Hill and Commissioner of Taxation (Taxation)
[2019] AATA 1723
•8 July 2019
Hill and Commissioner of Taxation (Taxation) [2019] AATA 1723 (8 July 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2018/3320, 3321 and 3322
Re:Greg Hill
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Deputy President P Britten-Jones
Member S Griffiths
Date:8 July 2019
Place:Adelaide
The decision under review is affirmed.
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Deputy President Britten-Jones
Member Griffiths
CATCHWORDS
Allowable deductions — Losses — Losses incurred in carrying on a business — Indicia of carrying on a business — Indicia of carrying on a share trading business — Taxpayer engaged in purchase and sale of shares — Deduction for loss disallowed — Whether taxpayer carrying on share trading business — Consideration of indicia — No system and regularity of trades — Lack of sophistication — No engagement of professional assistance despite having no relevant qualifications — Income Tax Assessment Act 1997 (Cth), s 8–1 — The Tribunal affirms the decision under review.
LEGISLATION
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth)Taxation Administration Act 1953 (Cth)
CASES
AAT Case 6,297 (1990) 21 ATR 3747
Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307
Martin v Federal Commissioner of Taxation (1953) 90 CLR 470
Hartley and Federal Commissioner of Taxation (2013) 93 ATR 985
Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459
REASONS FOR DECISION
Deputy President Britten-Jones
Member Griffiths8 July 2019
The applicant seeks a review of the respondent’s objection decision to disallow the applicant’s objection to the respondent’s audit review decision and finding that the applicant’s share trading activities were not a “business”, with the consequence that the applicant was not entitled to claim or carry forward existing losses he had initially claimed in the 2015, 2016 and 2017 income years (the relevant period).
The central issue for determination is whether the applicant was carrying on a share trading business during the relevant period.
The applicant was in the aviation industry as a licensed aircraft maintenance engineer until he decided to retire in February 2010. He had been investing in the Australian share market from 1988 including through a margin lending account. Upon his retirement, the applicant invested his superannuation in the Australian share market and used a $600,000.00 Westpac investment loan to commence share trading on a full-time basis. He suffered significant losses in those first two years and had to return to his aviation career in November 2012 so as to repay his Westpac investment loan. That loan was repaid in 2015.
The applicant worked as an engineer in Alice Springs from November 2012 until he was retrenched on 31 December 2016. During this period he worked from 6 am to 6 pm four days on and four days off. At the same time he bought and sold shares on the Australian Securities Exchange (ASX). He generally placed his orders on his days off. He held a share trading account with Commsec and Westpac. He sometimes bought and sold from his mobile phone but most of the transactions were carried out using a computer situated in a home office that had been set up for the purposes of trading.
The applicant gave evidence of a business plan for his share trading activities which involved the purchase of undervalued shares and the sale of overvalued shares. He used online Commsec Securities and Westpac accounts to trade shares. He did not utilize the services of a stockbroker or other financial advisor. He read about various shares, commodities and options to assess their likelihood of increasing in value and he researched stock market commentary. He spent time daily monitoring trading activity with respect to certain shares and commodities. His research included watching CNBC and Bloomberg news daily to which he subscribed through his Foxtel subscription. He received daily updates from MorningStar and through a website called Hot Copper.
His stated goal in preparing the share trading plan was to obtain a level of income after retirement from the aviation industry. His business plan was set out in a half page document written in 2010. It included that his trading objectives were “to trade in shares that give a high level of fully franked dividend from the S&P/ASX 200 and to provide capital growth over the medium to long term”. His suggested investment period was “five years to 10 years or longer”. The business plan included a reference to “professional management of portfolio, experienced in share trading and investment”.
The relevant period commenced 1 July 2014 and continued to 30 June 2017. Having paid off his Westpac loan in 2015 there were no other loans associated with his share trading during the relevant period.
In the year ending 30 June 2015, the applicant engaged in 14 separate trades on the ASX. The trades were all buy orders and were placed on nine different days. Thirteen of the fourteen trades were carried out in the period 19 September 2014 to 23 December 2014. There was then a gap until 25 June 2015 when the final trade for that financial year was carried out. The shares purchased in this financial year were Galaxy Resources Ltd (Galaxy) and Rum Jungle Resources Ltd (Rum) for a total of approximately $116,000. The applicant received no dividends in this year.
