Executor for the late Joan E Osborne and Commissioner of Taxation

[2014] AATA 128

[2014] AATA 128

Division	TAXATION APPEALS DIVISION
File Number(s)	2012/3775
Re	Executor for the late Joan E Osborne
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Professor R Deutsch, Deputy President
Date	10 March 2014
Place	Sydney

The objection decision is affirmed.

................[sgd]........................................................

Professor R Deutsch, Deputy President

CATCHWORDS

TAXATION AND REVENUE – income tax – whether taxpayer was carrying on a business of share trading – consideration of factors indicative of a business being conducted – decision under review affirmed

LEGISLATION

Income Tax Assessment Act 1997 s 8-1

CASES

AAT Case 6,297 (1990) 21 ATR 3747

Federal Commissioner of Taxation v Cooke (2004) 55 ATR 183
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187
Re Hartley and Commissioner of Taxation [2013] AATA 601

Re Shields and Deputy Commissioner of Taxation (1999) 41 ATR 1042

REASONS FOR DECISION

Professor R Deutsch, Deputy President

10 March 2014

FACTUAL BACKGROUND

1. Although the relevant tax year in this case is the year ended 30 June 2009, the relevant history dates back to the year 2000 when Mrs Joan Osborne executed a power of attorney appointing her nephew, Mr Eric Prentice, and her niece, Ms Judith Kleem, to conduct her affairs on her behalf.

2. At the time the power of attorney was executed Mrs Osborne was aged 82 and living in a nursing home. The appointment under the power of attorney appears to have been largely precipitated by the onset of dementia and related symptoms.

3. Prior to the appointment Mrs Osborne appears to have managed a portfolio of shares herself albeit with assistance from some professional advisers.

4. After the appointment Mr Prentice took over the management of the portfolio and there is no suggestion that Mrs Osborne had any involvement with the portfolio or in her own financial affairs after 2000.

5. The appointment was effected by way of a formal general power of attorney which was executed on 19 September 2000 and was worded in the broadest possible way to enable the attorneys to:

   … exercise, subject to any conditions and limitations specified in Part 2 of this Instrument, the authority conferred on him/her/them by Section 163B of the Conveyancing Act, 1919, to do on my behalf anything I may lawfully authorise an attorney to do.

   …

   Part 2 contained no conditions or limitations.

6. According to the affidavit of Mr Prentice dated 17 August 2013, Mr Prentice had a conversation with Mrs Osborne during which she said words to the following effect:

   Will you please look after my share portfolio, as I cannot manage it anymore? You should use an accountant for the tax returns and to provide accounting services. Please use my broker Tony Barry. It is up to you to do whatever you think is best, in consultation with Tony. I want you to charge me fees for looking after the share portfolio.

7. At the time the power of attorney was granted the portfolio in question had an approximate value of $1,314,776.

8. From the time at which the power of attorney was entered into up to around June 2007, the portfolio was handled by Mr Prentice. In accordance with Mrs Osborne’s wishes the broker, Mr Tony Barry, provided advice and undertook trades on behalf of Mr Prentice, in his capacity as the attorney for Mrs Osborne.

9. In around July 2007 Mr Prentice effected the incorporation of a company Crembrook Pty Limited (“Crembrook”) and thereafter Crembrook managed the share portfolio. In providing those management services, Crembrook effectively provided to Mrs Osborne the services of Mr Prentice and Crembrook was paid fees of $45,931 and $19,750 in the years to 30 June 2008 and 2009 respectively.

10. The transactions which were conducted were very effective. During the course of the ensuing years, the value of the portfolio grew considerably such that by 30 June 2008 the portfolio was worth in excess of $4 million.

11. However, in the following year the trading was less successful and by 30 June 2009 the portfolio was worth considerably less.

12. On 16 July 2010 Mrs Osborne passed away and as at the date of death the portfolio value had fallen further such that it was then valued at $1,756,363.

