good security to borrow against, and uneasy about the way the price of them was escalating during the first week in January 1970, he rang his broker and sought his advice as to what should be done. That he should do so is readily understandable, bearing in mind that due to the advice of his broker his portfolio of shares had enhanced in value considerably.

25. He states that his broker intimated that he thought the shares would probably rise further but if he was concerned about the situation he would recommend that he sell as he, the broker, considered that at the ruling price the shares were grossly over priced. His reaction to this advice was to ask in what way the proceeds should be reinvested and the broker advised the purchase of shares in Mt. Lyell, a company in which he did not already own shares, some more shares in B.H.P. and some Hamersley, and this advice was followed.

26. After the sale of the Poseidon shares he continued negotiations to buy the city business and a city home obtaining a bank overdraft secured by his country home and his wife's shares. The shares held by the wife at that time were valued at $32,000, they had been acquired on advice from his broker, and

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again were in what is commonly referred to as ``blue chip'' companies.

27. His broker, whilst conceding that he could not recall in detail due to the lapse of time his exact conversations with taxpayer, nevertheless confirms the circumstances relating to the purchase of the shares and that he advised him to sell when he did because he considered the shares were considerably overpriced. He stated that he felt sure taxpayer would not have bought the shares if he had not advised him to do so.

28. It is against this background that the Board has to decide whether the dominant purpose the taxpayer had in buying the shares was to sell them at a profit.

29. Naturally the onus of proof lies on the taxpayer, sec. 190(2)(b), and in cases of this type it is difficult to discharge. The guide which is usually followed is to make a close scrutiny of the activities of the taxpayer in the particular field involved, see
Western Gold Mines N.L. v. F.C. of T. (W.A.) 59 C.L.R. 729 . Further as was said in the case of
Pascoe v. F.C. of T. 11 A.T.D. 108 , the best evidence is that of the taxpayer but for obvious reasons such evidence must be received with caution and closely tested.

30. Having seen the taxpayer, his father and his sharebroker in the witness box and the manner in which each of these persons gave their evidence, I cannot but feel that his explanation of the transaction should be accepted.

31. The Commissioner has not been able to show, and indeed appears to concede that all other share transactions were purely for investment purposes. Whilst the very nature of this share suggests it could only be for speculation purposes, to so decide in this case would be to go against the weight of evidence adduced.

32. If the taxpayer had a history of dealing in speculative shares or if this were an isolated purchase by a person with no prior history of investing in shares, one might find it difficult to accept that such a share could be acquired as an investment.

33. However the circumstances of this case are vastly different and are such that I consider the explanation given by the taxpayer and supported by his broker should be accepted.

34. I would therefore uphold the objection and direct that the assessment be amended to delete the amount of $17,567 profit on the sale of Poseidon shares included therein.

Claim allowed