Greig v Commissioner of Taxation
[2020] FCAFC 25
•2 March 2020
FEDERAL COURT OF AUSTRALIA
Greig v Commissioner of Taxation [2020] FCAFC 25
Appeal from: Greig v Commissioner of Taxation [2018] FCA 1084 File number: NSD 1427 of 2018 Judges: KENNY, DERRINGTON AND STEWARD JJ Date of judgment: 2 March 2020 Catchwords: TAXATION – allowable deductions – where taxpayer made 64 separate acquisitions of shares in one company – whether the taxpayer’s acquisition of shares was made in a “business operation or commercial transaction” within the meaning of the principle established in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 – whether loss or outgoing was incurred in gaining or producing assessable income – whether the shares had been held by the taxpayer on revenue account – whether the shares were purchased in circumstances which were akin to, or indistinguishable from, an ordinary investment engaged by a private investor
TAXATION – whether legal fees and share losses incurred by the taxpayer by reason of the compulsory transfer and cancellation of his shares were deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth)
Legislation: Income Tax and Social Services Contribution Assessment Act 1936-1963 (Cth) s 26(a) (repealed)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth) ss 6-5, 8-1
Taxation Administration Act 1953 (Cth)
Cases cited: AAT Case 12,258 (1997) 37 ATR 1045
Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1
Blockey v Federal Commissioner of Taxation (1923) 31 CLR 503
Californian Copper Syndicate v Harris (l904) 5 TC 159
Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344
Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604
Commissioner of Taxation v Glennan (1999) 90 FCR 538
Commissioner of Taxation v Haass (1999) 91 FCR 132
Commissioner of Taxes v Melbourne Trust Ltd (1914) 18 CLR 413
Ducker v Rees Roturbo DevelopmentSyndicate Ltd [1928] AC 132
Edwards (Inspector of Taxes) v Bairstow [1956] AC 14
Federal Commissioner of Taxation v Anstis (2010) 241 CLR 443
Federal Commissioner of Taxation v Bidencope (1978) 140 CLR 533
Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42
Federal Commissioner of Taxation v Lau (1984) 6 FCR 202
Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639
Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 22 ATR 344
Federal Commissioner of Taxation v Stone (2005) 222 CLR 289
Federal Commissioner of Taxation v Visy Industries USA Pty Ltd (2012) 205 FCR 317
Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355
Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 9 ATR 873
Jones v Leeming [1930] AC 415
Livock v Federal Commissioner of Taxation (1985) 16 ATR 959
London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 138 CLR 106
McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487
McCurry v Federal Commissioner of Taxation (1998) 39 ATR 121
Moana Sand Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4897
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJ 402
Puzey v Commissioner of Taxation (2003) 131 FCR 244
Ransley v Deputy Commissioner of Taxation [2018] FCA 1796
Resource Capital Fund IV LP v Commissioner of Taxation (2018) 355 ALR 273
Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640
Visy Industries USA Pty Ltd v Federal Commissioner of Taxation (2011) 284 ALR 455
Visy Packaging Holdings Pty Ltd v Federal Commissioner of Taxation [2012] FCA 1195; (2012) 91 ATR 810
Western Gold Mines NL v Commissioner of Taxation(WA) (1938) 59 CLR 729
Westfield Ltd v Commissioner of Taxation (1991) 28 FCR 333
Williams v Federal Commissioner of Taxation (1972) 128 CLR 645
Parsons RW, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Limited, 1985)
Date of hearing: 22 February 2019 Registry: New South Wales Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 253 Counsel for the Appellant: Mr B J Sullivan SC with Mr R A Jedrzejczyk Solicitor for the Appellant: PricewaterhouseCoopers Counsel for the Respondent: Mr D F C Thomas SC with Ms K N Pham Solicitor for the Respondent: ATO Review and Dispute Resolution
Table of Corrections 30 November 2020 In paragraph 65, the word “Queensland” has been replaced with “New South Wales”. In paragraph 75, the word “an” before “business operation” has been replaced with “a”. In paragraph 135, the cross-reference to the quote at paragraph 57 has been replaced to refer to paragraph 89. In paragraph 179, the citation for the case referred to has been replaced with “(1979) 9 ATR 873 at 876-7”. ORDERS
NSD 1427 of 2018 BETWEEN: ANDREW CARLYLE GREIG
Appellant
AND: COMMISSIONER OF TAXATION
Respondent
JUDGES:
KENNY, DERRINGTON AND STEWARD JJ
DATE OF ORDER:
2 MARCH 2020
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The orders made by the Court on 20 July 2018 be set aside and in lieu thereof, it be ordered that the appeal against the objection decision dated 9 May 2017 be allowed.
3.The matter be remitted to the respondent to take such further administrative action as is necessary to give effect to these orders.
4.The respondent pay the appellant’s costs of the appeal and of the proceeding before the learned primary judge, to be taxed in default of agreement.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
KENNY J:
This is an appeal from a judgment of a judge of the Court, dismissing an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) against the decision of the respondent Commissioner of Taxation to disallow an objection to a notice of assessment issued to the appellant, Andrew Carlyle Greig, in respect of the income year ended 30 June 2015.
I have had the considerable advantage of reading in draft the judgments of Derrington J and of Steward J. I agree with the orders proposed by Steward J, substantially for the reasons his Honour gives. Since, however, the outcome of the appeal turns on issues of characterisation that are not straightforward, due in part to the way the appellant has framed his case, I would add the following.
The primary judge rejected Mr Greig’s submission that a loss of $11,851,762 incurred on the transfer and cancellation of his shareholding in Nexus Energy Limited in December 2014 and the expenditure of $507,198 in legal fees incurred in connection with litigation arising out of Nexus’ voluntary administration in June 2014 were deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Although the learned primary judge accepted that Mr Greig had acquired the Nexus shares for the purpose of obtaining a profit or gain on their subsequent sale, his Honour found that Mr Greig’s acquisition was essentially a private investment in listed shares. The acquisition was not made, so his Honour held, in a “business operation or commercial transaction” “or commercial dealing” so as to bring it within the principle set down by the High Court in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199. His Honour also held that the share purchase did not constitute a business of trading in shares.
On appeal, the appellant contended that the primary judge erred in that both the loss and the expenditure were deductible under s 8-1 of the ITAA 1997. On the appellant’s case, this was because the loss and the legal fees were deductible under par (a) of s 8-1(1) since they were incurred in a “business operation or commercial transaction” entered into for the purpose of making a profit within the principle in Myer Emporium. In the alternative, the appellant argued that the loss and the legal fees were a loss or outgoing “necessarily incurred in carrying on a business” for the purposes of par (b) of s 8-1(1).
Section 8-1 of the ITAA 1997 relevantly provides:
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
…
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
…
The Commissioner contended that there was no error in the judgment under appeal, and that the primary judge was correct in finding that Mr Greig’s acquisition of Nexus shares were not made in a “business operation or commercial transaction” as explained in Myer Emporium and that the loss and legal fees were not incurred in the carrying on of a business of dealing in Nexus shares. The Commissioner contended that the loss and legal expenses were “a loss or outgoing of capital, or of a capital nature” within the meaning of s 8‑1(2)(a).
As will be seen, whether the primary judge erred in not finding that the loss of $11,851,762 and the legal fees of $507,198 are deductible under s 8-1(1) turns on the applicability of the principle in Myer Emporium. As senior counsel for Mr Greig said at the hearing of the appeal, if the Court rejected the appellant’s primary argument about the applicability of this principle, then it would not accept the appellant’s alternative argument that Mr Greig was carrying on a business of dealing in Nexus shares.
It was common ground that, under Myer Emporium, a loss or outgoing incurred in gaining or producing assessable income is deductible under s 8-1(1)(a) of the ITAA 1997 if that loss or outgoing is incurred in a “business operation or commercial transaction” entered into with the purpose of deriving profit or gain, even though the loss or outgoing was not incurred in the ordinary course of carrying on the taxpayer’s business. In Myer Emporium at 209-210 the High Court said:
Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.
(Citations omitted; emphasis added)
In their respective reasons for the judgment, Derrington and Steward JJ detail the facts and circumstances relevant to the application of the principles in Myer Emporium. I shall not repeat all that their Honours have said. The following factual outline suffices for my purposes.
From April 1981 until May 2015, Mr Greig was a senior executive in the Bechtel group of companies. In January 2008, he retained Mr Warwick Foot of FSS Advisory to advise him on the purchase and sale of shares. Mr Greig told Mr Foot that, on account of his work experience, he knew quite a bit about mining and thought there were a lot of opportunities with respect to mining shares. Mr Greig’s evidence (which on this point was accepted by the primary judge) was that at that time he told Mr Foot that he wanted “to purchase stocks that [were] undervalued and which [were] likely to go up in the short-term”. Mr Greig added that he was interested “in smaller companies that [were] going to outperform over the next 12 months or so”. His evidence in this regard was corroborated by Mr Foot, who said that Mr Greig told him that he wanted to “find undervalued stocks that [he could] buy at decent volumes and then sell quickly in order to make a profit” and that he was not “looking for shares to hold in the long-term”. Mr Greig remitted $1.2 million to Mr Foot to begin.
Some years later, in early 2011, when planning for his retirement around 2015, Mr Greig reviewed his approach to his share acquisitions. He deposed that his objective at this time was to maximise the amount of cash that he would have available upon his retirement and that, to this end, he proposed to buy and sell shares in relatively large volumes, which his substantial cash reserves allowed him to do. His strategy was, he said, to “select stocks whose market value was likely to increase in a short space of time” and “then sell at a profit within [a] period of several months, or [an] even shorter period, depending on the circumstances of the individual company”. He deposed that he “wanted to be able to purchase shares, sell them quickly at a profit upon the happening of a liquidity event (such as the announcement of a takeover bid), and then use the proceeds to make other trades”. He further deposed that he “intended to draw upon [his] professional experience, skills and expertise gained in the course of working for [the Bechtel group] to identify suitable stocks in the mining, energy and resources sector”. In the proceedings below, this was referred to as Mr Greig’s Profit Target Strategy.
Mr Greig instructed Mr Foot to purchase 1 million shares in Nexus on or about 8 February 2011, after he had read a research note sent to him by Mr Foot. Although Mr Foot first drew Mr Greig’s attention to the Nexus shares, Mr Greig was at that time familiar with the company because of his knowledge of the mining and resources sector. He knew that the company held interests in natural gas fields, including an interest held with Royal Dutch Shell and Osaka Gas in the Crux resource in the Browse Basin near Western Australia. Mr Greig deposed that his decision to purchase the Nexus shares was based on his considered view that:
(a)there was underlying value in the Crux asset and correspondingly Nexus’ economic interest in that asset;
(b)in negotiating the option with Shell, Nexus had removed an important impediment to realising a greater portion of the underlying value in the Crux asset, and the market had reacted positively to that development;
(c)additional developments were likely to take place in the following 12- to 18-month period, such as a potential sell-down by Nexus of its equity stake in the Crux project, which would cause Nexus’ share price to increase; and
(d)there was a reasonable prospect of making a profit (and potentially a substantial profit) by selling Nexus shares upon the announcement or happening of positive events in the months ahead.
As it happened, however, the Nexus share price fell and Mr Greig decided to sell his Nexus shares at a loss in around mid-May 2011.
