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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J.L. Burke (Chairman): The taxpayer's income tax return for the year ended 30 June disclosed inter alia income from an ``investment'' partnership with his sister. The income of the partnership came mainly from rents of a block of flats (sold during the said year of income) and prior to 1970 there had been modest dividends from industrial shares. In the 1970 return lodged on behalf of the partnership a ``share trading'' loss of $154 was claimed as per a statement attached thereto and signed by the taxpayer. The statement is headed ``Share Trading'' and carried the following particulars of dealings in shares of twenty companies engaged in mineral exploration. (The names of the companies in abbreviated form are as set out in the statement.)

Company                          Shares                   Profit     Loss

                                         Sale

                          No.   Cost   Proceeds



Associated Continental

N.L.                    2,000  $1,063   $  821              -       $ 242

Pioneer Mines             700     403      434           $   31        -

Barrier Exploration     3,500   1,304*

Barrier Exploration

Rights                  2,100      -     6,797            5,493        -

Sedimentary Uranium     2,000     200    1,172              972        -

Omega                   3,000     521    1,060              539        -

Endeavour               2,000     409      703              294        -

Hawkstone               2,000   1,316    1,733              417        -

Endurance                 500     337      302               -         35

Eastern Copper          3,000   2,146    2,759              613        -

Stellar                 3,000   2,299    1,875              -         424

Narla                   5,000   2,524    2,577               53        -

Offshore               10,000   1,022    1,173              151        -

Lamadee                15,000  10,118    3,401            3,283        -

Minefields              5,000   2,913    3,712              799        -

Halls Peak              5,000   3,066    3,193              127        -

Abaleen                 5,000   3,832    4,099              267        -

North Deborah           1,000   3,465    1,923              -       1,542

Hastings               10,000   3,475    3,908              433        -

Tasminex                  200   5,212    5,617              405        -

Mid-East                2,500   8,688    2,394              -       6,294

                                                       ----------  --------

                                                        $13,877    $8,537



* In error for $1,429

                                                        Net Profit $5,340
    

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ATC 173

2. In calculating the net loss of $154 disclosed in the return the profit on the sale of Barrier Exploration shares and rights $5,493.63 was deducted from the figure of $5,340 with the following explanation: ``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.''

3. The return carried a further statement signed by the taxpayer headed ``Shares on Hand, 30th June, 1970 (Purchased for Speculation)'' setting out details of the partnership's holdings of seventeen parcels of shares in mineral exploration companies - cost value $21,380.

4. The Commissioner declined to accept the description of ``Capital gain'' accorded by the partnership to the profit on the sale of shares and rights in Barrier Exploration N.L. and included the amount of $5,494 in his calculation of the net income of the partnership. The taxpayer objected against the consequential adjustment to his taxable income and the letter of objection written by his accountants contains the following paragraphs -

``With regards to the sale of shares in Barrier Exploration we have discussed this matter with (taxpayer), in fact it was discussed at length on a number of occasions prior to and during the preparation of the partnership return, and he maintains the shares were originally purchased as an investment. His view is supported to some extent because the shares were purchased in 1967/68, and rights issued in respect of them in 1968/69, and at this time (taxpayer) held investments with such Companies as Anthony Hordern, Producers Distributing Society, Wormalds Ltd., Taubmans Industries, Plastic Sheeting Ltd. and he insists that Barrier Exploration shares were to form part of his investment portfolio.

The shares were purchased on advice from a relative in Sydney who considered them to be a good investment. (Taxpayer) 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 (taxpayer) to become interested in the share market, particularly as he and his partner already owned the shares now in question. They were sold of course because their value was inflated during the boom and any person would have been foolhardy not to have sold them in similar circumstances.

(Taxpayer) and his partner subsequently has 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.''

5. The transactions of the partnership in Barrier shares and rights are detailed hereunder -

         Purchases              Number                             Cost



         2. 2.1968              1,000                              $  194

        10. 4.1968              Call of 10c a share                   100

        23. 4.1968                500                                 207

        14. 5.1968              1,000                                 828

        14. 4.1969              1,000 (2 for 5 issue)                 100

                                                                  ---------

                                                                   $1,429

         Sales



         7.10.1969              1,400                              $2,413

         5. 1.1970                100                                 146

         8. 1.1970              2,000                               2,638

         8. 1.1970              2,100 (Rights - 1 for 1)            1,600

                                                                  --------

                                                                   $6,797
      

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ATC 174

6. The taxpayer is a partner in a fruit packing business in a country area some distance from Sydney. He is aged 72 and of Italian origin. In evaluating his evidence I have made allowance for his age and the difficulty he experienced in expressing himself in English in the witness box. His partner-sister did not give evidence and it is clear that he managed the funds of the ``investment'' partnership.

