Case H29

Judges: JL Burke Ch
RE O'Neill M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 16 July 1976.

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C.F. Fairleigh Q.C. (Member): By an amended assessment the Commissioner adjusted the income as returned by the taxpayer for the year ended 30 June 1971 by including profits of $7,986 (as calculated by him) made on the sale of shares and options. The taxpayer objected thereto on the ground that these were acquired for a long term investment and there was no intention to trade or deal and that due to a change in her domestic and financial situation she was forced to sell the same to finance the purchase of a home. The Commissioner decided to disallow the objection and that decision was referred to a Board for review.

2. From 1 July 1970 (and for several months prior thereto) to 26 February 1971 the taxpayer was employed by a Sydney firm of stockbrokers and from 9 March 1971 to 27 May 1971 by another firm of stockbrokers. For the final two weeks of that financial year she had different employment. All the shares and options here in issue (International Mining Corporation N.L., Arcadia Minerals N.L. and Talga Exploration N.L.) were acquired by the taxpayer whilst she was employed by the first mentioned firm of stockbrokers and were all in exploration companies where the issue was underwritten by those brokers. In each instance the amount paid by the taxpayer was ten cents per share and one cent per option. There was a special feature in respect of shares and options in I.M.C. in that the employer made these available to employees as a ``non-cash bonus'' in lieu of making a bonus payment to the staff at the end of the calender year.

3. Particulars of all share transactions by the taxpayer both in preceding year and in the year in issue are as follows: -

• (i) 1,000 shares purchased in Company W 1/10/69 sold 2/10/69 at a profit

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• (ii) 1,000 shares purchased in Company X 10/10/69 sold 17/10/69 at a profit
• (iii) 500 shares purchased in Company X 29/10/69 sold 11/11/69 at a profit
• (iv) 1,000 shares purchased in Company Z 20/11/69 sold 26/11/69 and 4/12/69 at a loss
• (v) 500 shares purchased in Company Y 18/12/69 sold 5/1/70 at a profit

(These were all exploration companies.)

International Mining Corporation N.L.

• (A) 2,000 shares and 2,000 options allotted in January 1970
• (vi) 400 shares sold 19/1/70 and 22/1/70 at a profit (2 parcels of 200)
• (vii) 600 shares sold 14/8/70 at a profit (in 2 parcels)
• (viii) 1,000 shares sold 20/8/70 at a profit
• (ix) 500 options sold 17/8/70 at a profit
• (x) 1,000 options sold 20/8/70 at a profit (in 2 parcels)
• (xi) 300 options sold 16/9/70 at a profit
• (xii) 200 options sold 20/10/70 at a profit

Arcadia Minerals N.L.

• (B) 1,000 shares and 1,000 options allotted in February 1970
• (xiii) 500 shares sold 7/4/70 at a profit
• (xiv) 1,000 options sold 23/6/70 at a profit
• (xv) 1,000 options purchased 26/6/70
• (xvi) 500 shares sold 10/12/70 at a profit
• (xvii) 1,000 options sold 10/12/70 at a loss

Talga Exploration N.L.

• (C) 1,000 shares and 1,000 options allotted in September 1970
• (xviii) 1,000 shares sold 17/2/71 at a loss (overall a small profit)
• (xix) 1,000 options sold 19/2/71 at a profit (overall a small profit).

• (There was also a purchase of 2,000 options in Company E in partnership in an ``Investment Club'' on 23/10/69 and a sale thereof on 15/12/69 at a profit but this has no present materiality.)

The sales (i) to (vi) inclusive as well as the sales (xiii) and (xiv) all took place in the financial year preceding the one now in issue. The present reference is in respect of the sales (vii) to (xii) inclusive (I.M.C.), (xvi) and (xvii) (Arcadia), and (xviii) and (xix) (Talga).