In the year ending 30 June 2016, the applicant engaged in 23 separate trades confined to Galaxy and Rum. The trades were a mixture of buy and sell orders and were placed on 15 different days. In the first four months of this financial year, there was only one trade which took place on 25 August 2015. The value of shares traded in this financial year was significant amounting to approximately $844,000.00. The applicant received no dividends in this year.
In the year ending 30 June 2017, the applicant engaged in 32 separate trades in which he sold down his holdings in Galaxy and purchased Telstra Ltd (Telstra) and Djerriwarrh Investments Limited (Djerriwarrh) together with a small amount in options. Most of the trading took place between 30 December 2016 and 24 May 2017. There were two trades on 10 and 11 October 2016 but no trades between 21 April 2016 and 9 October 2016. The value of shares traded in the financial year was again significant amounting to approximately $2.78 million. Some dividends were received in this year.
The applicant accepted that his portfolio of shares was not diversified in 2015 and 2016 but that was due to his poor financial situation. His portfolio became more diversified in 2017.
The applicant used MYOB accounting software to prepare what is described as a profit and loss statement for Greg Hill Share Trading during the relevant period. His accountant later told him that these profit and loss statements were not accurate and did not include the correct cost of sales.
The applicant gave evidence that he registered an Australian Business Number for share trading in 2010. Under cross-examination it became apparent from an extract of the Australian Business Register that the trading name associated with the ABN of the applicant was Western Avionics which had nothing to do with his share trading activities. The applicant then conceded that he did not conduct his share trading activities through his ABN. He also conceded that he did not register Greg Hill Share Trading as a business name or as a trading name. The applicant said that it was only last year that he first provided Commsec with his ABN. In his tax returns for the relevant period, the applicant described his main salary and wage occupation as aircraft maintenance engineer – avionics.
Legislative framework
Section 8-1(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a loss or outgoing can be deducted from assessable income to the extent that it is necessarily incurred in carrying on business for the purpose of gaining or producing assessable income. The issue of deductibility of interest under s 8-1(1)(a) of the ITAA 1997 does not arise because no dividends were paid whilst the Westpac loan was in place. Section 35-10(2) of the ITAA 1997 requires there to be a business activity. If the applicant fails to establish that he was carrying on a business then he will not succeed on his application.
The applicant asserts that he was carrying on a business of share trading. Whether the applicant carried on a business requires “a wide survey and an exact scrutiny of the taxpayer’s activities”.[1] In Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 (Spriggs), the High Court stated that the existence of a business:
will depend on a number of indicia which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner (footnotes omitted).[2]
[1] Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1, 20 [60].
[2] Ibid, 19 [59].
Ultimately, the question of whether a business is carried on is a matter of fact and degree based on a wide survey and the overall impression of the taxpayer’s activities.[3]
[3] Steele v DCT (1999) 197 CLR 459 at 476; Spriggs (2009) 239 CLR 1 at [59]; Ferguson v FCT (1979) 26 ALR 307 ; [1979] FCA 2; and Martin v Federal Commissioner of Taxation (1953) 90 CLR 470 at 474.
We note the definition of “business” in s 995-1 of the ITAA 1997 and that it “includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee”. This is not particularly helpful. A more helpful approach is to assess whether a business exists by considering a number of accepted factors which point in one direction or the other. The most commonly referred to summary is that of Deputy President Todd in AAT Case 6,297 (1990) 21 ATR 3747 which was cited in Hartley and Federal Commissioner of Taxation (2013) 93 ATR 985 at [20]:
The question is essentially one of fact. In deciding this issue the case law has established the following factors as generally relevant considerations:
(a) the nature of the activities and whether they have the purpose of profit-making;
(b) the complexity and magnitude of the undertaking;
(c) an intention to engage in trade regularly, routinely or systematically;
(d) operating in a business-like manner and the degree of sophistication involved;
(e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
(f) the volume of the taxpayer’s operations and the amount of capital employed by him;
and more particularly in respect of share traders:
(a) repetition and regularity in the buying and selling of shares;
(b) turnover;
(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;
(d) maintenance of an office;
(e) accounting for the share transactions on a gross receipts basis;
(f) whether the taxpayer is engaged in another full-time profession.
Application to the facts
Counsel for both parties urged us to take an impressionistic approach as opposed to a checklist approach so as to determine whether the applicant was carrying on a business. In so doing we have considered the above factors.