Less than a year later, however, Mr Greig purchased Nexus shares again. His first new purchase was in March 2012 and he continued to make significant purchases of Nexus shares until May 2014. Mr Foot, whose evidence was unchallenged, gave evidence that in discussing the fresh purchase of Nexus shares with Mr Greig in March 2012, he expressed the opinion that Nexus shares were undervalued and would be “worth a lot more” if Nexus exercised its option to sell part of the Crux resource “within the next couple of months”, which he considered it might do. His evidence was in substance that Mr Greig agreed with him. Mr Greig purchased Nexus shares to sell at a profit, which he thought might arise from a takeover of Nexus.
From March 2012 until a trading halt was placed on Nexus shares in July 2012, it appears that Mr Greig had reason to believe, and he expected, that Nexus would shortly make an announcement about a joint venture with Shell and Osaka Gas. On this scenario, Mr Greig expected the Nexus share price to rise. His confidence increased in April and May 2012 following Nexus’s appointment of a new Chief Executive Officer (CEO). His optimism was further fuelled by an article in the financial press stating that the joint venture, which was to be formalised under heads of agreement between Nexus, Shell and Osaka Gas, was “worth about $3.75 billion, valuing Nexus’s 17 per cent stake at a massive $637 million, about double Nexus’s market capitalisation”.
Mr Greig’s evidence was that, on 11 May 2012, he met with Mr Foot and another financial adviser, and that he said:
I’ve purchased a sizeable number of Nexus shares because I think the company is significantly undervalued and the share price is likely to go up in the next couple of months. When that happens, I’ll sell, which will hopefully provide me with a decent stockpile of cash when I leave Bechtel.
With this objective, Mr Greig went on to make more purchases of Nexus shares.
By the end of June 2012, as the price of Nexus shares continued to decline, Mr Greig gave consideration to selling his shares but determined not to do so on the basis that the anticipated joint venture would soon be finalised. When a trading halt was placed on Nexus shares in July 2012, the indications to Mr Greig were that the announcement of the joint venture agreement was imminent. On 9 July 2012, Mr Foot sent Mr Greig an email attaching an article from Energy News Premium stating that Nexus had announced that it had successfully finalised the terms and documentation regarding the Crux joint venture. At this point, Mr Greig was confident that the Nexus share price would increase in the ensuing months. His confidence increased in September-November 2012 with the appointment of a new Nexus Chairman, who was known to Mr Greig; indications that a Thai company was interested in purchasing an interest in Nexus; and the prospect that Nexus might be sold.
By March 2013, following more purchases of Nexus shares, Mr Greig was of the view that “the market was finally starting to appreciate that Nexus stock was undervalued, and that the share price would continue to increase in the following weeks and months”. He made further Nexus shares purchases in April and May 2013 in order, so he said, “to make a profit by selling those shares within a period of several months upon a material increase in the shares’ market value, in line with my Profit Target Strategy”.
In June 2013, with the Nexus share price falling, Mr Greig decided to become a substantial shareholder in order to bring about quickly a sale of the company or of its assets so that the company’s share price would rise and he might make a profit on the sale of his shares. He purchased further Nexus shares in August 2013 when the Nexus CEO told Mr Foot that the sale process was continuing and Mr Greig was confident a deal would be reached. When the Nexus share price fell further in December 2013, Mr Greig acquired more Nexus shares. He remained confident that he would be able to sell his Nexus shares at a profit.
Mr Greig’s optimism continued even after he read the Nexus announcement in March 2014 that Seven Group Holdings (SGH) had made an offer to purchase all of the shares in Nexus for two cents per share. As the primary judge said (in his reasons for judgment at [81]):
Mr Greig stated that he considered that the SGH bid significantly undervalued Nexus and its assets, that rival bidders would emerge and that, once the trading halt was lifted, those bidders would purchase substantial stakes in Nexus, causing the share price to rise. Mr Greig gave instructions on 4 May 2014 to purchase more Nexus shares on the basis that he considered there was still a “reasonable prospect of making a profit by selling his shares in line with his Profit Target Strategy”.
Mr Greig stated that he was very disappointed when Nexus announced on 7 May 2014 that a scheme of arrangement under which SGH would acquire all Nexus shares would go to a vote on 12 June 2014, and that the scheme booklet indicated that the directors of Nexus believed the scheme was in the best interests of the shareholders and unanimously recommended that the shareholders vote in favour of it. Mr Greig purchased a large number of shares on 8 and 9 May 2014 with the intention of blocking the SGH bid in order that Nexus might find another buyer and negotiate a sale providing a better return to shareholders.
On 12 June 2014, the scheme of arrangement was voted down at a meeting of Nexus shareholders. The directors of Nexus appointed voluntary administrators. Nexus’s creditors approved a Deed of Company Arrangement (DOCA) on 11 August 2014, which provided for the compulsory transfer of all Nexus shares to a third party for nil consideration to shareholders. Nexus’s creditors commenced proceedings in the Supreme Court of New South Wales to effect the share transfer. Mr Greig and 16 other defendants unsuccessfully contested the DOCA and resisted the involuntary disposal of Nexus shares. On 24 December 2014, the Supreme Court approved the proposed DOCA and, as a result, Mr Greig incurred the loss of $11,851,762 in the year ended 30 June 2015 and the legal fees of $507,198, both of which are the subject of this appeal.
Mr Greig plainly purchased his shares in Nexus with the purpose of making a profit on their subsequent sale. The primary judge correctly so found. The contested issue is whether he acquired the shares in a business operation or commercial transaction. If he did, then he falls within the principle stated in Myer Emporium and the sums in question are deductible under s 8-1 of the ITAA 1997.
In order to characterise the nature of a taxpayer’s activities in circumstances such as these, the parties have naturally taken the Court to numerous cases, highlighting the similarities and differences between them and this case. The relevant cases are discussed in the reasons prepared by Derrington J and by Steward J.
As their Honours show, in many cases there has been little or no dispute that the relevant taxpayer was carrying on a business. Rather, the issue has been whether the relevant transaction was entered into in the course of that business. While cases of this kind may affirm and to some extent elucidate the applicable principles, they do not directly address a case like this where the issue is whether a taxpayer was engaged “in a business operation or commercial transaction” for the purpose of making a profit, while also being a very well remunerated corporate employee in full-time employment. It must be said immediately that this latter circumstance is not determinative one way or the other. Rather, it is simply a part of the factual matrix that falls for consideration in the process of characterisation.
As Steward J notes, Stephen J’s decision in Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 may be instructive because in that case the taxpayer was also an individual, and the managing director and shareholder in an import-export company from which he derived fees and dividends. Stephen J found (at 656) that he had entered into “quite considerable share market speculations”. The analogy cannot, of course, be taken too far. As Steward J makes clear, the case turned on different legislative provisions. Moneys paid on the shares were deductible in any event under the former s 77A of the Income Tax Assessment Act 1936 (Cth). Whether s 82(1) or s 82(2) (and therefore s 82(3)) applied with respect to such deductions turned on whether the former s 26(a) of the Income Tax Assessment Act 1936 (Cth) also applied to the share transactions. His Honour held that it did. It is at this point that Stephen J’s analysis can perhaps assist in this case, even if only to a small degree.
Stephen J held (at 656 and 657) that:
[A] basis of assessment founded upon s 26(a) will, I think, accord well with the facts of the matter. It will treat the taxpayer for what he was, a speculator in mining and oil exploration shares who, having had only very modest and infrequent share transactions before the onset of Australia's minerals boom, during the period of the boom, indulged in quite considerable stock market speculations and did so with remarkable success. Those speculations were, I think, viewed by him as, and indeed had the character of, individual forays in particular stocks which he bought with a view to resale.
…
The taxpayer’s evidence of how he undertook his stock exchange transactions indicated nothing in the nature of a system or method or the carrying on of a business; he simply relied upon his own knowledge of the prospects of particular companies, gained very largely from his contacts with their managements in the course of the export and import business which he managed and which brought him into contact with a number of mining companies.
As Steward J observes, however, Stephen J did not address the issue whether the appellant’s share trading had the character of a business deal. Having regard to the then relevant provisions and the facts as he found them, there was no need for him to do so.
While the principle in Myer Emporium is clear, it may fairly be said that previous decisions provide limited assistance as to its application in a case such as this. This is, however, of no special moment because a question of characterisation of the kind now arising will always turn on the facts of the particular case. In their joint judgment in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639, Gaudron, Gummow, Kirby and Hayne JJ made much the same point when they said (at [68]-[69]):
[I]ncome is often (but not always) a product of exploitation of capital; income is often (but not always) recurrent or periodical; receipts from carrying on a business are mostly (but not always) income. Further, in a case where it is said that the receipt is from carrying on business, often there will be a real and lively question whether what has been done amounts to carrying on business or is, in truth, no more than a singular transaction of purchase and resale of property.
The search for analogous cases is, then, hardly surprising and was undertaken by both of the parties to this appeal. In doing so, each party tended to emphasise one or more features of the transactions that gave rise to the payments received by the firm. Sometimes the emphasis of one or more of these features was taken to the point of excluding any consideration of the other features of the transactions. But as Dixon and Evatt JJ said (in the more limited context of distinguishing between profits derived from carrying on or carrying out a profit-making scheme and proceeds of a mere realisation or change of investment) [in Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740] “it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities”.
(Citations omitted)
The need for “a wide survey and an exact scrutiny” of the taxpayer’s activities in determining a question of characterisation was reiterated in Federal Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19], citing Montgomery and Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729.
I have already set out most of the relevant facts and circumstances. It is also relevant that in the course of the activities to which I have referred, Mr Greig made 64 separate acquisitions of a total of 134,893,686 Nexus shares for a total sum of $11,851,762 between 28 March 2012 and 9 May 2014. Further, from 2007 to 2014 Mr Greig purchased listed shares in companies other than Nexus on 218 separate occasions for what amounted to a very large sum of money. He held most of these shares for only a short time, and usually for less than two years. As Steward J concludes, there appears to be no material difference between Mr Greig’s object in acquiring Nexus shares in early 2011 and thereafter and in acquiring shares in other companies after January 2008: see also [10] and [11] above. It follows that the taxpayer’s attempt to isolate his acquisition of Nexus shares in March 2012 and following from the rest of his share trading activities has a distinct air of unreality.
As indicated, I agree with Steward J that if Mr Greig had realised the gain he sought on the sale of his Nexus shares, that gain could not have been properly characterised as a realisation of a capital asset. Nor could it have been characterised as a windfall or having been made in pursuit of a game of chance or a hobby. This would indicate that the loss that Mr Greig in fact suffered was not on capital account. Further, the evidence established that Mr Greig did not have an intention or a purpose of holding his Nexus shares over the long-term as an investment on the basis that he would receive dividends in the meantime. Rather, Mr Greig set out to sell his shares at a profit quickly or at least before he retired.
Plainly enough, any profit on the sale of the Nexus shares would have been the fulfilment of Mr Greig’s intention or purpose at the time he acquired the shares to make a profit on their sale. Significantly, a profit made in this way was a key part of Mr Greig’s plan for his retirement as formulated in 2008 and 2011: that is, he aimed to achieve a pool of cash profits by the time he retired. In carrying this plan into effect, including in purchasing shares in Nexus, Mr Greig relied on the knowledge, experience and information he acquired in business. He researched, reviewed and kept a close eye on the value of his shares. He also retained Mr Foot (amongst others) to provide him with professional advice and assistance in effecting his objects. Further, the acquisition of the Nexus shares was not an isolated event. Mr Greig acquired his Nexus shareholding on 64 separate occasions in a little over two years. At the same time, he was engaged in buying and selling other stock on a large scale. Importantly too, Mr Greig took significant commercial steps, directly or through Mr Foot, in an effort to ensure that the Nexus share price rose to a level commensurate with what he believed to be the true share value, and one which would yield him his intended profit. These steps included acquiring a substantial Nexus shareholding in June 2013 to facilitate his profit-making on the sale of his Nexus shares, and the further purchase of Nexus shares in May 2014 to block the SGH bid to allow another buyer to be found who would provide a better return on his shareholding. To include these last-mentioned considerations is not to assess the taxpayer’s activities with the benefit of hindsight, since Mr Greig continued to acquire his Nexus shares while engaged in these share-price raising activities.