4. The taxpayer did not include in her return of income for the year preceding the one now in issue any share transactions. After making inquiries and receiving information the Commissioner included in the assessable income of the taxpayer the result of the transactions (i) to (v) inclusive as set out in para. 3 hereof and also (vi) the sale of 400 I.M.C. shares and the sales of 500 Arcadia shares and 1,000 Arcadia options. (The Commissioner made a different identification of sales of Arcadia options than is shown herein.) The taxpayer did not lodge an objection thereto although in evidence she said in effect that her attitude was one of objection in respect of shares in I.M.C. and Arcadia but otherwise she conceded that in that year she was trading in shares.

5. In substance the taxpayer's case is that she applied for the shares in I.M.C. and in Arcadia with the belief that each company would be successful in exploration work and with the intention of holding the shares in expectation of receiving dividends in the course of time. Her statements in correspondence with the Commissioner and in the notice of objection make the same assertions in respect of shares applied for in Talga. Yet in evidence in chief she said that it was more likely that with Talga the purpose was profit-making by sale.

6. As on almost every occasion where the question is whether a profit arising from a transaction is of an income or capital nature, the Board has been referred to
Western Gold Mines N.L. v. C. of T. (W.A.) (1937-1938) 59 C.L.R. 729 at p. 740 where Dixon J. (as he then

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was) and Evatt J. in a joint judgment said: ``... it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities.'' Of course, in one sense, the survey by a Board or a Court of the taxpayer's activities is necessarily as wide or as narrow as counsel (or the parties) make it by the evidence adduced; furthermore, the scrutiny by a Board or a Court of the taxpayer's activities will only be upon the evidence before it and thus will be neither more nor less exact than in any civil (or criminal) proceeding. However that passage is not to be read as if it were a legislative enactment or a recital in an indenture. When the paragraph in which the passage appears is read as a whole it is apparent that their Honours were directing attention to the weight to be given by a Court (or a Board) to certain matters in evidence and to the legal construction which is to be put upon something that has been done - the intention which the law imputes, i.e., the inference which is to be drawn.

7. More recently in
Steinberg v. F.C. of T. 75 ATC 4221 and in
Gauci v. F.C. of T. 75 ATC 4257 the members of the High Court have expressed differences of opinion as to the basis which must exist before an inference should be drawn that property has been purchased for resale at a profit. As the circumstances which occasion the differences are not present in the instant case I see no need to pursue the problem in reaching a conclusion here. It is sufficient to cite Barwick C.J. in Steinberg's case at 75 ATC pp. 4226-4228 as there is nothing in the other judgments which runs counter to this principle: -

``No doubt the sale of the thing acquired reasonably soon after its acquisition would afford evidence that the thing was acquired for the purpose of resale in order to make a gain. That inference is made because of evidentiary value of the voluntary act of sale.''

``Reference is made in argument to such cases as
Pascoe v. F.C. of T. (1956) 30 A.L.J.R. 402 ; 11 A.T.D. 108 and
Jacob v. F.C. of T. 71 ATC 4192 ; (1971) 45 A.L.J.R. 568 where expressions as to onus of proof are to be found. But in those cases the acquired property had been sold after a brief interval of time from the date of acquisition. That fact clearly warranted a prima facie inference of the requisite purpose and did call for the displacement of that inference by the appellant taxpayer.''

8. Again in this case (as in almost every similar case) the Board has been referred to the judgment of Fullagar J. in Pascoe's case (supra) where he repeated the dictum of Cussen J. in
Cox v. Smail (1912) V.L.R. 274 at p. 283 that the oral evidence of purpose or state of mind in relation to the transaction in issue must ``be tested most closely and received with the greatest caution''. As such oral evidence is, in one sense, the ``best'' evidence it is ``received'', i.e. formally admitted, as of course and the ``testing'' of it is primarily the function of counsel in cross-examination. What Fullagar J. was directing attention to as a function of a Court or a Board is shown by his statements in the same and succeeding paragraphs to be the inferences to be drawn in the light of the circumstances disclosed by the evidence. There is no legislative policy to be deduced from sec. 190 that the oral evidence of purpose or state of mind is anything other than the ``best'' evidence.

