Devi and Commissioner of Taxation (Taxation)
[2016] AATA 67
•9 February 2016
Devi and Commissioner of Taxation (Taxation) [2016] AATA 67 (9 February 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2014/4297
Re
Neelam Devi
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms G Lazanas, Senior Member
Date 9 February 2016 Place Sydney The decision under review is affirmed.
..............................[sgd]..........................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION – income – whether applicant conducted a business of share trading – whether applicant entitled to deductions for losses – decision under review affirmed
LEGISLATION
Income Tax Assessment Act 1997 (Cth), ss 8-1, 70-35
CASES
AAT Case 6,297 (1990) 21 ATR 3747
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187
Re Hartley and Commissioner of Taxation [2013] AATA 601
Re Shields and Commissioner of Taxation (1999) 41 ATR 1042Re The Taxpayer and Commissioner of Taxation (2011) 84 ATR 659; [2011] AATA 545
REASONS FOR DECISION
Ms G Lazanas, Senior Member
9 February 2016
INTRODUCTION
Ms Neelam Devi is in dispute with the Commissioner of Taxation as to whether she is entitled to a deduction for losses incurred in the year ended 30 June 2011 in relation to share transactions. The resolution of the dispute depends on the determination of the issue of whether Ms Devi was carrying on business as a share trader or held shares as an investor.
I have decided that Ms Devi was not carrying on business as a share trader. Accordingly, Ms Devi is not entitled to a deduction pursuant to s 8-1(1) or s 70-35 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
THE FACTUAL BACKGROUND AND EVIDENCE
The following findings of fact are based primarily on the evidence of Ms Devi, including her oral evidence at the hearing (given with the assistance of an interpreter), a bundle of documents submitted to the Tribunal by Ms Devi on 5 March 2015 referred to as her ‘Case Statement’ (marked Exhibit A1), her submissions filed on 12 May 2015 (marked Exhibit A2) and a few payslips from the 2011 income year (marked Exhibit A3). I also took into account the ‘T-Documents’ filed and served by the Commissioner.
Ms Devi has been working in Australia in the child care sector as an early childhood educator from mid 2006. She has a Bachelor of Arts and a Bachelor of Education from the Kurukshetra University in India and also various other certificates from the New South Wales Technical and Further Education Commission (also known as TAFE), including for retail operations, computer applications, financial services and children’s services.
During the 2011 income year, Ms Devi worked as a casual employee with two different employers in the child care industry although I note that her 2011 income tax return showed three payers. Ms Devi explained that this was due to one of her employers having restructured during that year. Nothing turns on how many employers Ms Devi worked for. She worked an average of between 25 and 30 hours per week as a child care educator and earned approximately $40,000 in wages during the 2011 income year. Ms Devi acknowledged that her “work doesn’t involve share trading activities but [she] do[es] it purely to earn some money by buying and selling shares”.[1] She also acknowledged that as a casual worker, she wasn’t certain about how much work she would get, so the share trading was “some small business to supplement [her] income by utilising [her] spare time”.[2]
[1] T11-71 and Exhibit A1, page 19.
[2] Exhibit A1, page 1.
Ms Devi commenced trading shares in July 2010 utilising funds sourced from her and her husband’s savings of approximately $60,000 and a margin loan of initially $40,000. She used “CommSec” (a stockbroking firm operated by the Commonwealth Bank of Australia) for all her share transactions and had two accounts, one of which was linked to a margin loan.
Ms Devi purchased shares in banks and mining companies as well as some smaller companies. As at 30 June 2011, she held the following shares:
Description
Registered Units
Value
Alumina Limited FPO
2,500
$5,275.00
AWE Limited FPO
3,000
$3,825.00
BHP Billiton Limited FPO
150
$6,570.00
Fortescue Metals Grp FPO
1,000
$6,350.00
Gindalbie Metals Ltd FPO
10,000
$8,350.00
Newcrest Mining FPO
150
$5,656.50
Nexus Energy Limited FPO
27,000
$8,910.00
$44,936.50
During the 2011 income year, Ms Devi made:
(a)71 purchases to a value of $379,630.87
(b)37 sales to a value of $215,019.76.[3]
[3] T9-37 and Exhibit A1, page 1.