It goes without saying that a profit-making purpose alone is not sufficient to engage the Myer Emporium principle, although such a purpose has a bearing on the complexion of the taxpayer’s activities. Whether a gain or loss is properly characterised as the outcome of a “business operation or commercial transaction” cannot be determined by further exegesis of the words “business operations” and “commercial transaction”. Their meaning is plain enough. It may be that, as Steward J indicates, one cannot improve upon RW Parsons’ description of “business deal” (in Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Limited, 1985) at 2.498-2.500) as adapted to the expression “business operation or commercial transaction”. If the taxpayer’s activities in acquiring the intended profit-making property (here, the shares) are the kind of things that a business person would do in seeking to make an intended profit, then generally speaking the property will have been acquired in a “business operation or commercial transaction”. It seems to me that, on the facts and circumstances of this case, there can be little doubt that Mr Greig acted as a business person would do in acquiring his Nexus shares to obtain a profit on their sale and that therefore he acquired these shares in a “business operation or commercial transaction”. It follows that the Myer Emporium principle is engaged and that the loss of $11,851,762 and the legal fees of $507,198 are deductible under s 8-1(1) under the ITAA 1997.
Accordingly, for these reasons and substantially for the reasons given by Steward J, I would allow the appeal.
I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate:
Dated: 2 March 2020
REASONS FOR JUDGMENT
DERRINGTON J:
This appeal is concerned with the deductibility under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) of certain losses sustained by the appellant, Mr Greig, in the 2015 income year. In that year a number of shares held by him in the company Nexus Energy Limited (Nexus) were compulsorily transferred and cancelled. He received no consideration for their transfer. Over the previous two years he had expended approximately $11.85 million in acquiring them and, at the time they were cancelled, he was a “substantial shareholder” in the company. In the same income year Mr Greig also engaged in legal action to prevent the compulsory acquisition occurring. He expended approximately $507,000 in connection with that attempt, including by engaging in litigation. He claims the amounts of his losses and expenses are deductible on revenue account because they were incurred in gaining or producing assessable income. In particular, he claims they were incurred in a “business operation or commercial transaction” entered into for the purposes of making a profit. This, he says, attracts the principle in Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 (Myer Emporium). Alternatively, he claims that the losses or outgoings had been “necessarily incurred in carrying on a business” of “dealing” in the shares of Nexus for profit.
The learned primary judge rejected both claims. Although his Honour accepted the acquisition of the Nexus shares was made with a view to obtaining a profit, he concluded they were not acquired as part of a business operation or commercial transaction. His Honour also rejected the proposition that Mr Greig, who relevantly had not sold any of this Nexus shares, had been “carrying on a business of dealing in Nexus shares for profit”.
Background facts
Mr Greig held various senior executive roles within the Bechtel group of companies in the period between April 1981 and May 2015. The companies under his control were engaged in construction, project management and provision of engineering services to clients, including many in the mining and resources industry. Mr Greig believed that in the course of his professional life he had developed an understanding of the oil, gas and mineral market sectors in Australia and the methods, logistics and technologies involved in exploring, extracting and processing oil, natural gas and mineral resources, as well as the commercial valuation of natural resource deposits.
Mr Greig’s positions included Executive Director of the Bechtel Group, Managing Director of Bechtel Australia Pty Ltd and President of the Bechtel Group’s Mining and Metals Global Business Unit. In these roles his earnings were substantial, providing him with sufficient cash to enable him to make significant share purchases. He retired from the Bechtel Group in May 2015.
In 2006, Mr Greig encountered Mr Foot, who was a member of the firm FSS Advisory, which carried on a business of stockbroking and financial advice. As at that time, Mr Greig had engaged Mr Kretschmer of Unity Partners to be his financial planner and adviser.
In the period from 2006 to 2008, Mr Kretschmer provided Mr Greig with advice in relation to superannuation, salary sacrificing, the structure of his personal and family asset holdings and his long term financial planning. It does not appear that Mr Kretschmer provided advice in relation to the purchase of the relevant shares.
In January 2008, Mr Greig retained FSS Advisory and, in particular, Mr Foot to advise him on the purchase and sale of shares. At that time he considered he had sufficiently large cash resources to generate significant short term cash profits. To about that time Mr Greig had, himself, invested in the share market, and did so through a “Macquarie Investment Manager” account which had been opened in 2006 with a transfer of $1.6 million.
It is apparent that Mr Greig was concerned that, given his schedule as a senior executive of Bechtel, he needed to engage a stockbroker who might monitor the market and identify stocks which he might acquire. In his role at Bechtel, Mr Greig was required to travel extensively and he was away from home for substantial periods at a time and regularly for more than 200 days a year. In some years he was absent from his residence for substantially longer periods.
In his first affidavit relied upon at the hearing before the primary judge, Mr Greig identified the substance of his initial instructions to Mr Foot in January 2008. He claims he told Mr Foot:
I want to purchase stocks that are undervalued and which are likely to go up in the short-term. I’m not looking for blue-chip companies. I’m more interested in smaller companies that are going to outperform over the next 12 months or so. The mining sector is booming at the moment and there are a lot of opportunities in that space.
I want you to have a look at what’s out there and tell me which stocks you like. I’ll give you $1,200,000 to begin with and we can see how things go.
This coincided with Mr Foot’s account of the conversation being to the effect that he was to identify undervalued stock which Mr Greig might acquire at decent volumes and sell quickly in order to obtain a profit. Mr Foot claimed that Mr Greig told him he was not looking for shares to hold in the long term and that he was knowledgeable about mining and believed there to be opportunities in that sector.
From 29 January 2008 until, for the purposes of this matter, June 2015, Mr Foot made numerous recommendations to Mr Greig as to the stocks which he believed were suitable for buying and selling on the Australian Stock Exchange. Periodically during this time, Mr Greig instructed Mr Foot to buy and sell certain ASX listed shares, most of which operated in the mining, energy and resources sector. In the usual course these instructions were in accordance with the recommendations provided by Mr Foot. In evidence before the primary judge and this Court is a schedule (ACG-3) setting out what appears to be the bulk of Mr Greig’s share acquisitions and disposals in the period from 29 January 2008 to 23 April 2014. The schedule does not include the purchases of shares in Nexus and a number of other acquisitions. Nevertheless, the schedule shows that, of the identified listed investments, which numbered 218, shares were purchased and held for periods of time ranging between several days to a number of years. The amounts invested varied widely, although a number included acquisitions worth millions of dollars. The schedule also identified whether Mr Greig made a profit or a loss on the transactions in relation to the shares acquired. In his evidence, Mr Greig acknowledged that all the losses and gains on these transactions were returned on capital account in his income tax returns for the relevant financial years.
Alleged “Profit Target Strategy”
An essential part of Mr Greig’s case is that from early 2011 he adopted a deliberate strategy pursuant to which he would acquire shares in large volumes and sell them quickly at a substantial profit. He claimed that, whist the strategy was not intended to be limited to Nexus shares, as it transpired, it was only adopted in relation to those shares and no others. He indicated that he had significant cash available which enabled him to engage in this strategy and that its purpose was to provide him with significant cash resources on his planned retirement from the Bechtel Group in 2015. He said his intent was to use the money generated to deposit in managed funds and superannuation for the purposes of securing his future, as well as having cash on hand to pursue other ventures which might arise. Specifically, Mr Greig described his strategy in his first affidavit as follows:
23.My strategy for making a profit from buying and selling shares was to select stocks whose market value was likely to increase in a short space of time – whether due to the relevant company being undervalued by the market, the potential for that company’s business to experience rapid growth, the company becoming a target for a corporate takeover, investors taking a favourable view of the performance or potential of a particular industry or sector of the market, or some combination of all of those factors.
24.I did not set out to purchase shares in a particular industry, but I intended to draw upon my professional experience, skills and expertise gained in the course of working for Bechtel Group Inc. to identify suitable socks in the mining, energy and resources sector, which at that time in early 2011 was generally performing very strongly.
25.In selecting shares to purchase, my aim was to find stock that I could acquire and then sell at a profit within [a] period of several months, or [an] even shorter period, depending on the circumstances of the individual company. I wanted to be able to purchase shares, sell them quickly at a profit upon the happening of a liquidity event (such as the announcement of a takeover bid), and then use the proceeds to make other trades. The high degree of liquidity in the stock market appealed to me, because it meant that I could react quickly to changing circumstances and sell out of positions if it appeared to me that more money could be made by purchasing different stock.
In Mr Greig’s affidavits this strategy was given the nomenclature of the “Profit Target Strategy”. It is this strategy which forms the foundation of his claim that his purchases of Nexus shares had a commercial character.
Despite the submissions to the contrary, it is apparent from both Mr Greig’s Appeal Statement and his affidavits that, at least at one stage, he claimed that his share trading strategy was put into effect from about January 2011. This can be seen in the submissions filed by Mr Greig before the primary judge. In his affidavit Mr Greig said:
Whilst my intention at the outset in early 2011 was to execute my Profit Target Strategy by acquiring shares in different companies, as events ultimately transpired, the only stock that I purchased in line with that strategy was Nexus. Nexus accordingly became the sole vehicle through which I worked to achieve my objective of making a short-term profit by buying shares and then promptly selling them upon a material increase in their market value.
Nexus phase one: purchase and sale of Nexus shares in 2011
In the course of submissions before this Court, the submissions on behalf of Mr Greig divided the dealings in Nexus shares into two phases. The first, referred to as “Nexus Phase One”, concerned the initial acquisition and sale of Nexus shares in 2011. In his affidavit, Mr Greig said the company, Nexus, was identified to him by Mr Foot on 31 January 2011, at which time he was informed that the company had acquired an option from Shell which might give it an opportunity to exploit its “Crux asset”, which was a gas field in the Browse Basin. Mr Greig was aware that Nexus held its interest in the Crux asset jointly with Royal Dutch Shell and Osaka Gas. After reading some research received from Mr Foot concerning Nexus and its prospects, Mr Greig claimed he saw there was value in the stock and there was a reasonable prospect of making a profit by selling it in the following months. He determined to acquire one million shares at a price of $0.47 per share for a total sum of $465,511.50. In his affidavit he says of this:
At the time that I acquired the Nexus shares on 8 February 2011, my intention was to make a profit by selling those shares within a period of several months, upon a material increase in the shares’ market value.
Although, thereafter, Mr Greig monitored the value of Nexus shares, they declined in value, and after receiving advice from Mr Foot he determined to sell them because the potential for growth in the short term had dissipated. They were sold between 16 and 18 May 2011 at a price between $0.34 and $0.35 per share at a net loss of approximately $120,000. Given what Mr Greig said was his Profit Target Strategy, it is difficult to see how this acquisition did not fit within it.
