John v The Commissioner of Taxation

The High Court of Australia considered an application for special leave to appeal in a matter between John (the taxpayer) and the Commissioner of Taxation. The dispute concerned the tax treatment of share trading activities undertaken by a partnership in which the taxpayer was a member. The taxpayer had been successful at first instance before Yeldham J in the Supreme Court of New South Wales, but this decision was overturned by the Full Court of the Federal Court.

The central legal issue before the High Court was whether the taxpayer's primary motive of obtaining an income tax benefit by way of a partnership deduction, arising from the application of the principles in *Curran's* case, invalidated the partnership's business of share trading and the tax treatment of its transactions. Specifically, the court needed to determine if the partnership was genuinely carrying on a business of share trading and if the dealings in the Compinge shares, which were analogous to the shares in *Curran's* case, were conducted in the course of that business.

The court was informed that the primary facts were not in dispute. The taxpayer and 19 others formed a partnership with the stated purpose of share trading, contributing $100,000 for the purchase of shares. The terms for purchasing unlisted shares in the Compinge companies had been substantially negotiated before the partnership's formation. A licensed investment adviser conducted the buying and selling activities, and the transactions were not alleged to be shams. Yeldham J had found that the partnership was carrying on a business of share trading and that the dealings in the Compinge shares were within the scope of that business, applying *Curran's* case. The essence of *Curran's* case, as explained, involved treating original shares as costing the purchase price and bonus shares as costing the amount of the dividend declared and applied in paying them up, with the proceeds of sale and the dividend forming assessable income, subject to the exemption of the dividend under section 44 of the *Income Tax Assessment Act*.