The bulk of the transactions took place in the first 6 months of the 2011 income year. There were only 10 transactions in the second half of the financial year totalling a value of approximately $70,000.
The gross dividends paid to Ms Devi in the 2011 income year were $4,384.65.
Ms Devi made a loss on her share transactions during the 2011 income year in the order of $20,000 and she is seeking to claim that as a deduction. She initially did not do so when she lodged her income tax return for the 2011 income year because she said she “did not have [any] idea of [the] difference between trading and investment and just relied upon [her] tax agent”.[4]
[4] Exhibit A1, page 1.
Ms Devi stated that her “plan was to make some profit every week and then raise this profit to a level where [she] could switch to this business full time”.[5] She said that her investment strategy involved “track[ing] the price of certain high quality shares and to buy them whenever it used to dip down a certain price range and sell it on a certain price”.[6] She said that she would check the share price history and read the reports of analysts on CommSec and financial newspapers and also watch “The Business” program on the ABC, before making purchases and sales. She would additionally discuss her strategy with her husband. She also said that the amount invested was based on her available funds.
[5] Exhibit A1, page 1.
[6] T9-36.
In response to the Commissioner’s request for information dated 17 April 2014, Ms Devi stated in a signed letter produced in or about May 2014 that she usually spent 5 to 10 hours on research and share trading per week.[7] Subsequently, in her Case Statement filed on 5 March 2015, Ms Devi stated that she spent 15 to 25 hours per week.[8] At the hearing, she maintained that the latter range of hours (15 to 25 hours) was correct and that her original answer of 5 to 10 hours was in reference to the 2014 income year and not the 2011 income year. I find it difficult to accept Ms Devi’s explanation as her written response contained specific information and attached documents relevant to the 2011 income year.
[7] T9-37.
[8] Exhibit A1, page 1.
Also troubling was Ms Devi’s oral evidence in relation to the existence of a written business plan. In response to the Commissioner’s request for information dated 17 April 2014 about whether Ms Devi had a business plan, Ms Devi had originally stated in or about May 2014 that “I have no written business plan but I am investing as an individual in a planned manner to earn some profit”.[9] Subsequently, in a letter to the Commissioner dated 2 October 2014, Ms Devi produced a single page document with the heading ‘Trading Business Plan’ which contained information under various headings including ‘Trading strategies’, ‘Budgeting’ and ‘Disaster plan’.[10] She said in the covering letter to the Commissioner that she “may not have given full details ... in the first place as I was not told the purpose of the information asked”.[11] At the hearing, she further explained that this business plan document had been prepared by her before she started her business of share trading but that she had not produced it in response to the Commissioner’s request because she had thought the Commissioner was asking for a plan prepared by her accountant or bank. I do not accept Ms Devi’s explanation about her misunderstanding regarding the requested business plan. I find that the written business plan document title ‘Trading Business Plan’ was prepared for this proceeding after the relevant income year, however, I consider that Ms Devi was undertaking share transactions according to a plan of some kind (probably in the head of Mr Devi) and that it was developed during the 2011 income year.
[9] T9-36
[10] Exhibit A1, page 29.
[11] Exhibit A1, page 28.
More significantly, Ms Devi’s oral evidence revealed that she knew very little about the share transactions that she claimed to have personally extensively researched and undertaken. Specifically, she was unable to provide any details of any reports and or recommendations of analysts, even in the broadest terms. She said that she could not recall any information because more than four years had passed. More critically, Ms Devi could not identify many of the companies in which she had invested, nor the industries in which they operated and their activities, notwithstanding counsel for the Commissioner prompted her with several questions about the Australian Stock Exchange (ASX) codes for those companies. She simply couldn’t recognise the companies. All that she could offer as an explanation was that she was no longer undertaking any share transactions and, therefore, could not recall what the ASX codes stood for. I do not accept that explanation.