13. In each of the tax years ending 30 June 2001 through to the year ending 30 June 2008 the relevant tax returns which were lodged on behalf of Mrs Osborne recorded any gains or losses arising from the buying and selling of shares from the portfolio as capital gains or losses. The consequence was that in relation to any shares that were held for more than 12 months, the capital gain included in assessable income was essentially halved in accordance with the law that allowed for a 50% discount on the amount of any capital gain derived in circumstances where the underlying asset is held for more than 12 months.

14. In each of those years, separate amounts were also recorded in relation to the receipt of unfranked and franked dividends.

15. In September 2009 Mr Prentice applied for and was granted an Australian Business Number (ABN) for Mrs Osborne and she was registered for the purposes of GST with effect from 1 July 2009.

16. On 6 May 2010 the tax agent for Mrs Osborne, Mr John Nelson of The Village Accountant, lodged Mrs Osborne’s return for the year ended 30 June 2009. That return indicated that Mrs Osborne was conducting a business described as “Financial Asset Investing” and recorded a non-primary production business loss in the amount of $792,168. This amount was claimed to be attributable to losses arising from the conduct of the business of buying and selling the shares within the share portfolio of Mrs Osborne. This return also included amounts in respect of unfranked ($11,870) and franked ($92,229) dividends.

17. On 10 May 2010 Mrs Osborne’s 2008/09 income tax return was selected for a pre-issue audit.

18. On 12 July 2010 Mr Nelson was advised that the Respondent had concerns that the claim for the non-primary production business loss in respect of the year ended 30 June 2009 was a re-characterisation of a capital loss.

19. On 1 September 2010, Mr Nelson engaged in a further telephone discussion with officers of the Australian Taxation Office (ATO) and it is suggested that it was verbally agreed that the amount in question constituted a loss in the nature of capital and the return should be adjusted to reflect that fact.

20. On 29 September 2010, a Notice of Assessment was issued assessing Mrs Osborne to tax of some $34,595.25. A notice of shortfall penalty was issued on 27 October 2010 imposing a penalty of $16,799.40 being 25% of the shortfall amount. An objection to the notice of shortfall penalty was the subject of a separate objection decision which was not the subject of these review proceedings.

21. By letter dated 20 October 2010, the estate of the late Mrs Osborne was formally advised that the review of the deceased’s 2009 income tax return had been completed, a deduction of $792,168 was disallowed on the basis that the Commissioner took the view that the loss was of a capital nature and not incurred in the conduct of a business.

22. On 28 October 2010, a return for the year ended 30 June 2010 was lodged on behalf of Mrs Osborne which recorded an amount of $134,531 as a capital gain in respect of the buying and selling of shares undertaken on her behalf. At the hearing, this news appeared to take Mr Prentice and his solicitor by genuine surprise and it was not clear to Mr Prentice who in particular had authorised or who had lodged this return. It appears that Mr Prentice genuinely believed that the return for the year ended 30 June 2010 had not been prepared or lodged. There was some suggestion that it had been prepared by an accountant then acting for the estate of Mrs Osborne, who was anxious to finalise the matter so as to avoid any fines being incurred.

23. The exact position in terms of who authorised and lodged this return remains unclear. However it remains a fact that the return was lodged and it was lodged on the basis that the gains in question for the year were treated as capital gains rather than as income gains.

24. On 20 December 2011, the estate lodged an objection against the assessment of 29 September 2010. That objection was disallowed by decision dated 5 June 2012, which indicated that the reason for the disallowance was that the decision-maker was not satisfied that Mrs Osborne had been carrying on a business as a share trader.