As the learned primary judge’s reasons observe, for the income year ended 30 June 2011, FSS Advisory sent to Mr Greig a document which included a tax summary for that year. The document related to Mr Greig’s share portfolio and the tax summary was divided into an income summary and a CGT summary. The income summary recorded income which included revenue derived from dividends. However, the CGT summary recorded share sales in three ASX-listed corporations being Lynas Corporation Limited, Pryme Energy Limited and Nexus. The document showed that a capital gain was recorded in respect of the sale of shares in Lynas in an amount of $1,074,144.22. It also recorded a capital loss of $113,571.91 in respect of the sale of Nexus shares. It recorded a further capital loss of $172,219.75 in respect of the sale of shares in Pryme.
When the inconsistency between Mr Greig’s claimed Profit Target Strategy and the tax summary prepared by FSS Advisory was identified by the Commissioner in his pre-hearing submissions, Mr Greig swore and relied upon a subsequent affidavit purporting to explain it. He claimed that he did not read the document at the time because he was extremely busy with his work at Bechtel and, further, that his accountants, PricewaterhouseCoopers (PwC), had prepared his tax return. He claimed that the indication in the tax summary prepared by FSS Advisory that his transaction in relation to Nexus shares was on capital account was not based on any discussion with him. At the hearing Mr Greig accepted that he may have looked at the tax summary from FSS Advisory when he received it, but claims he would have looked at it in a cursory way and had forwarded it to his accountant. In other words, Mr Greig sought to disassociate himself from his past accounting treatment of the losses on the Nexus shares as capital losses.
The treatment of Mr Greig’s transaction in Nexus shares as being on capital account was replicated in his tax return for the financial year ending 30 June 2011. In relation to this, he claims he had no discussions with his accountants as to the treatment of the losses and that he had left it to them to prepare and lodge the tax return on his behalf. He gave evidence that at the time of the lodgement of that return it did not occur to him, and nor did it occur to him in the following tax year, that the losses on the sale of the Nexus shares ought to be treated differently for tax purposes from other share transactions. A somewhat curious piece of evidence appears at paragraph 12 of his second affidavit to the following effect:
It was only after I incurred the loss on the compulsory transfer and cancellation of my Nexus shares in December 2014 that I turned my mind to the question of whether that loss should be treated as a CGT transaction for tax purposes. I consulted PwC. By that stage I was out of time to seek to amend my tax return for the 2011 financial year, or to apply for a private ruling in respect of the tax treatment of the losses that I incurred on the sale of Nexus shares in that year.
The substance of Mr Greig’s subsequent evidence in this respect was that he disavowed the statements made on his behalf by FSS Advisory and his accountants that the loss on the sale of Nexus shares in 2011 was or should have been on capital account. To some extent, that is not consistent with the submission made to this Court, as it was made to the primary judge, that the business of dealing in Nexus shares only commenced in 2012.
It is appropriate to observe that Mr Greig’s statement in paragraph 12 (extracted above) seems to suggest that, prior to 2012, he did not intend to carry on any separate business of dealing in Nexus shares in a manner distinct from his dealings in other shares. That said, if he was carrying on a business, his subjective intention as to whether he was or not is not relevant. As the discussion of the authorities below reveals, it is the objective intention with which the transactions were entered into which is important.
Nexus phase two: purchase of Nexus shares from 2012 to 2014 and disposal
The alleged second phase of dealings in Nexus shares occurred in the period between 28 March 2012 and 9 May 2014, during which Mr Greig made 64 separate acquisitions of Nexus shares. The total number of shares acquired was 134,893,686 and the amount expended was $11,851,762. No Nexus shares were sold by Mr Greig during this period. However, as the schedule ACG-3 demonstrates, shares in other companies were also bought or sold through this period.
In support of his claim that he was engaged in the business of dealing in Nexus shares, Mr Greig claimed that in the period from March 2012 he engaged in several activities which were consistent with that characterisation. They included monitoring the share price on a daily basis; considering ASX announcements concerning Nexus shares; reviewing the financial press daily for articles concerning Nexus; reading research reports about Nexus published by investment banks and stockbrokers; communicating with Mr Foot to discuss developments regarding the Nexus share price; and obtaining recommendations about potential purchases.
In general, Mr Greig claims he pursued his Profit Target Strategy from January 2012 and that when he received substantial cash payments he devoted significant portions to acquiring Nexus shares. He says he followed the business activities of Nexus and acquired additional parcels of shares from time to time and that he intended to make a profit by selling them within a period of seven months or so. Several events in the business operation of Nexus caused Mr Greig to believe that the share price would increase such that he made further acquisitions of substantial parcels of shares. Even when the share price fell and continued to fall, Mr Greig made further purchases. He did so, so he claimed, on the basis of his perception that the shares were undervalued and he would be able to sell his shares for a profit in the future.
During this period, Mr Greig, as a significant shareholder, kept himself informed of matters pertaining to the value of Nexus shares and the prospects of the value increasing. He received research from Mr Foot including ASX announcements, articles from newspapers and reports from brokerage firms and banks. Generally these suggested that the shares had the potential to increase in value when the company became a viable takeover target. Mr Foot occasionally met with the Chief Executive Officer of Nexus and others in the company in relation to its activities and reported any new information to Mr Greig. It is not apparent that Mr Foot communicated with Nexus personnel only because Mr Greig held shares in the company. That said, Mr Greig did ask Mr Foot to attend a presentation to shareholders on his behalf and obtain information for him from it. He also asked Mr Foot to attend the company’s annual general meeting in (late) 2012 and to be part of a shareholder’s conference call on his behalf. There is little doubt that Mr Greig carefully considered his acquisition of Nexus shares and that he did so with an eye to ascertaining whether they would increase in value in the near future. When he formed that opinion, he acquired additional shares even though the share price fell consistently throughout this period.
For the purposes of asserting that his dealings in Nexus shares had the requisite commercial character, Mr Greig relied on the fact that the CEO of Nexus, Mr Della Martina, contacted him directly about a potential takeover bid and urged him not to accept any offer because the company was worth much more than was reflected in the bid. He also relied on several meetings he had with Mr Foot in which he discussed whether he should sell his Nexus shares or hold onto them.
Despite the share price continually dropping, Mr Greig continued to acquire further shares. In 2013 he was already a significant shareholder but wished to reach the status of a “substantial shareholder”, as he believed that the company’s management would be obliged to keep him informed about the issues facing the company and the decisions being made about important strategic matters. Just how a listed public company might lawfully have passed on that type of price-sensitive information to a major shareholder to the exclusion of others was not explained. Nevertheless, as a result he increased his shareholding in June 2013 by 11,681,571 shares and became a “substantial shareholder”.
Mr Foot continued to acquire Nexus shares throughout 2013 and claimed that he did so when he received market information which he regarded as indicating that they were then undervalued and would increase in the following months. This continued into 2014 despite the share price dropping to a very low figure compared to the initial acquisition prices and the trading of shares being halted as a result of the company ceasing production.
In his affidavits and throughout his oral evidence Mr Greig emphasized that on each occasion when he made the decision to acquire Nexus shares, he did so with the intention of making a profit by selling them within a period of several months upon a material increase in their value. He also said that, if during the period he held the shares he had reached the view that there was no longer a reasonable prospect of making a profit on their sale, he would have sold them.
In March 2014, Seven Group Holdings Ltd (SGH) made an offer to purchase all the shares in Nexus for $0.02 a share which was apparently to be effected through a scheme of arrangement. Mr Greig considered the offer to undervalue the company and he purchased additional shares so that he might exert pressure to prevent Nexus accepting the takeover and, so he said, to profit from the sale of the shares when a higher offer was obtained.
The scheme put forward by SGH failed — in part, because Mr Greig used his voting power to help defeat it.
By March 2014, Nexus had encountered severe financial difficulties and was unable to restructure its debt. Mr Greig’s attempts to preserve the value of his investment in Nexus shares had failed. The failure of the SGH scheme had the consequence that the directors resolved to place Nexus into voluntary administration in June 2014.
Compulsory acquisition of Nexus shares in 2014
Subsequently, on 11 August 2014, Nexus’ creditors approved a deed of company arrangement (DOCA) which provided for the acquisition of all Nexus shares by a third party for nil consideration to shareholders. The creditors commenced proceedings in the Supreme Court of New South Wales to effect the transfer of those shares. That litigation was apparently hard fought, with Mr Greig being one of the main protagonists seeking to prevent the share transfer occurring. Nevertheless, on 24 December 2014, the Supreme Court of New South Wales approved the DOCA. This had the consequence that, in the year ended 30 June 2015, Mr Greig incurred a loss of $11,851,762 in relation to the shares purchased. He also incurred legal fees of approximately $500,000 in connection with the Supreme Court proceedings.
Advice from PwC
Subsequent to his loss being sustained in relation to the Nexus shares, Mr Greig consulted PwC in relation to the treatment of his losses for tax purposes. He sought a private ruling as to the deductibility of the losses but the Commissioner issued a ruling on 24 May 2016 that the share losses were not deductible under s 8-1 of ITAA97. Mr Greig subsequently lodged a tax return for the year ended 30 June 2015 consistent with that ruling, and the Commissioner issued an assessment accordingly. Thereafter, Mr Greig lodged an objection to the notice of assessment, claiming that it was excessive on the basis that he was entitled to claim deductions for the share losses and legal fees. That objection was disallowed in full and, on 7 July 2017, Mr Greig filed an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) to the Federal Court.
Decision of the primary judge
Issues relating to Mr Greig’s credibility
In his reasons, the primary judge noted a number of instances where Mr Greig’s evidence proved unreliable. First, it was observed that in Mr Greig’s second affidavit he sought to distinguish the Nexus shares from other shares in his portfolio and, in particular, on the basis that he became a substantial shareholder in Nexus. Under cross-examination he said that he could not recall being a substantial shareholder in any other ASX listed company. However, it was subsequently established that around the time he became a substantial shareholder in Nexus he had also become a substantial shareholder in two other ASX listed companies in the resource sector. The primary judge pointed out that one of those companies, Elementos Limited, did not appear in annexure “ACG-3”, which Mr Greig had said was intended to set out all his share acquisitions and disposals in the relevant period. Mr Greig also confirmed that he had become a substantial shareholder in certain overseas companies. The learned primary judge found:
98Mr Greig stated in his first affidavit that the Nexus shares were the only shares to fall within his claimed “business operation or commercial transaction” and, in his second affidavit, he sought to convey that the circumstances of his dealings in the Nexus shares were distinguishable from all of his other share purchases. However, that statement and those circumstances were not based on a clear recollection of all of the events, and omitted significant events relevant to the position he sought to convey.
The learned primary judge also found that Mr Greig’s claim that he treated the acquisition of Nexus shares differently to the other stocks he acquired was unreliable.
Similarly, his Honour found Mr Greig’s repeated assertions that he had acquired the Nexus shares in the course of a business operation with respect to those shares was exaggerated. His Honour said that this exaggeration had occurred as a consequence of Mr Greig focussing on the specific events concerning the Nexus shares after they occurred and after he had sought advice in the context of a disappointing loss. That can be taken as indicating that Mr Greig’s evidence was, at its best, the result of some subconscious rational reconstruction on his part.
