Robert Elvy and Commissioner of Taxation

[2012] AATA 862

[2012] AATA 862

Division	TAXATION APPEALS DIVISION
File Number(s)	2011/3354
Re	Robert Elvy
APPLICANT
And	Commissioner of Taxation
RESPONDENT

DECISION

Tribunal	Deputy President S E Frost Senior Member G Lazanas
Date	7 December 2012
Place	Sydney

Decision Summary

The objection decision is affirmed.

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

Deputy President S E Frost

Catchwords

INCOME TAX – loss deduction claim – Income Tax Assessment Act sec 8-1 – whether losses incurred in gaining or producing assessable income – whether intention or purpose to make profit or gain – intention or purpose measured objectively – surrounding facts and circumstances – whether reasonable expectation of profit or gain – profit-making scheme – the objection decision is affirmed

Legislation

Income Tax Assessment Act 1997 s 8-1

Cases

Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199

REASONS FOR DECISION

Deputy President S E Frost
Senior Member G Lazanas

7 December 2012

INTRODUCTION

1. Robert Elvy is an experienced businessman.  He is also a proud resident and supporter of Wollongong and the Illawarra region. 

2. In 2005, he became aware of what he calls “financial difficulties” that were being experienced by the company running the local basketball team, the Wollongong Hawks, who played in the National Basketball League (NBL).  One of his colleagues asked him to contribute money to the company.  He and a number of other men did so.  They hoped they could turn the company around. 

3. Unfortunately, their efforts were unsuccessful.  In 2009 the company appointed an administrator and during the 2010 income year it went into liquidation.  The money Mr Elvy had contributed, $350,000 in total, was lost. 

4. In his income tax return for the 2010 year, Mr Elvy claimed the $350,000 loss as a deduction against his assessable income.  The Commissioner disallowed the claim.  Mr Elvy’s objection against the Commissioner’s assessment was disallowed, and Mr Elvy has applied to the Tribunal for review of that objection decision.

5. We have concluded that the Commissioner’s objection decision is correct.  Our reasons follow.

   THE LOSS

6. The $350,000 that Mr Elvy put into the company has two components.

7. The first component amounts to $110,000.  This is money that Mr Elvy paid for the purchase of shares in the company.  We will refer to this amount as the Share Advances.  The shares were declared worthless when the company went into liquidation. 

8. The second component amounts to $240,000.  This amount, contributed in instalments over a period of a little over two years, was originally provided for the purchase of additional shares in the company.  However, Mr Elvy says that additional shares were not provided, and these sums should now be regarded as loans.  We will call these amounts the Loan Advances.  The loans are not recoverable, the liquidator having informed the unsecured creditors that there would be no distribution to them.

   THE DEDUCTION CLAIM

9. Mr Elvy has claimed the total amount of $350,000 as a loss under s 8-1 of the Income Tax Assessment Act 1997, on the basis that the contributions were incurred in gaining or producing his assessable income.  He claims that he was involved in a profit-making scheme and that the amounts of the Share Advances and the Loan Advances are deductible as a result of the loans being written off in the 2010 income year and the shares losing their value in that year.

   MR ELVY’S ADVANCES TO THE COMPANY

10. In early 2005, when Mr Elvy was first approached to contribute money to the company, he was a director and chief executive officer of a family owned building and construction business employing about 350 staff.  He had extensive corporate experience, having been a director of the Illawarra Mutual Building Society since March 2008, a director of Illawarra District Rugby League Football Ltd from 1991 to 1997 (and its chairman from 1992 to 1997), chairman of the Illawarra Sports Stadium Ltd since 1992, and a trustee of the Wollongong Sportsground Trust from 1992 to 1997. 

11. It seems that the approach that was made to Mr Elvy was motivated by two factors: first, that his financial contribution would assist the company; and second, that his experience as a company director may improve the operations of the company.

