Case H35

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

Court:
No. 1 Board of Review

Judgment date: 31 August 1976.

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J.L. Burke (Chairman): The taxpayer in this reference lodged a return for the year ended 30 June 1971 in which he disclosed salary received from the firm of stockbrokers by whom he was employed as a scrip manager during the said year. An attachment to the return listed a series of share transactions resulting in a net loss of $2,253.37 which was claimed as a deduction. In addition, a loss of $5,000 was claimed in respect of a private company, M Pty. Ltd., with the narration ``Share investment and trading company entire share capital and assets of $34,000 have been lost as at 30.6.1971''.

2. The assessment for the said year of income was accompanied by an adjustment sheet notifying the disallowance of the loss of $2,253 on the sale of shares ``in view of non-payment to brokers as at 30 June 1971'' and also the loss on the shares in M Pty. Ltd. ``considered to be of a capital nature''.

3. By letter dated 18 April 1972 the firm of accountants which had signed the tax agent's certificate on the taxpayer's 1971 return lodged an objection against the two disallowed items claiming that the losses incurred in buying and selling shares in public companies were allowable under sec. 52 of the Income Tax Assessment Act 1936 (as amended). As to the shares in M Pty. Ltd. the following ground of objection was taken:

``Shares in M Pty. Ltd. valued at $5,000 were sold for consideration of $1 in June, 1971. The intention of this company was to buy and sell share options also listed shares, and ultimately float the proprietary vehicle into a public company. Accordingly, it was intended to sell the shareholding initially valued at $5,000 at a profit, once the company was listed on the Sydney Stock Exchange. However, the financial climate prevented listing from becoming a reality and the loss incurred is claimed under sec. 52 of the Commonwealth Income Tax Assessment Act, 1936 as amended, as one derived whilst carrying on a business or trading with the intention of making a profit as prescribed in sec. 26(a) of the Commonwealth Income Tax Assessment Act, 1936 as amended.''

4. The objection having been disallowed, the taxpayer's then agents by letter dated 22 March 1973 expressed dissatisfaction with the Deputy Commissioner's decision on the objection and requested that the decision be referred to a Board of Review for review.

5. On or about 9 July 1973 the taxpayer in company with his father, who was a member of the firm of accountants referred to in para. 3 and 4 of these reasons, attended at the Department in connexion with the outstanding request for reference to a Board. Subsequently a letter dated 11 July 1973 on the letterhead of the said firm was addressed to the Deputy Commissioner of Taxation, Sydney, in the following terms: -

``Following the meeting held on Monday 9 July, 1973 with Mr.... of the Appeals Section, the taxpayer advises that he wishes to withdraw his appeal to the Board of Review on the matter of him having the claim for loss incurred on sale of shares in M Pty. Ltd. disallowed as a deduction.''

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There followed a letter from the said firm dated 13 July 1973 as under: -

``Following the meeting held on Monday 9 July, 1973 with Mr.... of the Appeals Section, the taxpayer advises that he wishes to withdraw his appeal to the Board of Review.''

6. By notice of amended assessment dated 21 March 1974 the Deputy Commissioner added to the taxable income as previously assessed an amount of $1,702 (the loss of $2,253 on share trading was converted to a profit by excluding from the transactions losses totalling $3,955 in the name of the taxpayer's fiancee). The said amended assessment was objected to by the chartered accountant to whom the taxpayer had transferred his business but the objection has not yet been determined by the Deputy Commissioner.

7. In the course of the letter dated 16 May 1974 which covered the objection the accountant wrote: -

``I have taken over the taxation affairs of (taxpayer) within the last three weeks and so am not aware of much of the previous discussion between the taxpayer and the department.