I find that Ms Devi was not spending any considerable time on shares. Specifically, I do not accept that she spent between 15 to 25 hours per week on share trading or related activities. It was more likely in the vicinity of 5 hours on average per week, that is, as per her original, spontaneous answer to the Commissioner during the tax audit. This was evident from her lack of familiarity with her share investments. I also find that it is more likely that it was her husband who was knowledgeable about the share transactions and who was doing the stock market research. Furthermore, I find that Ms Devi either placed the share sell and buy orders (in reliance on her husband’s advice) or Ms Devi’s husband executed the share transactions on behalf of Ms Devi, using her CommSec accounts. These findings are not of themselves fatal to Ms Devi’s case as many persons in business rely on others for advice and also engage others, including agents, to perform work for them. However, these findings highlight that Ms Devi’s evidence was incomplete. Furthermore, I note that Ms Devi’s husband attended the hearing to assist his wife in the presentation of her case but chose not to give evidence. Against that factual background, I now turn to the law.
LEGISLATIVE FRAMEWORK
Section 8–1 of the ITAA 1997 relevantly provides that “[y]ou can deduct from your assessable income any loss or outgoing to the extent that... it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income”.
Section 70-35(1) of the ITAA 1997 also provides a deduction for trading stock (which is relevantly defined in s 70-10(1) to include anything acquired that is held for sale in the ordinary course of a business) by comparing the values of trading stock on hand at the start and end of an income year, but only if the taxpayer is carrying on a business.
Whether or not someone is engaged in carrying on business is a question of fact. The answer to that question depends on the impression gained from having regard to all the circumstances, and in doing so, no single factor is necessarily determinative (see Federal Commissioner of Taxation v Radnor Pty Ltd(1991) 102 ALR 187 at 202 per Hill J).
A particularly helpful summary of factors in the context of examining share trading activities was suggested by Deputy President Todd in AAT Case 6297 (1990) 21 ATR 3747 at 3755-6, as follows:
In deciding this issue the case law has established the following factors as generally relevant considerations:
(a) the nature of the activities and whether they have the purpose of profit-making;
(b) the complexity and magnitude of the undertaking;
(c) an intention to engage in trade regularly, routinely or systematically;
(d) operating in a business-like manner and the degree of sophistication involved;
(e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
(f) the volume of the taxpayer’s operations and the amount of capital employed by him;
and more particularly in respect of share traders:
(a) repetition and regularity in the buying and selling of shares;
(b) turnover;
(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;
(d) maintenance of an office;
(e) accounting for the share transactions on a gross receipts basis;
(f) whether the taxpayer is engaged in another full-time profession.
The decision of Deputy President Todd has been repeatedly cited with approval by the Tribunal as a convenient way of evaluating the factual circumstances of each case. See, for example, Re Shields and Commissioner of Taxation (1999) 41 ATR 1042 at 1047-8 and, more recently, Re Hartley and Commissioner of Taxation [2013] AATA 601 (Hartley).
WAS MS DEVI CARRYING ON A BUSINESS OF SHARE TRADING?
It is appropriate to answer this question by examining the factors laid out by Deputy President Todd in AAT Case 6,297, particularly as both parties directed their submissions to that analysis, as also recently applied by Deputy President Deutsch in Hartley. I consider the general factors first followed by the specific share trading factors.
(a) Nature of the activities and profit-making purpose
Ms Devi submitted that the sole purpose of her trading activities was to generate a profit. I am satisfied that Ms Devi had an intention to make a profit and that her activities were not a hobby.
However, her motivation for profit is consistent with both carrying on a business as a share trader and share investment and I consider that this factor is therefore neutral in the analysis. This is demonstrated by the fact that Ms Devi said that she took up share trading to fill in her spare time and to supplement her income from her casual child care work. That is to say, it was not the focus of Ms Devi’s attention in the 2011 income year. Rather, it was characterised by her as an activity on the side which she hoped would be profitable.
(b) Complexity and magnitude of the undertaking
Ms Devi undertook 108 transactions in the 2011 income year comprised of purchases valued at approximately $380,000 and sales of approximately $215,000, whereas her wages income was less than $40,000. She traded in 20 different companies, 14 of which were said to be ‘non-blue-chip’ companies. Ms Devi submitted that these transactions highlighted the complexity and magnitude of her activities. At the end of the 2011 income year, she held shares in seven companies with a value of approximately $45,000. She utilised CommSec’s paid subscription service which sets out detailed analytics, graphs and charts.