12. Mr Elvy explained his own motivation in agreeing to the request for assistance as follows[1]:

    The reason I made the investment was because I formed a view that with my involvement and that of my Colleagues in the Company, we could “turn the Club around”.  That is we could make it financial[ly] viable and profitable, and as a consequence my investment in the Company would increase in value.  My aim was to sell my shares and crystallise this increase in the value.  However, by investing in and becoming a shareholder in the club I was also enthused to be involved and assisting the basketball team.  This had two personal aspects, [the] first being my having played the game when younger, and second maintaining a locally based sporting team at a national level for Wollongong.

    In terms of its return as an investment I took the view that it was a high risk high return investment.  The financial well being of the Company was likely to be principally dependent on sponsorship of the Team, and the value of the Company on the value of the goodwill attributable to this sponsorship and the basketball licence held by the Company.  This licence allowed the Club to play in the basketball competition organised by the National Basketball League (“the NBL”).  The NBL was responsible for the organisation of the basketball competition the Team played in (“the Competition”), the leading basketball competition run in Australia.  However, the value of the Company also was dependent on how well run the Company was.

    While it was a high risk high return investment, it was made as a profit-making decision.  I was and am not adequately financially well off to regard this investment as a private venture.  I did not make my investment decision principally because of my interest in basketball or maintaining the club in Wollongong.  I did it to make a profit.  I intended to make a profit by selling my shares.  When the Company was financially stable and profitable I expected that its value would increase.  As well I expected that a market would exist of people interested in owning shares in and/or controlling the Company and the Club.  I was not interested in holding the shares on a long term basis, with an expectation of dividend returns to me.  As a long term investment, an interest in a basketball company would be much too high risk to be of any interest to me.

    [1] Exhibit A1, [4]-[6]

13. Mr Elvy made the Share Advances over the period February 2005 to June 2006.  He received shares in the company in return for those advances, and in March 2006 he joined the board as a non-executive director. 

14. From November 2006 to January 2009 he contributed the Loan Advances.  As he explained in a letter to the Australian Taxation Office (ATO) dated 24 March 2011[2]:

    Whilst all contributions were intended to be to purchase shares (providing working capital to the company), the company in fact did not issue further shares but received the monies a[s] loan monies.

    [2] T5-67

15. The Loan Advances were made on an interest free basis[3].

    [3] T5-67

    MR ELVY’S CONTRIBUTION TO THE OPERATIONS OF THE COMPANY

16. Apart from contributing the money to the company, Mr Elvy also spent a considerable amount of time working for the company without remuneration.  He says that he did this “to improve the business operations of the Company”[4].  His involvement in the company included time spent at board meetings, finance meetings and marketing meetings, personal attendances at the company offices several times a week, and making contact with other directors, office staff, sponsors, creditors, debtors, coaching staff, players, venue hire management, NBL management and others.  He described his work as[5]:

    ... work done by me to enhance the value of my shares in the Company, which as I have said above I intended to sell when they increased in value.

    [4] Exhibit A1 [11]

    [5] Exhibit A1 [15]

17. Mr Elvy resigned as a director in November 2008 because of other work commitments.

    THE COMPANY GOES INTO LIQUIDATION

18. The efforts to “turn the company around” were ultimately unsuccessful.  Mr Elvy says that the company’s financial difficulties were much greater than he and his colleagues had been told.  He could no longer justify making further financial contributions and it seems that his colleagues thought the same.  The company was eventually wound up in or about mid 2010.

    ARE THE LOSSES DEDUCTIBLE?

19. Mr Elvy’s claim is based on his having been involved in a profit-making scheme which would have rendered assessable any profit he would have made on the sale of his shares.  In summary, he claims that he did not make a passive long-term investment in the company; rather, he undertook a scheme which involved the purchase of shares with a view to selling them at a profit.

20. To make good his deduction claims, Mr Elvy must as a threshold issue satisfy us that his intention or purpose in making the contributions to the company was to make a profit or gain.  This is something he has failed to do.