In a letter to the department on 11 July, 1973 following a discussion with your appeals section the taxpayer withdrew his appeal to the Board of Review in respect of the year ended 30th June, 1971, on the matter of the taxpayer having the claim for loss incurred on sale of shares in M Pty. Limited. However, there is still an appeal outstanding in respect of the losses on sale of shares other than M Pty. Limited. Would you please advise what stage this appeal has reached and whether a time for hearing by the Board of Review has been arranged.''

8. The following is an extract from the accountant's subsequent letter dated 10 September 1974 to the Deputy Commissioner: -

``(Taxpayer) was aware of the letter dated 11th July, 1973 forwarded to your offices by his former Tax Agents which withdraws the Objection to the extent of the loss incurred on the sale of shares in M Pty. Limited.

However, after receiving Counsel advice I cannot find a provision in the Income Tax Assessment Act, 1936, as amended, which gives effect to the withdrawal of the Objection dated 11th July, 1973. It would appear from my researches that a taxpayer is not entitled to withdraw an Objection once it has been lodged but that such Objection could only be withdrawn by the Board of Review itself. If this is the case then my client wishes the total Objection, both in respect of the loss on sale of shares in public companies and the loss on sale of shares in M Pty. Limited, to be heard by the Board of Review. Accordingly, would you please advise the estimated date of hearing before the said Board.''

9. In apparent compliance with the taxpayer's formal request dated 22 March 1973 for reference to a Board of Review of the decision on the objection dated 18 April 1972 the Commissioner under cover of letter dated 3 March 1975 formally referred the matter to the Board in the following terms:

``I hereby refer to the Board of Review for review the decision upon the taxpayer's objection to the assessment for the abovementioned year of income. Copies of relevant documents are enclosed.''

Accompanying the reference was the formal statement required to be furnished to the Board in accordance with Income Tax Regulation 35(1), the said statement incorporating the following as the Commissioner's reasons for disallowing the taxpayer's claims:

``(i) The loss of $5,000 incurred by the taxpayer in the year of income ended 30 June 1971 upon the sale of shares in M Pty. Ltd. is not an allowable deduction under the provisions of sec. 52 of the Income Tax Assessment Act 1936-1971 in that the shares were not purchased for the purpose of profit-making by sale nor did the loss arise from the carrying on or carrying out of a profit-making undertaking or scheme.

(ii) The net loss of $2,253 claimed as arising from the sale of shares and options in companies other than M Pty. Ltd. is not allowable as a deduction to the taxpayer pursuant to the provisions of sec. 52 of the above Act in that it was a loss not incurred by him but by another person.''

10. When the matter came on for hearing the Commissioner's representative submitted that the reference in so far as it related to the loss on the sale of shares in M Pty. Ltd. was not properly before the Board in view of the tax agent's letter of 11 July 1973. He did not

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however claim that the letter of 13 July 1973 had effectively withdrawn the reference in toto and was prepared to have the Board adjudicate on issue (ii) above.

11. At the hearing the taxpayer, having been duly sworn, declared that the letters of 11 and 13 July 1973 had been written without his authority. The Commissioner for his part did not call the tax agent who had prepared and signed the said letters to rebut the evidence given by the taxpayer. Section 188(1) of the Assessment Act states that if a request for reference to a Board has been made pursuant to sec. 187 the Commissioner shall refer the decision to a Board in accordance with the request. The matter having been referred to the Board by the Commissioner in compliance with the statutory duty cast upon him by sec. 188, and the taxpayer having sworn that the letters of withdrawal were written without his authority, the Board at the hearing gave an oral ruling that it was properly seized of the reference and proceeded to take evidence on the matters of substance raised by the taxpayer's objection.

12. After evidence had been taken the taxpayer's representative formally withdrew the objection in so far as it related to the loss of $2,253 on share trading.

13. I turn now to the loss on the shares in M Pty. Ltd. During the period of his employment as a scrip manager the taxpayer, with the approval of his principal, undertook extensive share trading on his own account and additionally, in the period of the mineral boom, commenced underwriting put and call options. This aspect of the taxpayer's share dealing went so well financially that he and a friend, F, discussed entering into the option dealing business in a bigger way. A group of people was approached and $30,000 was the sum agreed upon as the amount to be contributed by way of capital to a company to be formed as the vehicle for the proposed operation.