Our overall impression of the activities being carried out by the applicant during the relevant period was that they were not business activities and that he was not carrying on a business. During the first 18 months the applicant simply purchased shares in Galaxy and Rum (except for two sell orders of Galaxy on 2 November and 23 December 2015). During the first 30 months all trading was confined to Galaxy and Rum except for two purchases of Djerriwarrh shares on 10 and 11 October 2016. There were no trades in the six month period up to 25 June 2015. In the first four months of the 2016 financial year there was only one trade on 25 August 2015. There were no trades between 21 April 2016 and 9 October 2016. The vast majority of trading was confined to Galaxy and Rum. It was not until the third year of the relevant period that the applicant traded in Djerriwarrh, Telstra, Verdant Minerals Ltd and Bluescope options.
The share trading was infrequent and characterised by numerous periods of no trading. There was no established system and the trading was irregular. The portfolio of shares held and traded was not extensive. The lack of regular or routine trading tends to point to the applicant being involved in a series of individual transactions on a speculative basis rather than as a share trader conducting a business. The applicant was working full time in the aviation industry for the majority of the relevant period (30 months out of 36 months) and my overall impression was that the share trading activities were very much a side issue which did not occupy a significant amount of the applicant’s time until the final 6 months when trading became more frequent and extensive.
We accept that a business does not necessarily have to occupy the majority of a person’s working life and that some businesses may be operated “on the side”. However, the applicant did not arrange his share trading activities in a business-like manner. The applicant did not incorporate a trading vehicle or register a business name or trading name. He did not engage any professionals despite having no relevant formal qualifications himself. There were few records kept of the trading or other associated activities. The lack of records became apparent when the applicant failed to produce an accurate record of his trading in Galaxy. Instead he produced an incomplete summary of that trading in the attachment marked “GBH2” to the applicant’s written statement dated 15 January 2019. If accurate contemporaneous records had been kept then there would have been no problem in preparing an accurate summary for his statement. Further, the profit and loss statements prepared by the applicant were incomplete and inaccurate. Accurate accounting records are very important to a business and one would have thought that the applicant would have sought professional assistance from a book keeper or accountant if his intention was to operate a business of share trading.
Another indication that the applicant was not conducting a business was the lack of sophistication about the share trading activities. The applicant engaged no professional assistance from a stock broker or financial planner despite having no qualifications in these areas. The research conducted by the applicant was unsophisticated relying on readily available sources from Foxtel, Commsec, Westpac and the internet generally. The applicant kept no records of this research or of any of the relatively minor expenses associated with this research. There were no budgets of intended expenditure or expected revenue.
The written business plan was unsophisticated and contained very little detail. Stating an intention to invest in shares so as to receive dividends and capital growth in the medium to long term is not indicative of an intention to carry out a share trading business. Further, the plan was not adhered to because the shares purchased during the first 2 years of the relevant period did not provide any dividends and there was no professional management of the portfolio. The applicant explained that he did not follow his business plan when his financial position deteriorated and that it changed at that time. There is no written documentation of that change which again suggests a failure to act in a business-like manner.
We accept that the applicant established a separate office for his share trading activities and that these activities increased to a significant level over the relevant period. There is no doubt that the applicant made a very significant investment in the share market. By investing his superannuation and taking out a Westpac loan, the applicant was putting all his eggs in the one basket, namely the ASX. This was a high risk strategy but is not necessarily indicative of a business being carried on. Our overall impression was that the applicant’s share trading activities were not carried out in a business-like manner. His activities were very basic and lacked the sophistication to be a share trading business.
Decision
The applicant sought a remittal to the respondent in the event that a finding was made that he carried on a business. We have not so found but in any event there is no power to remit under section 43 of the Administrative Appeals Tribunal Act because of the operation of section 14ZZK of the Taxation Administration Act 1953 which on the evidence provided is not satisfied.
For the reasons above, the respondent was correct to find that the applicant’s share trading activities were not a business. The Tribunal affirms the decision under review.
I certify that the preceding 26 (twenty-six) paragraphs are a true copy of the reasons for the decision herein of Deputy President P Britten-Jones and Member S Griffiths.
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Associate
Dated: 8 July 2019
Dates of hearing: 4–5 July 2019 Representative for the Applicant Mr M Robson, Robson Legal Representative for the Respondent Mr T Besanko instructed by Australian Government Solicitors
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