Case H29

Members:
JL Burke Ch
RE O'Neill M
CF Fairleigh QC

Tribunal:
No. 1 Board of Review

Decision date: 16 July 1976.

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J.L. Burke (Chairman): The issue before the Board is whether the Commissioner has correctly brought to account under sec. 26(a) of the Income Tax Assessment Act 1936 (as amended) the profit arising on the sales by the taxpayer during the year ended 30 June 1971 of shares and options allotted to her in three companies engaged in mineral exploration. The companies involved were International Mining Corporation N.L., Arcadia Minerals Ltd. and Talga Exploration Ltd., the shares in each case being of a par value of 10 cents each with a one cent negotiable option attached. Details of allotments and sales on which the total net profit ($7,986) was calculated are set out hereunder: -

                           INTERNATIONAL MINING

               ALLOTMENT                                    SALES

Date         Shares      Options       Date        Shares $         Options $

Jan. 1970    2,000        2,000      14.8.70      400 at 1.20

                                                  200 at 1.28

                                     17.8.70                        500 at 2.20

                                     20.8.70    1,000 at 2.50     1,000 at 2.65

                                                                           2.60

                                                                           2.20

                                     16.9.70      300 at 2.30

                                    20.10.70      200 at 2.85



                                   ARCADIA MINERALS



Feb. 1970   1,000         1,000     10.12.70      500 at 20c      1,000 at 11c



                                  TALGA EXPLORATION



Sep. 1970   1,000         1,000      17.2.71    1,000 at 8c

                                     19.2.71    1,000 at 4c
    

(The said profit of $7,986 was calculated by reference to cost and selling prices as supplied to the Commissioner by the taxpayer. However evidence before the Board indicates that the 1,000 options in Arcadia Minerals acquired on allotment were sold on 23 June 1970 for a net $283.31 and on 26 June 1970 1,000 options in the same stock were purchased on the market for $225. The inference is that it was the secondly acquired parcel of options which was sold on 10 December 1970. Accepting this to be the position and from information appearing in a broker's statement tendered in evidence the net profit to be taken into account for the year ended 30 June 1971 is $7,529. As to other transactions in the year ended 30 June 1970 see para. 5 infra. )

2. The taxpayer at the time of issue of the above shares was employed by the broker who underwrote them and had been so employed since early 1969. Her written submission to the Commissioner was that the shares in the three companies were taken up for long term investment for eventual dividend yield and she repeated this contention before the Board so far as shares in International Mining and Arcadia Minerals are concerned but modified it with regard to Talga Exploration scrip. For reasons set out in the following paragraphs I am unable to hold that the taxpayer has discharged the onus thrown upon her by sec. 190(b) of the Assessment Act of proving the assessment the subject of review to be excessive.

3. The three companies mentioned were incorporated for the purpose of mineral exploration and the prospectus of each (which was seen by the taxpayer prior to her

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subscribing) carried a warning as to the speculative nature of the issue. The taxpayer, working as she did in the office of a sharebroker handling such issues, must be credited with the knowledge that the prospect of profit by sale of shares in such companies was much more probable than a yield by way of dividends.

4. There are special reasons why the taxpayer, in the employ of the sharebroker who underwrote the stock in question, should be credited with an acute consciousness of the profit-by-sale potential of the speculative shares which came her way through her employment. Firstly the shares (10 ¢ with a 1 ¢ option attached) in International Mining and Arcadia Minerals were issued in the period of the boom in mineral shares which followed hard on the heels of the announcement by Poseidon of the nickel strike at Windarra in late September 1969. Secondly the shares in International Mining the sales of which provided the bulk of the profit in dispute were offered to the taxpayer by her employer as a ``non-cash'' bonus. The obvious expectation of employer and employee that the shares would come on at a substantial premium was justified, the closing sales on the day of listing (16 January 1970) being shares 83 cents, options 60 cents.