The Commissioner said that the companies she traded in were high profile, public companies and that the transactions were not complex but typical of an ordinary share investor. The Commissioner also pointed to the fact that Ms Devi did not demonstrate that she had any risk management strategies in place in the 2011 income year although Ms Devi did show that she had used stop orders to stem share losses – but, unhelpfully, in a later income year.
I agree with the Commissioner’s submission that there was nothing complex about these share transactions. However, I do not agree with the implication that a taxpayer who limits their activities to purchasing and selling ‘blue chip’ companies cannot be a share trader particularly where, as here, there was no evident intention on the part of Ms Devi to earn dividend income from the shares. However, in the present case, there were other considerations that influenced my analysis of this factor, namely, the fact that Ms Devi did not have any expertise in the share market and that her tertiary degrees and casual employment were completely unrelated to her share trading activities. Additionally, based on my finding that she was unlikely doing any share research herself but relying on her husband, I conclude that she was not actively involved in the share transactions. As noted at [16] above, Ms Devi spent very few hours per week on share transactions and related activities.
On the other hand, I consider that the magnitude of the transactions points in favour of Ms Devi carrying on business of share trading particularly as the total of sales and purchases in the 2011 income year was substantial compared to her wages.
This factor is, in my view, finely balanced having regard to these competing considerations.
(c) Intention to engage in trade regularly, routinely or systematically
Ms Devi said that she traded regularly and systematically. However, the evidence shows that the share trading was only relatively regular in the first six months of the 2011 income year in circumstances where Ms Devi only started in July 2010. It was significantly reduced and ad hoc in the second half of the year, when only 10 share transactions occurred and no explanation was provided for this change. Therefore, the share trading activities lacked regularity throughout the 2011 income year. The overall impression gained was that Ms Devi started by initially investing all the available funds and then slowed down for a considerable period of time and took a passive approach.
Even though I found that Ms Devi was unlikely doing the research and analysis of shares, I consider that she executed on the advice and trading strategy of her husband which involved, as stated above, her husband tracking the prices of shares and Ms Devi buying when the shares dipped down to a certain price range. I place no weight on the ‘Trading Business Plan’ document which Ms Devi sent to the Commissioner on 2 October 2014 as I found that there was no written business plan in existence during the 2011 income year and that this was brought into existence afterwards, merely to satisfy the Commissioner’s request for such a document when the tax dispute ensued. As noted above at [14], I accept that there was a plan of some kind for undertaking share transactions in the 2011 income year.
On the whole, this factor points against Ms Devi having conducted a share trading business.
(d) Operating in a business-like manner and the degree of sophistication involved
Ms Devi had a dedicated space at home to undertake share transactions and she said and I accept that she used a desktop, internet and a multifunction printer, fax, photocopier and scanner, as well as an iPad, home phone and smart phone. Nowadays, many people have computers and similar equipment, including for home offices as well as for private purposes. Notwithstanding, I concur with the views expressed in Re The Taxpayer and Commissioner of Taxation (2011) 84 ATR 659: [2011] AATA 545 at [21] and in Hartley at [31] that the question of whether a taxpayer operated in a business-like manner is becoming “increasingly fluid” due to modern technologies. Consequently, I accept that taxpayers armed with the right gadgets have the ability to undertake business activities in various places and do not need to maintain traditional business premises.
However, I do not consider the use of this equipment alone to necessarily point to Ms Devi carrying on business as a share trader. The same facilities would have been necessary for share investment. The same considerations and analysis applies to the records kept by Ms Devi which included receipts, CommSec statements and spreadsheets listing the sale and purchase transactions. She would have kept these records to track her share transactions for tax purposes if she was conducting a share trading business or investing in shares for the long term.