7. The taxpayer was represented by counsel before the Board and, shortly stated, the case for the non-application of sec. 26(a) to the profit on the Barrier shares and rights is, as it was put in opening, that ``the shares in question were purchased without any fixed ideas at all as to their ultimate disposition''. In contrast with the ``investment'' purpose which was advanced on behalf of the taxpayer in the letter of objection (para. 4 supra ) the taxpayer said, in chief, in response to the question ``What did you intend to do with the shares after you bought them?'' ``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.''

8. The following evidence was given in chief as to the reasons which prompted the sale of the Barrier shares -

``Do you remember that these shares were later on sold by you? - Yes.

What made you sell them? - Again I cannot say why I sell, but I sold them.

...

When you sold the shares, did you make up your own mind to sell them or did anybody make any recommendations to you? - No, I always make up my own mind.''

9. In answer to a question from a member of the Board ``Did anyone advise you to sell?'' the taxpayer replied ``No, I do not think anybody advised me to sell. This Mr. X advise me, but on the selling I sold probably because I was a bit scarce of money and I sell.''

10. The taxpayer said that most of the speculative type shares which he acquired on behalf of the partnership from February 1968 onwards were purchased on the advice of an Italian import and export agent (Mr. X) with whom he was friendly: ``What he used to say is it is a good share and if you want to put a few bob in, and I buy.''

11. The taxpayer's attempt to isolate the Barrier transaction from other speculative dealings is faced with considerable difficulty. On 2 February 1968, the day on which he purchased the first parcel of shares in Barrier, he purchased shares in Pioneer Mines (also, he says, on the advice of his friend) and the profit arising on the sale of Pioneer is acknowledged by him as a trading profit (see table para. 1 supra ); in April 1968 well before the ``Poseidon'' boom of October 1969 he purchased shares in Exoil and Transoil and included them in the signed list of ``speculation'' shares on hand at 30 June 1970; in June 1968 he purchased shares in Associated Continental N.L. and treated the loss on sale as a trading loss in the 1970 statement (see para. 1 supra ); in signed statements attached to the partnership's returns for 1971 and 1972 the taxpayer claimed losses on sales of speculative shares amounting to $2,597 and $4,585 respectively and again listed his mineral shares on hand with the description ``purchased for speculation''. In cross-examination the taxpayer said that he understood speculation to mean buying and selling for profit.

12. Although it is true that the bulk of the taxpayer's dealings in speculative shares took place after September 1969 that fact, in the light of the documentary evidence, does little to persuade me that shares in one particular mining exploration company acquired before that date were purchased other than for resale at a profit.

13. On a review of the evidence, oral and documentary, I would hold that the taxpayer has failed to discharge the burden of establishing that the shares in Barrier were not acquired for the purpose of resale at a profit.

14. There remains the question of the assessability of amounts totalling $1,600 received by the partnership on the sale of 2,100 rights to shares in Barrier on 8 January 1970. In a recent case, Case F41,
74 ATC 227 , Board No. 2 dealt directly with the application of the first limb of sec. 26(a) to a sale of rights. The following is extracted from the joint judgment of the majority, Messrs. A.M. Donovan (Chairman) and G.R. Thompson (Member) (at p. 230), with whom Mr. R.K. Todd concurred -

``The question of the profit made by the taxpayer on the sale of the Murchison rights is in a different category.

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ATC 175

We accept the evidence of the taxpayer that at the time when he acquired the Murchison shares he had no inkling of a prospective issue of rights. He purchased the shares in October 1969, and the rights issue was announced about three months later. He did not avail himself of the right to take up further shares on a one for one basis, but instead he sold the rights. To sustain an assessment of the profit that he derived from that sale under sec. 26(a), it is necessary to find that he acquired the rights that he sold for the purpose of resale at a profit or that the acquisition of the shares from which the rights grew was part of a profit making undertaking or scheme.

The difficulty confronting the Commissioner lies in the fact that in this case, as in most cases, shareholders of Murchison played a completely passive role in the acquisition of the rights. The taxpayer did not have to exercise his mind in any way to acquire rights. They simply came to him because he was a shareholder. Certainly he could have renounced them after he had acquired them, but that is not the point. If he had exercised his right to take up the shares offered it may have been possible to spell out some purpose of acquisition of such shares, but he did not do so. This appears to us to be one of the unusual cases where no purpose of any kind can be spelt out, and unless an acquisition of property is as a result of an affirmative profit making purpose an assessment under sec. 26(a) of profit gained as a result of such acquisition simply cannot be sustained.

The taxpayer must succeed on this part of his objection.''

(For a similar expression of opinion see per the then Chairman of this Board, Mr. R.R. Gibson, in Case 25,
14 C.T.B.R. (O.S.) 243 at pp. 248, 249.)

15. Respectfully adopting the above as a correct statement of principle and as the evidence clearly points against the taxpayer having any thought of a ``rights'' issue when the partnership acquired the shares in Barrier, I would exclude the said amount of $1,600 from the calculation of the net income of the partnership and to that extent would uphold the taxpayer's claim. The assessment under review should be appropriately amended.