14. M Pty. Ltd. was incorporated on 16 February 1970 with an authorized capital of $10,000 divided into 1,000 ``A'' shares, 1,000 ``B'' shares and 8,000 ordinary shares of $1 each. It was provided in the Articles that the ``A'' shares in the capital of the company would confer on the holders thereof 26 per centum of the votes at all general meetings of the company plus the right to appoint and remove one director of the company. There was a similar provision with regard to the ``B'' shares.

15. On incorporation the taxpayer was allotted one ``B'' share and F was allotted one ``A'' share. Although the taxpayer said in evidence that he believed that he was a director of the company no record of his appointment as such was tendered to the Board and his name does not appear on the return of directors filed with the Commissioner for Corporate Affairs.

16. The day to day affairs of the company in the matter of option trading were in the hands of the taxpayer who, from time to time, conferred with F before entering into a particular underwriting transaction. It is clear however that the taxpayer was not in a position of control.

17. The balance sheet of the company as at 30 June 1970 discloses subscribed capital of $2 and a liability of $34,167 being loans at call. The documentary evidence is against the taxpayer's evidence that the company at no time operated on loan moneys; an unsigned directors' minute records that it was not until 27 November 1970 that 5,798 ordinary shares of $1 each (including 999 to the taxpayer) be issued at a premium of $4 per share.

18. Because of the falling share market the company did not prosper. It recorded a loss of $618 to 30 June 1970 and $35,207 to 30 June 1971. On 8 June 1971 the taxpayer transferred his 1,000 shares to a private company for $1 giving rise to the loss which is now claimed as a deduction.

19. In evidence the taxpayer spoke thus of the aspirations of the group when the decision was taken to commit $30,000 to the venture: -

``After three months time that $30,000 might be worth $40,000 or $45,000, whatever the amount is. We hoped that if the market kept on going the way it was, after three months we would do the same with that money and so on. It was not necessarily a three months option. It might have been for one month, six months, two months or whatever; it was up to our decision. The decision was mainly mine because of my involvement in the shares and I was on the market all the time and we hoped after 12 months that if everything went all right we might even float the company or sell our shares but we actually had not made a decision. We talked about what could be done and this is basically what happened.''

``... in twelve months time we were thinking of doing it in a big way if the future looked

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rosy, either by floating the company and making it a public company, or bringing in more people or selling our shares in M. We virtually discussed it. We did not make any final decision on it but this is what we were looking at. Unfortunately the market did not continue the way we hoped.''

20. Section 52 is complementary to sec. 26(a) and provides that: -

``Any loss incurred by the taxpayer in the year of income upon the sale of any property or from the carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction:''

21. The taxpayer's agent acknowledges that the evidence does not establish that the shares in M Pty. Ltd. were acquired for the dominant purpose of profit-making by sale. He puts his case on the footing that what was here involved was the carrying on or carrying out by the taxpayer of a profit-making undertaking or scheme which in the events that happened resulted in a loss of the moneys subscribed to the venture, such loss being allowable in terms of sec. 52 of the Assessment Act.

22. It is questionable whether the subscription of share capital to a company simpliciter could, in any circumstances, be regarded as initiating a profit-making undertaking or scheme within the meaning of that expression as used in sec. 26(a) of the Assessment Act. But, even if it could, the vague aspirations which the taxpayer had for M Pty. Ltd. and for the capital which he had subscribed thereto and which was beyond his absolute control do not add up to a ``scheme'' for the purposes of the section. I am accordingly unable to hold that the loss incurred by the taxpayer is allowable under sec. 52 of the Assessment Act. The Commissioner's decision on the objection should be upheld.