Consideration of the issues
After consideration of numerous authorities, the primary judge identified that the first question was whether the relevant acquisitions were made “in an operation of business or commercial transaction”, with particular focus on the word “in”: [136]. His Honour observed that there were a number of acquisitions and that the argument advanced by Mr Greig was that all were made in a single business or commercial operation which existed from 2011, which was the acquisition of the Nexus shares in accordance with the Profit Target Strategy. It had been argued that the shares were acquired in circumstances of an expected short-term profitable sale on the occurrence of a “liquidity event”. However, whilst the primary judge accepted that the shares were acquired in the hope or expectation that they would increase in value, it did not follow that they were purchased in an operation of business or commercial transaction or as a commercial dealing. His Honour found the circumstances of the share acquisitions were in the nature of an ordinary investment in shares by a private investor. His Honour’s reasons were as follows:
(a)The 2011 purchase and sale of 1 million Nexus shares did not have the flavour of a business operation or commercial transaction or commercial dealing. It was the purchase of shares which hopefully would increase in value and which would be sold if they did or if they were considered to be no longer worth retaining.
(b)There was nothing out of the ordinary in the manner in which the Nexus shares were dealt with. Like many investors, Mr Greig followed their price and reports from analysts as to whether they were undervalued or whether they were recommended to buy. Mr Greig undertook similar activities in relation to other shares in his share portfolio.
(c)Mr Greig sold the shares acquired in 2011 when he could no longer foresee the share price increasing in the future and he accounted for the losses as a capital loss. There were numerous other instances of short term share holdings where losses eventuated and each was treated as a capital loss.
(d)The circumstances of this case were not similar to those in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 (Edwards v Bairstow), which stands for the proposition that an isolated transaction could be characterised as a “business operation or commercial transaction”. The single share sale in 2011 did not come within that description.
(e)Nor did the 64 individual Nexus share transactions entered into by Mr Greig between March 2012 and May 2014 comprise a consistent course of conduct. His purchases in phase two were made in the hope that each parcel of shares would increase in value. It was difficult to predict that he would have sold them had the price increased rather than retained them, as he did with shares in other companies in which he became a substantial shareholder.
(f)Mr Greig was not engaged in a share trading business generally. His portfolio was under management by others who treated all of his shares, including his Nexus shares, on capital account. The Nexus shares were merely part of the larger portfolio of shares. The size of the holdings did not convert the acquisitions into a business operation.
(g)The increased monitoring activity and research in relation to Nexus shares between March 2012 and May 2014, the communications with Nexus and the steps taken to protect the investment in that company did not constitute a business operation or commercial transaction. Those steps were neither likely nor anticipated when the shares were acquired and were not part of a business operation. Further, Mr Greig did not advance a case that the latter share acquisitions should have been regarded as a “commercial dealing” different from the “Profit Target Strategy” or the earlier purchases. The steps taken by Mr Greig were those one would expect from a person who was seeking to protect a substantial capital investment.
(h)It was accepted that there existed an objective profit-making intention or purpose held by Mr Greig when he purchased the Nexus shares, although whether that came to fruition depended upon movements in the prices of the shares and he was generally prepared to hold onto them for as long as possible to allow them to increase in value. Nevertheless, they were not acquired in a “business operation or commercial transaction” within the Myer Emporium principle.
(i)Nor were the losses and legal fees “necessarily incurred” in carrying on a business and so deductible under subsection 8-1(1)(b) of the ITAA97. The alleged business was dealing in Nexus shares in the phase 2 period, even though shares were only purchased during this period rather than sold.
(j)Whether a person is carrying on a business is a matter of fact and degree and to be answered based on a wide survey and overall impression of the taxpayer’s activities. Here, a number of matters indicated Mr Greig was not carrying on a business: he was in full time employment which required him to travel from his home for a substantial part of each year and, particularly, overseas; he had no written business plans or methodologies and nor did he seek to tender accounts or records of the particular business; he did not treat the shares as trading stock; and the records of trading were of his advisors and they did not distinguish between Nexus shares and remainder of the share portfolio.
(k)To the extent intention was relevant, Mr Greig did not have a subjective intention of carrying on a business of dealing in Nexus shares when he acquired them as opposed to making investments in them. He made no claim to be engaged in a business of dealing in Nexus shares contemporaneously with the activities associated with them. It was only after the shares were compulsorily acquired that it was raised with him that he was carrying on a business, and from then he adopted the position that he had been engaged in a business of dealing in those shares albeit no others.
(l)The number of purchases was substantial, as was the amount invested, though there was no evidence of the relative size of the investment in comparison to his personal wealth and he made large capital investments in other shares as well. Regardless of the substantial size of the investment, the acquisitions were not in the nature of a commercial dealing.
(m)Although Mr Greig made a number of transactions, he did so on the advice of Mr Foot, who carried out research and advised him in relation to shares across the portfolio. The engagement of Mr Foot was for advice and recommendations in relation to shares generally and not only in relation to Nexus shares. The fees charged were based on the totality of the portfolio and not only the size of Mr Greig’s holdings in Nexus.
(n)The activities in relation to the shares on which Mr Greig relies as affording his dealings a commercial character were consistent with the protection of a large capital investment.
(o)Mr Greig did not, himself, conduct any of the significant record-keeping or accounting functions in relation to his dealings in Nexus shares or any of the other shares. He did not arrange his transactions in relation to Nexus shares in a particularly businesslike manner and did not treat the Nexus shares as trading stock. They were treated in the same manner as his other shareholdings and managed by FSS Advisory together with those other shareholdings in his portfolio.
(p)Although Mr Greig had a profit motive in acquiring the shares, that was equally consistent with him being an investor.
(q)The acquisition of the Nexus shares did not have a commercial character and were consistent with investment activity. Mr Greig did not tender any contemporaneous document to suggest that the Nexus shares were held on revenue account in a business of dealing in them in a way one might ordinarily be expected if a separate business was being carried on. Indeed, the records disclosed that all share transactions were treated the same and as being held on capital account.
(r)The records kept by FSS Advisory and Mr Greig’s accountant were business records of those entities, but they did not constitute evidence of Mr Greig carrying on a business in relation to his dealings in Nexus shares. Relevantly, they disclosed that the Nexus shares were treated as being held on capital account.
The result of his Honour’s analysis was that the Nexus shares were not acquired in a business or commercial transaction and nor were they acquired by Mr Greig in carrying on a business of dealing in Nexus shares.
Issues arising in the appeal
The appellant’s written submissions contend that the loss sustained on the compulsory acquisition of his shares in the sum of $11,851,762, and the expenditure of approximately $500,000 in seeking to prevent the acquisition, were deductible under s 8-1 of the ITAA97 on either of two bases being:
(a)that the loss and the legal fees were deductible pursuant to subsection 8-1(1)(a) because they were incurred in a “business operation or commercial transaction” entered into for the purpose of making a profit, such as to fall within the principle recognised in Myer Emporium; or
(b)the amounts were losses or outgoings “necessarily incurred in carrying on a business” for the purposes of subsection 8-1(1)(b).
Section 8-1 of ITAA97 is concerned with general deductions and makes provision for taxpayers to deduct from the amount of their assessable income certain amounts:
8‑1 General deductions
(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a)it is incurred in gaining or producing your assessable income; or
(b)it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note:Division 35 prevents losses from non‑commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your *exempt income or your *non‑assessable non‑exempt income; or
(d) a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12‑5.
(3)A loss or outgoing that you can deduct under this section is called a general deduction.
For the effect of the GST in working out deductions, see Division 27.
NoteIf you receive an amount as insurance, indemnity or other recoupment of a loss or outgoing that you can deduct under this section, the amount may be included in your assessable income: see Subdivision 20‑A.
In this Court the appellant submitted that, in order to come within s 8-1(1)(a), it was only necessary to show the claimed losses were sustained as a result of a transaction entered into with the intention to make a profit. It was said that it was not necessary to show the loss was sustained in the course of a “business operation or commercial transaction”. On that basis, the appellant claimed that, as it was accepted by the primary judge that he had entered into the share acquisitions with the intention of making a profit, it ought to have been concluded the losses were deductable under s 8-1(1)(a). It was alternatively submitted that the Profit Target Strategy executed in relation to Nexus shares was, in any event, a “business operation or commercial transaction” because it was pursued with a profit motive such that it satisfied the requirements of the Myer Emporium principle.
Conversely, the Commissioner submitted that s 8-1(a) and the Myer Emporium principle require that a loss arising from an “isolated transaction” can only be claimed as a general deduction if sustained in a “business operation or commercial transaction” entered into with the purpose of deriving a profit. He submitted the appellant bore the onus of establishing both elements and, in this case, the first had not been established.
The conflicting submissions raise for consideration the nature of the requirements of the Myer Emporium principle. Second, if the appellant’s initial submissions in this respect cannot be sustained, the next question is whether his actions relating to Nexus shares had the necessary business or commercial character.
The Myer Emporium principle
Each party made extensive submissions in relation to the authorities concerning the principle now referred to as the “Myer Emporium principle”. However, before considering the appellant’s central submission on this issue it is appropriate to consider the eponymous decision in detail, as well as the more recent decision in Visy Packaging Holdings Pty Ltd v Federal Commissioner of Taxation (2012) 91 ATR 810 (Visy Packaging).
In Myer Emporium, the Myer group of companies undertook a corporate restructure and, in doing so and as an essential part of it, established a company to conduct its financing activities. The holding company, Myer Emporium, lent the new company, Myer Finance, $80,000,000 and assigned the right to receive the interest on the loan to a third party, Citicorp Canberra Pty Ltd (Citicorp). When the loan to Myer Finance was made it was not intended that Myer Emporium would ever receive the interest on it. The assignment was always intended to be part of the overall transaction involving Citicorp. The consideration for the assignment was $45,370,000 which was paid on the date it took effect. The Commissioner assessed the amount of consideration as income in the hands of Myer Emporium. That conclusion was overturned on an objection hearing in the Supreme Court of Victoria and upheld by the Full Court of the Federal Court where the amount was held to be a capital receipt.
Before the High Court the Commissioner submitted that “a gain made by a taxpayer as the result of a business deal or a venture in the nature of trade is income of the taxpayer, even if the transaction that yields the gain is outside the ordinary course of business”: Myer Emporium at 209. Myer Emporium argued to the contrary on the basis that a gain was not income unless it was made “in the ordinary course of business”. The Court (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ) observed at 209-210:
Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.
(footnotes omitted)
The last two sentences capture the essence of the decision, being that revenue derived from an isolated transaction entered into with the intention to make a profit will be income where the transaction has the character of a business operation or commercial transaction. They were relied upon by the Commissioner in this Court for the proposition that the acquisition of an asset for resale with a profit-making intention was insufficient to characterize any gain on the resale as income. The gain needed to be acquired in the course of a business operation or commercial transaction.
By reference to the decision in Californian Copper Syndicate v Harris (l904) 5 TC 159 (Californian Copper Syndicate v Harris), the High Court then observed the distinction between mere realization or change of investment leading to receipt on capital account on the one hand and an act done in the carrying on or carrying out of a business. In the latter respect, a receipt may constitute income where it arises from an isolated business or commercial transaction when it has been entered into with the intention or purpose of making a relevant profit or gain: at 211. The Court rejected the proposition that a mere profit-making intention was sufficient to stamp the receipt of gains with the character of income. In doing so, it noted that mere realization of an asset was a matter of capital and not income, that otherwise windfall gains and gains from games of chance would constitute income, and generally gains from recurrent acts or activities are income whereas gains from isolated transactions are capital. These observations were also heavily relied upon by the Commissioner.