25. By way of summary the following table provides the approximate number of trades that were conducted and the extent of gains and dividends derived in four of the critically relevant tax years:

Year ended 30 June 2007	Year ended 30 June 2008	Year ended 30 June 2009	Year ended 30 June 2010
Buys	90	84	43	n/a
Sells	54	84	76	n/a
Total	144	168	119	n/a
Capital Gain	527,854	86,597	Nil	134,531
Income Gain (Loss)	Nil	Nil	(792,168)	Nil
Franked Dividend	139,789	190,397	92,229	54,121
Unfranked Dividend	11,565	17,431	11,870	11,202
Franking Credit	59,909	81,599	39,527	23,195

ISSUE

1. The issue in this case is whether Mrs Osborne’s losses as a result of the share transactions undertaken in the year ended 30 June 2009 are deductible under s 8-1 Income Tax Assessment Act 1997 (ITAA 1997).

2. The Applicant is of the view that it is so deductible because the losses in question are incurred in carrying on a business within the meaning of s 8-1(1)(b) and that they are not losses of a capital nature within the meaning of s 8-1(2)(a).

3. The Respondent argues that it is not so deductible because the losses in question were not incurred in carrying on a business or because the losses were of a capital nature.

   LEGISLATIVE FRAMEWORK

4. Section 8-1 ITAA 1997 provides that a loss or outgoing can be deducted from assessable income to the extent that “it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.”

5. At its most fundamental level, the parties here are in dispute as to whether or not the applicant in this case was carrying on a business as required by the statutory provision.

6. Whether or not someone is engaged in a business is a question of fact, but in many cases it is a question that does not admit of an easy answer. Essentially, the answer depends on the impression which the decision-maker forms have regard to all the circumstances. In doing so, no single factor is necessarily determinative: Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187 at 202 per Hill J).

7. Although some attempts have been made to define the notion of “business” for taxation purposes the more usual approach and the one adopted in the income tax context is to assess whether a business exists by considering a number of accepted factors which point in one direction or the other. Perhaps the most helpful summary is that suggested by Deputy President Todd in AAT Case 6,297 (1990) 21 ATR 3747 which was cited with approval by Senior Member Block (as he then was) in Re Shields and Deputy Commissioner of Taxation (1999) 41 ATR 1042 at 1048:

   The question therefore is essentially one of fact. In deciding this issue the case law has established the following factors as generally relevant consideration:

   (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 a business-like manner and the degree of sophistication involved;

   (e) whether any profit/loss is regarded as arising from a discernible pattern trading;

   (f) the volume of the taxpayer’s operation 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, keep 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.

   SPECIFIC ASPECTS OF THIS CASE

8. Before commenting on some of the specific Shields matters, there are a number of unusual aspects in relation to this particular case which need to be taken into account in determining the resolution of the critical question as to whether or not a business was being conducted at the relevant times.

9. First, it is worth noting that the relevant taxpayer to consider in the present case is neither Mr Prentice nor Ms Kleem. Rather, even though the proceedings are in the name of the Executor for the late Joan E Osborne, the taxpayer whose purpose is to be assessed is that of Mrs Osborne herself. It is her purpose in conducting the transactions in question in the relevant year, namely the year to 30 June 2009, that is critical.

10. Of course, it is entirely relevant to note that during the year in question, Mrs Osborne was a very old lady living in a nursing home and suffering from dementia. She had entrusted her affairs to others who were better able to look after her share portfolio.

11. It is no doubt possible for someone in a position such as Mrs Osborne was in, to conduct a business through an agent.

12. However, whether that can be said to occur depends very much on an analysis of the agency relationship in question, including the instructions given to the agent and the rights and obligations that both parties to that relationship may have had: Federal Commissioner of Taxation v Cooke (2004) 55 ATR 183.

13. Looked at in that light there would appear to be nothing to suggest that Mrs Osborne ever carried on a business or that she ever intended for her nephew to so carry on a business as her agent. Undoubtedly, her nephew had a wide authority. However, that authority must always be viewed in the context of it having been given by an elderly lady who had not been in any sort of business and would need income from the capital she had available to, at the very least, sustain herself in her nursing home.