21. It is true that he has asserted in his affidavit that he made the contributions so that he could make a profit or gain on the sale of the shares.  But that does not make it so.  This is because, even if we were to accept the genuineness of Mr Elvy’s assertion, a taxpayer’s subjective intention or purpose is not determinative of the issue.  The intention or purpose of the taxpayer is to be measured objectively, by reference to the surrounding facts and circumstances.  As the High Court said in Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199 at 209-210:

    ... 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 ...

22. There is a distinct lack of commerciality in these arrangements, and while Mr Elvy no doubt hoped that he was not simply throwing his money away, there is no basis on which we could infer that, objectively, he entered into the transactions with an intention or purpose to make a profit or gain.

23. There are several circumstances tending away from a conclusion that Mr Elvy was involved in a profit-making scheme.

24. The first is the fact that the contribution of the Share Advances was made over a period of 16 months, as follows:

    ·$60,000 on 28 February 2005;

    ·$18,000 on 3 May 2005;

    ·$25,000 on 1 February 2006;

    ·$7,000 on 20 June 2006.

25. There is no evidence that the company’s prospects started to improve after the first contribution, so as to justify some reasonable expectation of profit or gain from the later contributions.  Indeed, given the fact that further contributions were considered necessary “as a contribution to the Hawks working capital”[6], it is much more likely that the company’s performance was slipping.

    [6] Mr Elvy’s letter dated 3 May 2005 to the CEO of the company, T5-70

26. The second is that Mr Elvy regards his unremunerated contribution to the company’s operations as an important element of the profit-making scheme.  But these activities were undertaken at a time when he was engaged in full-time employment as the chief executive officer of a company employing 350 staff.  A scheme that relies so heavily on the part-time input of Mr Elvy and his colleagues as contributing to the improvement of the company’s fortunes could not be regarded as a scheme likely to result in an increase in the value of the shares.

27. The third is that the circumstances, viewed overall, seem to have a haphazard nature about them rather than the methodical, focused approach one would expect to see in a profit-making undertaking.  The initial, larger contribution has the appearance of a payment designed to prop up the company; the later contributions seem no less so.  In addition, the timing of the contributions seems to have no structure around it, but instead to be driven by the needs of the company.  In other words, Mr Elvy’s contributions appear to be entirely reactive to the company’s financial position.  In contrast to that, we would have expected to see evidence of Mr Elvy’s considered and informed decision-making in respect of the contributions, with reference both to the quantum and the timing of them.

28. The fourth is that there is no clearly articulated explanation of what Mr Elvy might have expected to achieve from the undertaking.  We are left to speculate as to the potential profit that may have accrued to him and, in any event, we would have had no way, on the evidence, to assess whether his expectations, or hopes, might have been capable of realisation in the future.  It does not assist Mr Elvy’s case that he himself was uncertain as to how, and to what extent, the value of the company would increase[7].

    [7] Exhibit A1 [9] – [10]

29. The fifth relates specifically to the Loan Advances.  Mr Elvy has re-characterised these amounts as loans because, although they were originally intended to be payments for further shares, no further shares were issued by the company.  It is not clear to us why, in an arrangement which is said to be undertaken for the purpose of making a profit, a person in Mr Elvy’s position would accede to the company’s treatment of the contributions in that way.  Nor is it clear how that revised treatment can support the overall claim that the entire undertaking was a profit-making scheme.

    CONCLUSION

30. In summary, the evidence in support of Mr Elvy’s characterisation of the contributions is unconvincing, and in many respects vague and unspecific.  It does not support his claim that the contributions were made as part of a profit-making scheme or undertaking.  The objection decision is affirmed.

I certify that the preceding 30 (thirty) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost and Senior Member G Lazanas

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

Associate

Dated 7 December 2012

Date of hearing	16 August 2012
Counsel for the Applicant	Mr R Niemann
Solicitors for the Applicant	Rawcliffe & Associates
Counsel for the Respondent	Mr R Scruby
Solicitors for the Respondent	ATO Legal Services Branch