The Court further considered (at 211-213) that gains made in the course of an adventure in the nature of trade which has the character of a commercial enterprise, can be distinguished from those made on the realisation of a capital asset which is in the nature of a private endeavour. The mere fact the commercial enterprise is limited in duration and scope does not prevent it from being an adventure in the nature of trade. It was observed that the mere holding of a profit motive at the time of acquisition of the asset was insufficient to render any gains on the subsequent sale income. It is necessary that the profit motive was held in the context of carrying on a business or carrying out a business operation or commercial transaction: at 213.
The Court concluded that the consideration received by Myer Emporium from the transaction was income. It was of some importance to the Court that the gains were made in the course of the carrying on of the Myer business even though the transaction was not one of its ordinary day-to-day dealings. At 215-216, the Court said:
If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer’s business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.
In that case the transactions, whilst novel, were entered into in the course of Myer’s existing profit-making business and, it might be said, for business purposes. Additionally, the assignment of the right to recover interest was not independent of or isolated from the loan agreement. They were part of the same transaction or scheme. It follows that, where the transaction is an “isolated” one in the sense that it is made in the course of a business but not the ordinary course of that business, the fact that it was entered into in the course of a business goes a long way to impressing it with the commercial or business character.
Visy Packaging
The appellant also relied upon the decision in Visy Packaging at 845 [185] where Middleton J said:
The principle of law which is at the centre of this case is clear: if the intention or purpose of the relevant entity in entering into a transaction or upon acquiring an asset was to make a profit or gain, that profit or gain will be income, even if the transaction was extraordinary by reference to the ordinary course of that entity’s business: see Westfield Ltd v FCT (1991) 28 FCR 333; 21 ATR 1398; 91 ATC 4234; 99 ALR 510; FCT v Cooling (1990) 22 FCR 42; 21 ATR 13; 90 ATC 4472; 94 ALR 121; FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 61 ALJR 270; 87 ATC 4363; 71 ALR 28; FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692; 56 ALJR 240; 82 ATC 4031; 39 ALR 521; FCT v Visy Industries USA Pty Ltd (2012) 205 FCR 317; 2012 ATC 20-340; 90 ATR 148. Similarly, if the intention or purpose was to make a profit or gain but a loss was ultimately in fact sustained, then a deduction in the amount of that loss would be permitted.
In that case the Visy group, of which a main holding company was Visy Industries Australia Ltd, sought to acquire a primary packaging business to supplement its secondary packaging business. It identified an appropriate business operation owned by Southcorp Ltd. That latter company was willing to sell, but only on condition the Visy group acquired all of its businesses in Australia and South-East Asia. The sale of the additional businesses was said to be at a discount to the Visy group on the basis that they were buying them “in-a-line”. The Visy group made an assessment of the value of the additional businesses and concluded it could on-sell them at a substantial profit and, on that basis, it determined to proceed with the acquisition. Visy Packaging Holdings Pty Ltd was incorporated to acquire the Southcorp businesses with the intention of divesting some of them (the divestment businesses) in the near future. It advertised that it intended to sell certain of the businesses and received offers which would have secured a profit in respect of them. It chose not to accept those offers in the belief that it might acquire a higher price in the future. Unfortunately, it was wrong. The Southcorp business subsequently suffered a significant decline in results and value. This led to increased acquisition costs for the Southcorp businesses consequent upon higher financing costs. The acquisition of the Southcorp businesses went ahead despite the fact that at the date of completion of the contract there was no realistic possibility of Visy Packaging Holdings being able to profit on the resale of the divestment businesses. Consequent upon the disposition of the divestment businesses, Visy Packaging Holdings suffered a loss of approximately $86,000,000 and Visy Industries Australia suffered a loss of approximately $300,000,000. The Commissioner took the view that these core losses on the sale of the businesses were not allowable deductions for the purposes of s 8-1 of ITAA97 and, therefore, not able to be accounted for as tax losses of Visy Packaging Holdings and Visypak Operations. The Visy companies objected to the disallowance on the basis that the entire scheme under which the Southcorp businesses were acquired and the divestment businesses disposed of, was a business transaction or commercial operation with the intention of profit-making. The appeal was allowed and Middleton J found that the losses sustained should be accounted for on income account.
The appellant in the present case relied upon the above cited extract from his Honour’s reasons in support of the submission that the central factor in determining whether the gain or loss ought to be accounted for on revenue or capital account was the profit intention with which the asset was acquired. However, his Honour’s comments must be read in context, keeping in mind the reference to Myer Emporium, such that it should not be thought that his Honour considered the mere intention to profit as a result of a transaction was sufficient to stamp any gains with the character of income. It was axiomatic that the losses were sustained in “a business operation or commercial transaction” as that expression is used in Myer Emporium. The purchase and sale of the divestment businesses occurred in the course of the carrying on of the Visy business even though it was not one of the ordinary business transactions in which it engaged on a daily basis. In other words, that the transaction was engaged in by the Visy Group, which was carrying on businesses, went a long way to giving it the character of a commercial transaction. However, it might also be said that Middleton J’s comments (at 847 [197]-[198]) can be seen as invoking the second limb in Myer Emporium:
[197]From a practical and business point of view, the purchase of the businesses that were ultimately divested, whilst facilitating the purchase of all the Southcorp businesses, also enabled the opportunity for profit upon divestment.
[198]I say opportunity for profit, because when considering various options, an entity may not know which one will ultimately be to its commercial advantage. A participant in business can only rely upon his or her own judgment, sometimes based upon external advice. It may be, as is the nature of business, the plan of action set in motion does not achieve the desired result. This does not mean, however, that the entity putting in place that plan of action did not have an intention to achieve that desired result. The various witnesses called by the taxpayers in these proceedings were experienced businessmen, and gave evidence as to their opinions and views over the relevant period, and explained the opportunity for profit they sought to take advantage of at the time.
Yet, even in those words it is apparent that his Honour had in mind the context in which the transaction was entered into, being one of the carrying on of the Visy business. It is hardly likely that his Honour intended to suggest that the mere holding of a motive to sell the asset acquired at some time in the future at a profit would suffice to treat the gain on the sale as income. That is especially so given his reference (at 852 [232]) to the observations of Gordon J in the earlier decision in Visy Industries USA Pty Ltd v Federal Commissioner of Taxation (2011) 284 ALR 455 (Visy Industries USA) at [78]:
It is well-established that a gain from a transaction will be assessable as ordinary income under s 6-5 of the ITAA 1997 if it was realised in an isolated business operation or commercial transaction in circumstances in which the taxpayer, at the time it engaged in the transaction, had the intention or purpose of making the gain: Westfield Ltd v FCT (1991) 28 FCR 333; 21 ATR 1398; 91 ATC 4234; 99 ALR 510, FCT v Cooling (1990) 22 FCR 42; 21 ATR 13; 90 ATC 4472; 94 ALR 121, FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 61 ALJR 270; 87 ATC 4363; 71 ALR 28 and FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692; 56 ALJR 240; 82 ATC 4031; 39 ALR 521.
At [79] of her Honour’s reasons it was also said:
In order for an isolated transaction to constitute ordinary income, two criteria must be satisfied:
1.the transaction must be a commercial transaction or an adventure in the nature of trade; and
2.the transaction must be entered into for the purpose of making a profit.
Federal Commissioner of Taxation v Montgomery 99 ATC 4749 (1999) 198 CLR 639 at 672-677; Westfield at 342; Myer Emporium at 211.
In Visy Packaging the losses were obviously sustained in the course of an adventure in the nature of trade which had the character of a commercial enterprise. The scheme of the acquisition and sale of the divestment businesses for profit, which included the attempted on-sale before completion, was clearly one of that character. Before this Court the Commissioner submitted that Gordon J’s use of the expression “adventure in the nature of trade” was an appropriate descriptor of the characteristic required of the transaction, being one of a commercial transaction or a business operation.
A commercial transaction or business operation
After McClelland, the High Court considered on a number of occasions the need for a transaction to be a business dealing for the purposes of former s 26(a) of the 1936 Act (as amended from time to time). That need, it would appear, was to prevent s 26(a) from being used to tax the mere realisation of a capital asset. For example in Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640, Gibbs J. (as his Honour then was) contrasted the features of a business deal as against “[t]he mere realization of a capital asset” (at 699). Subsequently, in Federal Commissioner of Taxation v Bidencope (1978) 140 CLR 533, his Honour explained the need for the test at 552:
The second proposition which their Lordships asserted in McClelland’s Case—that to come within the second limb of s. 26(a) the scheme should exhibit features giving it the character of a business deal, at least where the transaction is one of acquisition and sale—has been accepted and applied in this Court. The reason for construing the section in that way is no doubt that if some such limitation were not placed on its generality it would include profits which were apparently not intended to come within its scope; for example, a mere realization of capital, carried out in an enterprising way, might then fall within the section. It is unnecessary for present purposes to consider whether there is an exception to the generality of the proposition so stated.
(Emphasis added.)
The perceived role of the “business deal” test in this passage again appears to be to prevent mere realisations of capital from being taxed by s 26(a).
In Whitfords Beach, Mason J. (as his Honour then was) again considered the “business deal” test from McClelland. He had “some difficulty” with the conclusion in that case. His Honour said at 378-379:
Unfortunately there is an element of ambiguity in the expressions “business deal” and “operation of business” as there is in the adjectives “business”, “commercial” and “trading” which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts “business deal” and “operation of business” may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character. Although the majority in McClelland thought that s. 26(a) was mainly, if not wholly declaratory, of the existing concept of income, they did not by the references to “business deal” and “operation of business”, necessarily mean a transaction entered into in the course of carrying on a business.
It is of importance to note their Lordship’s statement [(1970) 120 CLR 487 at 494-495] that not only are wagers and lottery tickets excluded from profit-making undertakings or schemes, but “also … the purchase of investments bought by a private investor as a hedge against inflation and sold — perhaps long afterwards — at more than the purchase price”, and the further statement [(1970) 120 CLR 487 at 495] that “The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain.” There are two separate strands of thought embedded in these observations: (1) that the transaction must have about it some business or commercial flavour — the purchase of an investment by a private investor is not enough; and (2) the profit in view must be an income, not a capital, gain, according to ordinary concepts.
Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom income tax legislation which have no place in our legislation. And there is the possibility that it insufficiently acknowledges that the operation of the second limb of s. 26(a) may extend to some gains of a capital nature according to general revenue law.
I do not doubt that the majority was right to exclude from the second limb of s. 26(a) successful wagers and lottery windfalls. Perhaps the exclusion of private investments originally made as a hedge against inflation was more open to question but there is now a strong body of authority to support its exclusion.
The last sentence in the passage quoted above is perhaps an indication that the requirement that a transaction be a “business deal” or “commercial transaction” involves only a low threshold. It certainly works to exclude gains made from wagers and lotteries from being taxed by s 26(a), however Mason J. doubted whether it also excluded the type of private investment referred to in McClelland. In that respect, the authorities appear to contrast a profit-making scheme from an investment. An investment connotes something to be held over time, which might then be sold “long afterwards”, to use the language of McClelland.
An earlier decision of Stephen J. in Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 should also be noted. In that case, Williams was a managing director and shareholder in a certain company which paid him fees and dividends. His Honour characterised the taxpayer as someone who had, until the mineral boom in Australia, been a “very modest and infrequent” trader in shares. However, with the coming of the boom, the taxpayer became a “speculator in mining and oil exploration shares” who, using a broker, indulged in “quite considerable share market speculation” (at 656). The speculation was considered to be “individual forays in particular stocks which [the taxpayer] bought with a view to resale” (at 656). At 657, Stephen J. said:
The taxpayer’s evidence of how he undertook his stock exchange transactions indicated nothing in the nature of a system or method or the carrying on of a business; he simply relied upon his own knowledge of the prospects of particular companies, gained very largely from his contacts with their managements in the course of the export and import business which he managed and which brought him into contact with a number of mining companies.