14. Secondly, the interposition of Crembrook is, in my view, somewhat of a red herring as it does little to change what might otherwise be one’s opinion in relation to the conduct of business. Crembrook was not an entity created by Mrs Osborne and the interposition of Crembrook did not amount to the appointment of a new attorney. Rather, the only plausible explanation is that Mr Prentice continued to act as the attorney. Mr Prentice adopted the interposition of this company for his own purposes and it cannot be seen to change the nature of the share activities which are being conducted by Mr Prentice as agent for Mrs Osborne. Mrs Osborne neither appointed nor authorised the appointment of Crembrook and therefore its interposition cannot be relevant to the issue as to the nature of the share transactions which were undertaken.

15. Thirdly, there is a long history of returning the relevant transactions on capital account and whilst it may have been done in error as suggested by the Applicant in the year to 30 June 2010, there has been a return to that treatment.

16. Thus, it must be asked what factually was different about the year ended 30 June 2009 to all the surrounding years.

17. The main factual differences were:

    ·Crembrook was introduced as an interposed entity from 1 July 2007;

    ·Mr Prentice applied for an ABN in Mrs Osborne’s name in September 2009;

    ·A margin loan facility was taken out and utilised in the early part of the year ended 30 June 2004.

18. It must be asked whether any of these matters make any real difference either alone or together to the fundamental question whether a business is or is not being carried on in the year to 30 June 2009.

19. None of these matters either alone or in combination are definitive in their support for the existence of a business. However, it must be said that the obtaining of an ABN and a margin loan are suggestive of the existence of a business or perhaps that the person obtaining them believed that a business existed.

20. However, it is worth noting that the ABN application was made well after the conclusion of the year in question and the margin loan was taken out well before the commencement of that year. This must raise concerns as to whether the obtaining of the ABN can be at all relevant to a preceding year and why if the margin loan is relevant, it had no impact on the years before the year in question.

21. There appears to be very little material difference in the manner in which and the circumstances in which the share transactions were conducted in the year to 30 June 2009 as compared to the earlier years during the operation of the power of attorney granted by Mrs Osborne. Indeed, if one looks at the Table presented at paragraph 25 above, there is nothing that stands out so as to suggest that 2009 is in any way materially different to all the other years referred to. There were fewer trades in the 2009 year compared to the two previous years and less franked dividends, but those comparative points do not of themselves suggest that a change to taxation treatment is warranted. Indeed, some might argue that fewer trades is more suggestive of capital treatment but I draw no conclusion from this fact alone.

22. Fourthly, I also note that during the relevant year a substantial amount of dividend income was derived from the share portfolio. In that particular year the dividend income was $104,099 and it is worth noting that in the previous year of income the amount was substantially higher. It appears that, the portfolio was, at least partially, constructed having regard to dividend flows that might be achieved and this would be necessary in order to ensure that there was an adequate income stream to cover the various expenses, but most importantly to pay Mrs Osborne’s nursing fees which would continue for some unknown period of time. Whilst there is nothing to preclude the derivation of dividend income as part of an overall business strategy, it is more suggestive of a share investor strategy than a share trader strategy to construct a portfolio which is designed to produce significant dividend yield to satisfy ongoing known expenses which the portfolio is designed to cover. Again, this is suggestive of a lack of business.

    APPLICATION TO THE FACTS

23. Having regard to those specific aspects, I now turn to a closer examination of the factors outlined in the decision in Shields. In doing so I will not focus on all the factors but I will comment on some specific matters.

    Business Plan

24. First, as to the existence of a business plan Mr Prentice has in his affidavit made a brief set of comments under the heading “Business Plan” and it is worth repeating those comments in full:

    34.In September 2000 I had a conversation with Joan at about the time she granted this said power of attorney to my sister and me. During that conversation she said:-

    Will you please look after my share portfolio, as I cannot manage it anymore? You should use an accountant for the tax returns and to provide accounting services. Please use my broker Tony Barry. It is up to you to do whatever you think is best, in consultation with Tony. I want you to charge me fees for looking after the share portfolio.