Ms Devi had a CommSec subscription and claims to have read financial newspapers and watched business programs on the ABC. In my view, these were not particularly sophisticated research tools even taking into account Ms Devi’s use of a margin loan facility, especially as the same resources would also have been used for share investment.
Accordingly, while some aspects suggest business-like activities (such as the dedicated space and the margin loan), the overall impression is that Ms Devi’s undertaking was very basic and lacked sophistication to constitute a share trading business. This factor points against Ms Devi having conducted a share trading business.
(e) Did profits/ losses arise from a discernible pattern of trading?
Ms Devi’s overall result for the 2011 income year was a loss in the order of approximately $20,000. Ms Devi submitted that she followed a pattern of selling shares with a 5 to 10 per cent profit or loss. It was not clear to me that this was the case as no specific evidence by reference to transactions was provided to support her statement and to show a correlation with the overall loss. Also, the ‘Trading Business Plan’ document which she pointed to as setting out her business plan and which stated that her purpose was that of making a profit of between $15,000 and $30,000 each year and then increasing the profit by 25% each year, as well as making at least one profitable share sale each week, was not supported by any detail. There were only general statements in the ‘Trading Business Plan’ such as “Buy a stock if analysts have strong recommendation and is moving up” and “Check the portfolio’s state at the end of each day”.
As noted at [9] above, Ms Devi’s purchase and sale transactions were more substantial in the first six months of the 2011 income year and infrequent in the latter six months of the income year. I agree with the Commissioner’s submission that a taxpayer in the business of share trading, especially one who claimed not to hold shares for the long term, would be expected to turn-over a larger volume of shares and on a more regular and systematic basis.
This factor points against Ms Devi having conducted a share trading business.
(f) The volume of the taxpayer’s operations and the amount of capital employed
The amount of capital involved in Ms Devi’s share transactions was not insubstantial having regard to her financial position. Ms Devi started with approximately $60,000 savings (which included savings of her husband) and a $40,000 margin lending loan which was later increased to $65,000. As at 30 June 2011, Ms Devi’s margin loan had a balance of about $62,000. As noted above, the turnover in share transactions (counting both purchases and sales) in the relevant year was approximately $600,000.
I do not agree with the Commissioner’s submission to the effect that “[t]he volume and value of the transactions and capital employed were relatively small when compared to what might reasonably be expected of a share trading business”. In my view, it is Ms Devi’s factual matrix that is important, including her financial position and, on any view, she was heavily vested, at least in financial terms, in her share transactions.
However, on balance, I consider that this factor is consistent with Ms Devi both carrying on a business as a share trader and share investment. Accordingly, in my view, this factor is therefore neutral in the analysis and does not assist Ms Devi.
(g) Specific share trading factors
I turn now to the more specific share trading factors that have been analysed in the relevant cases. See, for example, Hartley at [37] – [39].
In this case, the factors which favour Ms Devi carrying on business as a share trader are as follows:
·the turnover was substantial, particularly having regard to Ms Devi’s wages; and
·Ms Devi maintained a home office for the purpose of undertaking the share transactions.
The factors which do not favour Ms Devi carrying on business are as follows:
·the share transactions were not regularly and systematically carried out throughout the 2011 income year – there were only 10 share transactions in the second half of the income year;
·the activities were very basic and lacked sophistication to constitute a share trading business;
·there was no demonstrated pattern of trading although I accept there was a business plan even before the written document was later produced; and
·she had no skills or experience or interest in shares.
In my view, the specific share trading factors weigh heavily against Ms Devi carrying on a share trading business.
CONCLUSION
Having regard to the evidence and to all of the factors set out above, Ms Devi was not carrying on business as a share trader. Her activities were very basic and lacked sophistication to constitute a share trading business particularly as there was no demonstrated pattern of trading. Accordingly, I affirm the decision under review.
I certify that the preceding 47 (forty – seven) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member .................................[sgd].......................................
Associate
Dated 9 February 2016
Date of hearing 28 September 2015 Date of final submissions 19 October 2015 Advocates for the Applicant Mr G Randhaw and Mr V Singh Counsel for the Respondent Mr L T Livingston Solicitors for the Respondent ATO Review and Dispute Resolution
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