Stephen J. decided that the taxpayer was assessable under s 26(a) (and therefore entitled to a deduction pursuant to former s 77A of the Income Tax Assessment Act 1936-1969 (Cth), thus engaging, for the purposes of that case, s 82(2) and (3)(c) of the Act).
There is an evident analogy between the facts here and those in Williams. Stephen J. had to decide whether the taxpayer’s trades in shares were subject to former s 26(a). His Honour decided that s 26(a) applied because the forays into particular stocks were carried out with a view to resale. The need for any feature or attribute which might have given the share trading the character of a “business deal” was not addressed, presumably because it was self-evident that the trading was of such a nature.
The applicable principle to be derived from the subsequent decision of the High Court in Myer Emporium is reproduced in the quotation from Visy Industries USA above. In Myer Emporium the Court decided, amongst other things, that the “business deal” test was not just relevant for the purposes of applying s 26(a); it applied equally to gains derived from profit-making undertakings which constituted income according to ordinary concepts for the purposes of former s 25 of the Income Tax Assessment Act 1936 (Cth). The need for it was explained at 211-212 as follows:
Several different strands of thought have combined to deter courts so far from accepting the simple proposition that the existence of an intention or purpose of making a profit or gain is enough in itself to stamp the receipt with the character of income. The first was the notion that the realization of an asset was a matter of capital, not income. The second was the apprehension that windfall gains and gains from games of chance would constitute income unless the concept of income, apart from income from personal exertion and investments, was confined to profits and gains arising from business transactions. And the third notion, itself associated with the idea that the carrying on of a business involves a systematic series of recurrent acts or activities, was that a gain generated by recurrent transactions is income, whereas a gain generated by an isolated transaction is capital.
In the United Kingdom, Schedule D of the Income Tax Act 1918 (U.K.) reinforced these notions. The Schedule seemingly confined the concept of income to (a) profits or gains from any trade, profession, employment or vocation, and (b) annual profits and gains from investments, though “trade” is defined so as to include every “manufacture, adventure or concern in the nature of trade”. These provisions naturally provoked the question: Was a profit made on an isolated transaction of purchase and sale income, if the purchase was made with the intention, or for the purpose, of making the profit, even though the transaction was not one entered into in the course of carrying on a business?
In Jones v. Leeming [[1930] AC 415], the House of Lords answered this question in the negative. There was a finding that the taxpayer never meant to hold the land bought as an investment. Nevertheless it was found that the transaction “was not a concern in the nature of trade”. This led to the conclusion that a profit on an isolated sale, not being an adventure in the nature of trade, was a capital accretion [at 430]. Central to the reasoning was the view that in order to constitute a trading or business transaction, an element of recurrence or repetition is needed and that the intention or purpose of making a profit or gain, is not enough. Viscount Dunedin said [at 423]:
“The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever.”
And Lord Buckmaster [at 420] discounted the suggestion that a profit made on the sale of an asset acquired in the expectation that it would rise in value (and presumably result in a realized gain) is income. To him all that was involved in such a case was the realization of a capital asset.
On the other hand in Edwards (Inspector of Taxes) v. Bairstow [[1956] AC 14] joint venturers who engaged in an isolated transaction of buying and selling a complete spinning plant, with a view to making a profit, having no intention of using the plant or deriving income from it, were held liable to income tax on the profit made on resale. Lord Radcliffe concluded [at 36-37] that it was a profit from an adventure in the nature of a trade because the joint venturers had no intention of using the machinery and therefore did not buy it to hold as an income-producing asset or to consume it or for the pleasure of enjoyment; and, instead of having any intention of holding the plant, they planned to sell it even before they bought it. This they did, making a net profit, as they hoped and expected to do. In his Lordship’s opinion this was “inescapably, a commercial deal in second-hand plant”.
In rejecting the argument that the profit was not income because it arose from an isolated transaction, Lord Radcliffe observed [at 38]:
“... that circumstance does not prevent a transaction which bears the badges of trade from being in truth an adventure in the nature of trade. The true question in such cases is whether the operations constitute an adventure of that kind, not whether they by themselves or they in conjunction with other operations, constitute the operator a person who carries on a trade. Dealing is, I think, essentially a trading adventure, and the respondents’ operations were nothing but a deal or deals in plant and machinery.”
More recently, the majority in Montgomery, reaffirmed the expression of the test from Myer Emporium at 673 [104] and said the following about singular transactions at 676 [113] which should be noted:
The singularity of a transaction may very well invite close attention to whether it is in business. The singularity of a transaction may suggest that there is a mere realisation of a capital asset or change of investment rather than a transaction on revenue account. The purpose of profit-making may be an important consideration in deciding these questions. But, as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt. And that is why, in Federal Commissioner of Taxation v Cooling, the Full Court of the Federal Court rightly emphasised the fact that, in that case, the receipt was an ordinary incident of part (albeit an extraordinary and unusual part) of the firm’s business activity.
(Footnotes omitted.)
Finally, I observe that Parsons thought that the test of “business deal” might only require that the transaction be the sort of thing a business person, or person in trade, might do. In his seminal book at [2.498]-[2.500], Parsons wrote the following:
2.498But the features which are necessary to give a transaction the character of a business deal or of a trade of dealing on a single occasion, include an elusive factor that is more than purpose to profit. This elusive factor may not be capable of any more precise defining than to say that the transaction must be the sort of thing a business man or man in trade does. In this context “business man” or “man in trade” brings in received ideas in the community about how such people behave.
2.499A taxpayer may acquire and sell land and not engage in trade, provided there is a decent interval between acquisition and disposition so that he does not appear too concerned about his profit, or, if circumstances have required him to sell soon after acquisition, he did not contemplate quick sale when he acquired (Turner v. Last (1965) 42 T.C. 517, Eames v. Stepnell Properties Ltd [1967] 1 W.L.R. 593). A taxpayer may acquire shares and not engage in trade. Indeed as a director of a company he may be required to own some shares. A taxpayer may sell shares and not engage in trade, provided he is not too hasty about it. But a taxpayer does engage in trade if he buys “a large quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process or realisation”. The words quoted are from the judgment of Lord Normand, in I.R.C. v. Fraser (1942) 24 T.C. 498 at 502-503. Lord Normand added that he could not consider a person who did this as “other than an adventurer in a transaction in the nature of a trade”. A taxpayer does engage in trade if he buys one million rolls of toilet paper (Rutledge v. I.R.C. (1929) 14 T.C. 490), or if he buys the Government’s surplus stock of aeroplane linen and embarks on its sale to more than one thousand purchasers: Martin v. Lowry [1927] A.C. 312. A taxpayer may engage in trade if he sets up an elaborate selling organisation to effect the sales. He may engage in trade if he carries out some manufacturing process and sells the manufactured goods (I.R.C. v. Livingston (1926) 11 T.C. 538 at 543-544, per Lord Sands).
2.500The cases may suggest that it is less likely that a conclusion that there is a trade will be reached if the transaction is in shares or land rather than in some other kind of property. Shares and land are traditional subjects of investment activity—activity that is not directed to profit-making in the turning over of the property acquired. An isolated transaction in land or shares does not necessarily yield an objective inference of profit purpose, when the same transaction in another kind of property may yield such an inference. A subjective purpose of profit-making, of which there may be evidence, will not in itself give the character of trade: Jones v. Leeming [1930] A.C. 415.
(Emphasis added.)
Six propositions may next be stated:
(1)first, I doubt whether the taxpayer’s loss arose out of an isolated trade, even though all his shares were disposed of at one time. The Nexus shares were acquired on 64 occasions over approximately a two-year period, and only disposed of following a protracted legal battle in which the taxpayer was a party. Meanwhile, as already mentioned, the taxpayer purchased over 200 parcels of shares in other companies and sold approximately 180 of these. The overwhelming majority of shares were held for only short periods of time;
(2)secondly, the Commissioner submitted that prima facie shares are held on capital account. That proposition is, with respect, mistaken. Whether shares are held by a taxpayer on capital account or on revenue account will depend on each occasion on the applicable facts. There is no prima facie position; there are no different or special rules for individuals or particular classes of assets;
(3)thirdly, the way a taxpayer personally characterises transactions as being either on revenue account or on capital account is probably irrelevant to the determination of his or her liability to pay primary tax. That treatment is either right or wrong. It certainly cannot control the objective conclusion which this Court must reach about the issue of characterisation. Such evidence might, nonetheless, be relevant to an attack on credit or be relevant to the issue of penalty for the purposes of Sch 1 to the Taxation Administration Act 1953 (Cth);
(4)fourthly, expressing, as Parsons did, the applicable test as being that the transaction must be the sort of thing a business person or person in trade does, effectively ensures that windfall gains, and gains from lotteries and hobbies, are not caught by the ordinary concept of income. In my view, this is an adequate expression of the content of the test;
(5)fifthly, the Court here was urged to accept that a “private” transaction is not one which has the characteristics of a “business deal”. There was a debate about what is and is not “private”. The proposition is rejected. Many truly private transactions may not be capable of being a “business deal” because they are not business-like. The usual example might be a gain encountered in the pursuit of a hobby. However, just because a transaction has been undertaken “privately”, it does not follow that any gain thereby made is necessarily an affair of capital: c.f. Federal Commissioner of Taxation v Anstis (2010) 241 CLR 443 at 458-459 [38] per French CJ, Gummow, Kiefel and Bell JJ. The concept of a “private” transaction, referred to briefly in Whitfords Beach and in McClelland in the context of an “investment”, is not referred to in Myer Emporium or Montgomery. Parsons also does not relevantly refer to it; it does not form part of his eight propositions concerning what is income. Nor is there an equivalent exclusion in s 6-5 of the 1997 Act akin to that found in s 8-1(2)(b) concerning a loss or outgoing of a “private or domestic nature”. In that respect, I observe that s 8‑1(2) would appear to assume that expenditure of a capital nature (addressed in s 8-1(2)(a)) is distinct from expenditure of a private nature (s 8‑1(2)(b)). Private expenditure, it would appear, is not subsumed within expenditure of a capital nature for the purposes of s 8-1. The Commissioner here otherwise made no attempt to rely upon s 8‑1(2)(b); and
(6)sixthly, where shares are acquired by an individual for the purposes of obtaining a dividend yield and for long-term growth, any gain made on a subsequent to sale of those shares is likely to be an affair of capital, if the sale is a mere realisation or change of investment. No doubt a great many individuals hold shares privately in Australia on this basis. But the gain so made is not ordinary income by reason of the transaction being “private”, rather, it is because the gain is on capital account.
Disposition
Here, the learned primary judge accepted that the Nexus shares were purchased for the purpose of profit-making by their sale, although it may be accepted that the taxpayer was prepared to hold those shares for so long as it took for them to increase sufficiently in value. In that respect, the learned primary judge also noted that the taxpayer had not sold shares in companies in which he also had a substantial interest, namely MacPherson Resources and Elementos. In relation to those shares, the taxpayer’s plan was to “hang on” to them until they had grown in value, including “in the long term or any term”. This was in contrast to the many other acquisitions of parcels of shares he had acquired and which he had sold.