    35.Throughout the Share Trading Period, my intention has been to conduct the Portfolio as a business, by buying and selling shares to generate a profit.

    36.My method was to carry out extensive research, and keep records of all companies in the Portfolio, and of other companies recommended to me from time to time as a result of that research. I would buy shares that I believed would go up in price, and sell shares after they had gone up in price, or had dropped in price, to a level from which I did not believe they would recover.”

    It would seem that the Share Trading Period referred to was the period spanning the tax year in dispute, namely the year to 30 June 2009.

25. These passages, in particular paragraph 36, appear to amount to an expression of a desired set of outcomes, but does not in any way amount to what could even be described as a rudimentary business plan. Everyone who buys shares, whether they conduct a business or not, buys shares which they think will go up in price and will often, though not invariably, sell them when they have gone up in price. Equally, they will sell shares which have dropped in price if they are convinced that the share price will not recover. This is nothing more than normal human behaviour and does not amount to what I would describe as a business plan. Equally, the statement in itself is indicative of a lack of sophistication and complexity both of which militate against any inference that a business was being carried on at any given time.

    Full-time employment

1. It was also put to me by counsel for the Respondent that the fact that Mr Prentice was a full-time employee during the relevant period would preclude or limit the possibility for the existence of a business. Counsel pointed out that, as was observed in Re Hartley and Commissioner of Taxation [2013] AATA 601 (at paragraph 42), it is rare that a business can be conducted by a person where that person is engaged in a full-time occupation as an employee and the activities that are said to constitute that business requires that person’s participation during standard work hours on a flexible and frequent basis.

2. Whilst I believe that comment is relevant, it must be accepted that it is of less force in this case. First, Mr Prentice is not the taxpayer, Mrs Osborne is. Secondly, even if one overlooks that point, Mr Prentice was a full-time employee working for a company which provided financial advice, including advice on investments. Clearly, that full-time employment is more consistent here with the possibility of running a share trading business than was the case in Hartley where the taxpayer who claimed to be in the business of share trading was a full-time council employee.

3. Nonetheless, the point remains that Mr Prentice’s ability to act in a share trader capacity would be somewhat constrained by his full-time employment obligations albeit to a lesser degree than was the case in Hartley.

   The underlying intention and the agency created by Mrs Osborne

4. Having regard to the background alluded to earlier, namely, that Mrs Osborne had granted the power of attorney in circumstances where she was in a nursing home and unable to manage her own share portfolio, it is implicit in the entire arrangement that Mrs Osborne’s intention was never to conduct a business either personally or through her agent.

5. In other words, the characterisation of the activities in question are coloured by and must be viewed through the prism of the agency that created the circumstance that Mr Prentice was transacting on behalf of Mrs Osborne.

   Sophistication

6. As mentioned previously, there appears to be little in the way of sophistication in the way in which the transactions were conducted and little evidence of any targets or budgets. The use of hedging devices, derivatives and stop loss orders as risk minimisation strategies, all or any of which one might well expect to arise in the context of a business, were not employed in any meaningful way in this case.

   Magnitude of trading, capital employed, repetition

7. Finally, the magnitude of the trading, the amount of capital employed and the repetition in buying and selling shares are factors which would all point to the existence of a business in the year in question.

   CONCLUSION

8. In my view, in the year in question, having regard to all the matters mentioned above, it cannot be concluded that the operations were conducted as a business.

   DECISION

9. The objection decision is affirmed.

I certify that the preceding 59 (fifty-nine) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President

................[sgd]...................................................

Associate

Dated 10 March 2014

Date of hearing	18 November 2013
Solicitors for the Applicant	Mr T Somerville, Somerville Legal
Counsel for the Respondent	Mr R Scruby
Solicitors for the Respondent	Mr R Pandey, Dispute Resolution Practice, Australian Taxation Office