5. The taxpayer sold 200 shares in International Mining on 19 January 1970 for $146.45 and 200 on 22 January 1970 for $126.87. She also sold 500 shares in Arcadia Minerals for $97.70 on 7 April 1970 (listed on 5 March 1970). When, in cross-examination, her attention was drawn to these sales (made prior to the commencement of the year of income under review) the taxpayer said it was fairly common practice to cover the cost of shares. Later on in evidence she said that the sales were made because she was having ``financial difficulties on and off''. The practice to which the taxpayer referred of ``covering your cost'' applied, of course, in the case of speculative shares which, achieving the speculator's hopes, came on at a premium of over 100%. Cost having been covered the holder was then in the fortunate position of being able to exercise his judgment as to when to sell off the remainder of his shares with no risk of losing his money.

6. Between October 1969 and January 1970 the taxpayer had purchased and sold shares and options in speculative mining companies, four sales being at a profit and one at a loss. Questioned as to these transactions the taxpayer admitted she was ``trading''.

7. It is, in my view, difficult to accept that the taxpayer ceased ``trading'' in January 1970 when she acquired shares in International Mining, the ``property'' then bought and subsequently sold being of exactly the same character as that in which the taxpayer admittedly ``traded''. And see below her concession with regard to the shares taken up in Talga Exploration in September 1970.

8. In a letter to the Deputy Commissioner of Taxation the taxpayer stated that for personal reasons she decided (some time after the acquisition of International Mining shares) to purchase a home for herself. As the shares in International Mining had risen out of all proportion and she ``no longer felt that they were a sound investment'' she decided to sell to be able to afford a larger deposit on the home. The shares in Arcadia and Talga, she told the Deputy Commissioner, were sold ``to pay legal expenses and stamp duty on the purchase of my property''.

9. In evidence before the Board the taxpayer said she started looking for a house in June 1970, paid the initial deposit in October 1970 and took possession in December 1970. If indeed the shares and options in International Mining were sold to provide the deposit for a house it is difficult to understand why the sales were spread over the period August to October 1970. On 12 August 1970 there was a spectacular rise in the price of the shares and options in International Mining following the announcement of a nickel strike (immediately before they were selling at 27 cents (shares) and 14 cents (options)) and over the period 14 August 1970 to 20 August 1970 the taxpayer sold the 1,600 shares which remained out of her original holding at prices ranging from $1.20 to $2.50 and 1,500 options at prices ranging from $2.50 to $2.65. The taxpayer said she became aware of the announcement and made the sales because she thought ``it (the price) was out of all proportion''. Asked why she held on to the options after 20 August 1970 the taxpayer said: ``I thought I would hold on to a few of the options and then the business with the house came up and I needed the money, I needed cash straight away.''

10. Following the announcement of a further nickel strike the shares and options in International Mining rose dramatically in late September with options changing hands at $5

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to $7 over a period through to 19 October 1975. Asked why she didn't take advantage of the price rise and sell the remaining 200 options the taxpayer said: ``I was not particularly looking to make money. Does that sound silly?'' Prices fell after 19 October 1975 and the taxpayer sold her remaining options on 20 October 1975 at $2.85 each.

11. Asked whether the shares in Talga had been taken up for long term holding the taxpayer said: ``I will not say that about Talga, no, because at the time we took them up I was in the process of selling International Mining... I think I may have been looking for a profit in that case.''

12. All of the above matters were put to the taxpayer in the witness box or emerged in the course of her evidence and constituted an attack, successful in my opinion, on her credibility. When I say that her credibility was successfully attacked I am not to be taken as finding that she set out to deliberately mislead the Board when she consistently averred her intention of long term holding of the shares in question. What has probably happened in this as in many other similar cases is that in a process of rationalization the taxpayer has substituted for her real intention at the time of purchase a reconstructed and self-serving intention. In other words reconstruction has been substituted for recollection.

13. On a consideration of the evidence in the reference and drawing such inferences as are warranted from the objective facts I would hold that the taxpayer has failed to discharge the onus cast upon her by sec. 190(b) of the Assessment Act. Accordingly subject to a direction to the Commissioner to amend the assessment under review by reducing the sec. 26(a) profit from $7,986 to $7,529 I would uphold the Commissioner's decision on the objection.