The learned primary judge was not satisfied that the Nexus shares had been acquired as part of a “business operation or commercial transaction” to use the language from Myer Emporium. His Honour said at [137]:
In my view, the Nexus shares were not acquired as part of a “business operation or commercial transaction” such that, on acquisition, they were stamped as being acquired on revenue account. I accept that the Nexus shares were acquired as a whole with the desire that the shares would go up in value and would be sold for a profit. Purchasers of listed shares often make the decision to acquire shares with a view to profiting from dividends or an increase in the share price or both. That hope or expectation does not necessarily make the purchase of the shares a “business operation or commercial transaction”. The purchase in such circumstances is an example of an ordinary investment engaged in by innumerable private investors each day and, without more, does not lend itself easily to the description of a “business operation or commercial transaction” (Myer) or a “commercial dealing” (McCurry).
His Honour, in reaching his conclusion, did not overlook the taxpayer’s active participation in litigation to prevent the forced disposal of the Nexus shares. His Honour said at [147]:
Whilst later events might be probative of the existence of an earlier intention, they cannot supply an intention which did not exist; nor can later events create a business operation which did not exist at the time of earlier acquisitions. As mentioned, it was not put by Mr Greig that the later purchases should be seen as having been acquired “in” a “commercial dealing” different to the “Profit Target Strategy” or the earlier purchases. These later events demonstrate that Mr Greig saw that the substantial investment position he had taken in Nexus was at risk and were entirely consistent with the steps one would expect to see of an investor seeking to protect his substantial capital investment, rather than one implementing a “commercial dealing” or business operation.
After much hesitation, and with the greatest of respect for the opinion of the learned primary judge, I find I cannot agree with the conclusion that the Nexus shares were not acquired in a “business operation or commercial transaction”. The shares were acquired with a view that they be sold at a profit in the short term; whilst no profit in fact was made, if the taxpayer had realised a gain, in my view, that gain would not have been characterised as windfall in nature or as the product of a game of chance or the pursuit of a hobby. Nor would the gain have been characterised as merely a realisation of a capital asset. That is so for a number of reasons:
(1)first, it is because the profit would have been the result of the implementation of an intention or purpose existing at the time of the acquisition of each Nexus share of profit‑making from their sale;
(2)secondly, it is because the realisation of profit formed part of the taxpayer’s overall sophisticated plan to generate cash profits prior to his retirement within four to five years;
(3)thirdly, it is because the shares were acquired in a systematic fashion on 64 occasions;
(4)fourthly, it is because of the taxpayer’s participation, either personally, or through the agency of Mr Foot, in a plan to crystallise indirectly what the taxpayer perceived was the true value of the Crux asset. It is true that the taxpayer’s level of activity increased over time and that one should not use hindsight to characterise all of the acquisitions of Nexus shares. At the same time, I observe that he acquired those shares progressively over time;
(5)fifthly, it is because the taxpayer used his business knowledge and experience. That knowledge and experience was applied each time Mr Greig decided to buy shares in Nexus; and
(6)sixthly, it is because the taxpayer relevantly acted as a “business person” would (as to which see below).
It follows that, in my view, the loss in fact encountered was on revenue account: c.f. Visy Packaging Holdings Pty Ltd v Federal Commissioner of Taxation [2012] FCA 1195; (2012) 91 ATR 810.
The fact that the taxpayer intended to hold his Nexus shares until he could secure his profit, whether in the “long term or any term”, does not detract from the conclusion I have reached. The taxpayer’s purpose was not to hold the shares as a long-term investment and to receive dividends over time. His plan was to sell the shares at a profit at least, I infer, up to the time of his retirement. If the profit had emerged quickly, I find that that is when he would have sold the Nexus shares. In that respect, I observe that some profit-making schemes can take many years to complete. In Whitfords Beach, the profit-making plan commenced in late 1967 and assessable profits were made from 1971 over a period of years. It is not antithetical to a profit‑making undertaking for a taxpayer to wait for the profit to become realisable, so long as that was the profit the taxpayer planned to secure. Waiting, without more, will not convert the profit eventually realised into an affair of capital.
Whether the taxpayer’s purchasing of shares was no more “than an example of an ordinary investment engaged in by innumerable private investors each day”, as the learned primary judge found, I cannot say. It may be doubted whether an ordinary private investor would have the same knowledge and experience as a local managing director of a significant worldwide group of companies. In that respect, the fact that the taxpayer engaged a stockbroker to undertake his share trading, is of no moment. It may be accepted that the taxpayer was enormously busy and relied in large part upon the services of Mr Foot to undertake research, to meet company representatives and to undertake the trades. It is also accepted that much of the taxpayer’s own physical activity was limited to meetings with Mr Foot, monitoring his investments and undertaking some research. But the key point is that Mr Foot acted on behalf of the taxpayer; as agent, his activities were, for present purposes, the activities of the taxpayer, and the profit-making scheme was the taxpayer’s scheme and not that of Mr Foot: c.f. Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209. Relevantly I note that this Court, on a number of occasions, has found a taxpayer to be carrying on a business, even though the taxpayer may personally have done as little as the taxpayer here did, sometimes less. The cases of Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 9 ATR 873, Federal Commissioner of Taxation v Lau (1984) 6 FCR 202 and Puzey v Commissioner of Taxation (2003) 131 FCR 244 suffice as examples.
Applying the test suggested by Parsons, it is also my view that the taxpayer acted in acquiring shares in Nexus as a “business person” would. He engaged professional help; he researched and monitored the value of his shares; he used his own business knowledge as a managing director to acquire more shares; he pursued a plan to exploit the unrealised value of the Crux asset; and he took steps to defend the value of his investment in court. His activities, I find, were entirely commercial and business-like. The evidence demonstrates “system and organization” in relation to the acquisition of Nexus shares, to borrow the language of Bowen C.J. and Franki J. in Ferguson. His share trading was not a hobby; it was not a pastime; it was not private gambling or gaming. And it was more than a “mere” realisation of an asset. I find it constituted a business dealing that would engage the principle in Myer Emporium.
The fact that the loss that was incurred was unexpected, and was not intended or planned for, compels no contrary conclusion. Losses are not often sought. In Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344, a taxpayer carried on the business of a departmental store which involved banking each morning the previous day’s takings. One day, on the way to the bank, two employees were robbed at gun point. The High Court said at 350-351:
The “occasion of the loss” in the present case was the course pursued in banking the money. In Commissioner of Taxation (N.S.W.) v. Ash [1938] HCA 68; (1938) 61 CLR 263, Rich J. said: “There is no difficulty in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognized incident of a particular trade or business the profits of which are in question. These are characteristic incidents of the systematic exercise of a trade or the pursuit of a vocation” [(1938) 61 C.L.R., at p. 277]. Even if armed robbery of employees carrying money through the streets had become an anachronism which we no longer knew, these words would apply. For it would remain a risk to which of its very nature the procedure gives rise. But unfortunately it is still a familiar and recognised hazard and there could be little doubt that if it had been insured against the premium would have formed an allowable deduction. Phrases like the foregoing or the phrase “incidental and relevant” when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income.
Something should finally be said about the “profit-making strategy” the taxpayer said he pursued. In one of his affidavits, the taxpayer explained this strategy as being the acquisition of undervalued stock to sell at a profit within a period of months. He deposed that the only shares acquired in accordance with this plan were the Nexus shares. His evidence was as follows:
Whilst my intention at the outset in early 2011 was to execute my Profit Target Strategy by acquiring shares in different companies, as events ultimately transpired, the only stock that I purchased in line with that strategy was Nexus. Nexus accordingly became the sole vehicle through which I worked to achieve my objective of making a short‑term profit by buying shares and then promptly selling them upon a material increase in their market value.
The foregoing statement is objectively inconsistent with the schedule of trades in evidence. They show, as already mentioned, the acquisition of securities on 218 occasions (in addition to the 64 occasions on which Nexus shares were acquired). The evidence is that during the relevant period the taxpayer held at the same time upwards of 44 different stocks. The schedule of trades also shows that the overwhelming majority of shares were sold within a short period of time. He made gains as well as losses.
The taxpayer’s evidence is also inconsistent with that of Mr Foot who deposed that when the taxpayer first instructed him he said he wanted “to find undervalued stock I can buy at decent volumes and then sell quickly in order to make a profit. I’m not looking for shares to hold in the longer term”. That instruction was given in January 2008 before the Nexus stock was first raised with the taxpayer in January 2011. Indeed, in the taxpayer’s own affidavit, he said that he generally wanted to generate “substantial cash profits in the short term and the stock market seems to be a suitable vehicle for achieving that objective”. I am unable to distinguish between the taxpayer’s object and purpose in relation to the acquisition of Nexus shares from his object and purpose in relation to the acquisition of his other shareholdings. There appears to be no material difference between the two. That he may have been less involved in the trading of the other stock, and in such cases was more reliant on Mr Foot, is not a relevant distinction. That is because Mr Foot acted on behalf of the taxpayer.
Accepting, as one should, that the testimony of a taxpayer should be cautiously considered, I am not satisfied that the taxpayer has proven that he acquired his Nexus shares in a meaningfully different way from his other share purchases. When one looks at the schedule of trades as distinct from the taxpayer’s evidence set out above, the inference should be drawn that all the shares were acquired for the purpose of profit-making and all bore the character of a business deal. In that respect, I am reminded of the decision in Livock v Federal Commissioner of Taxation (1985) 16 ATR 959. In that case, the taxpayer sought to draw a distinction between “trading shares” and “investment shares” that he had acquired for the purposes of s 26(a). Tadgell J. (as his Honour then was) rejected the existence of the distinction. At 960-961, Tadgell J. said:
When the appellant individually began to buy company shares in 1969 or 1970 or thereabouts he did so, he said, “just to make money out of them ... by selling them at a profit”. He was asked by his counsel in chief whether that intention “carried across in relation to all of your transactions”, to which he replied, “No, that wouldn’t”. Asked to explain “how a difference in view may have developed in your mind, as to different share purchases”, the appellant replied, “I viewed some shares to be purchased for investment, you know, to be held — you know, for dividend purposes, which is what — you know — what’s been cited in our — my returns over a number of years”. That answer should no doubt be taken to refer to the dichotomy mentioned in the appellant’s taxation returns from 1976 onwards between “trading shares” and “investment shares”. After he had said that his purpose in acquiring the trading shares was to sell them at a profit, he was asked what it was that prompted him to have a different purpose for the two categories of shares. He said “I wanted to have some investment ones. I just felt I should have some investments”. The appellant’s case (at least on this aspect of it) of course depended on the dichotomy, which was said to have reflected a state of mind negating an intention to purchase “investment shares” for resale at a profit. The appellant’s oral evidence, however, coupled with the available evidence of what he did with the shares after he had bought them, suggests that the distinction between “trading shares” and “investment shares” was one of words rather than of substance.
(Emphasis added.)
In my view, using the language of Tadgell J., the taxpayer’s distinction between his Nexus shares and other shares was “one of words rather than of substance”.
For the foregoing reasons, this appeal must be allowed and the taxpayer is entitled to a deduction pursuant to s 8-1 of the 1997 Act for the loss he made on the Nexus shares. It follows that he is also entitled to a deduction for his legal expenses. It will be a matter for the Commissioner to consider whether to reassess the taxpayer’s other gains from share trading.
I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Steward. Associate:
Dated: 2 March 2020
Key Legal Topics
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Taxation Law
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Allowable Deductions
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Revenue Account
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Capital Account
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Appeal
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