9. The taxpayer conducted her own case at the hearing of the reference and there was a degree of nervousness which at times led her to assent to questions without appreciating the scope of the questions or the implications of her answers. Where this was obvious her attention was directed again to the questions so that she could reconsider her response.

10. In reference to her reason for selling shares here in issue she said that for a certain reason a deposit was paid on a house in October 1970, settlement took place in December 1970 and some further associated debts were paid early in 1971.

11. I cast no doubts upon the veracity of the taxpayer in saying in effect that it was her belief that the shares and options were not taken up in a speculative venture; and that in her belief Australia has mineral wealth which can readily be exploited by an exploration company so that she expected dividends would be paid by these companies. Once the belief of the taxpayer is accepted on such matters then for the purposes of the case each company has the character which she believes it has and it is irrelevant that by ``objective evidence'' it can be shown to be speculative, i.e. that allotment moneys are at risk in the search by the company for oil or minerals with shares certain to fall in value if the search is unsuccessful. Furthermore before her evidence on that or on any other point could be rejected on the ground of untruthfulness it would be necessary to

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comply with the directions of the House of Lords in
Browne v. Dunne (1894) 7 C. & P. 408 : -

• Lord Herschell L.C.: ``It seems to me to be absolutely essential to the proper conduct of a cause, where it is intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made.... I mean upon a point on which it is not otherwise perfectly clear that he has had full notice beforehand that there is an intention to impeach the credibility of the story which he is telling... (unless) the point upon which he is impeached... is... manifest.''
• Lord Halsbury: ``To my mind nothing would be more absolutely unjust than not to cross-examine witnesses upon evidence which they have given, so as to give them notice, and to give them an opportunity of explanation, and an opportunity very often to defend their own character, and not having given them such an opportunity, to ask the (tribunal) afterwards to disbelieve what they have said, although not one question has been directed either to their credit or to the accuracy of the facts they have deposed to...''

12. The representative of the Commissioner has brought home to the taxpayer in cross-examination inconsistencies within her present evidence particularly in respect of the sale of two parcels of I.M.C. shares within a few weeks of allotment notwithstanding the assertion that investment was the purpose in respect of the entirety; also, and most importantly, an inconsistency in asserting that all shares and options in I.M.C., Arcadia and Talga were taken up as an investment when now it is conceded that Talga shares and options (where shares were sold at a loss) were probably taken up with the purpose of profit-making by sale. These defects in her evidence, together with her admission of trading in shares in the preceding year, raise a considerable doubt whether the taxpayer is able in the first quarter of 1976 to say with any confidence that her purpose in January and February 1970 was any different from her purpose in the last quarter of 1969 and in September 1970 when she does not deny that she was acquiring shares with a view to sale at a profit. Accordingly I would find that the taxpayer has not discharged the onus which sec. 190 of the Act places upon her.

13. The evidence as to outlays and receipts by the taxpayer in respect of sales made in the year in issue is as follows: -

      (a)       International Mining

                Corporation N.L.

                Receipts            $7,773

                (approximately)       less

                outlays $180              =       $7,593



      (b)       Arcadia Minerals N.L.

                Receipts              $205

                (approximately)       less

                outlays $275              =    (loss $70)



      (c)       Talga Explorations N.L.

                Receipts $116

                (approximately) less

                outlays $110              =           $6

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                Total profit on sales             $7,529

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14. In my opinion the decision of the Commissioner on the objection was correct in principle. The Commissioner's representative conceded that gross and not net returns had been used to arrive at $7,986. The evidence as referred to in para. 13 hereof indicates that the assessment should be amended to include a profit of $7,529 on sales of shares and options rather than $7,986.

Claim disallowed