Ron Hartley and Commissioner of Taxation
[2013] AATA 601
[2013] AATA 601
Division TAXATION APPEALS DIVISION File Number(s)
2012/5198; 2012/5199
Re
Ron Hartley
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President Date 26 August 2013 Place Sydney The decision under review is affirmed.
........................................................................
Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION – income – whether the applicant conducted a business of share trading – consideration of factors indicative of a business being conducted – decision under review affirmed.
LEGISLATION
Income Tax Assessment Act 1997 s 8–1; pt 3-1
A New Tax System (Goods and Services Tax) Act 1999 s 195-1
CASES
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187
AAT Case 6,297 (1990) 21 ATR 3747
Shields v Deputy Federal Commissioner of Taxation (1999) ATC 2037Re The Taxpayer and Commissioner of Taxation (2011) 84 ATR 659; [2011] AATA 545
REASONS FOR DECISION
Professor R Deutsch, Deputy President
26 August 2013
FACTUAL BACKGROUND
The Applicant is, and was at all relevant times, a full-time council employee, a position which occupies him for 38 hours per week.
For many years he has also been actively involved in the share market and, according to his testimony, that activity occupied him for about 15 hours per week. As the markets he traded in were open only during business hours, all his transacting took place during the ordinary working day. To the extent that his share market activity involved attention between 10 am and 4 pm he would make up any lost time to his employer by working back after hours. This all seemed to be part of an undocumented but accepted arrangement with his employer.
Since at least 2008 the Applicant asserts that his share market activities constitute a business for tax purposes. The Respondent asserts that no such business has been carried on by the Applicant.
For each of the three tax years ending 30 June 2009, 2010 and 2011, the Applicant, through his tax agent, lodged income tax returns claiming significant amounts as deductions based on the premise that the amounts in question were deductible as a business existed at the relevant times.
On 29 September 2011, the Respondent notified the Applicant’s tax agent that a review would be conducted of the Applicant’s tax returns for those years and requested substantiation of the deductions claimed.
On 17 May 2012, the Respondent completed the audit for the three years in question and made determinations based on the premise that the Applicant was a share investor and was not carrying on a business of share trading.
An administrative penalty was imposed for the 2009 year based on a lack of reasonable care.
On 18 June 2012, the Applicant lodged an objection against the notices of amended assessment and notice of assessment (in the case of the 2011 year) of income tax and shortfall penalty.
On 30 August 2012, the Respondent issued the Objection Decision which allowed the objection in part by reducing the shortfall penalty to nil for the 2009 year.
On 31 October 2012, the Applicant applied to this Tribunal for a review of the Objection Decision.
The Respondent conceded that he was out of time to amend the Applicant’s assessment for the 2009 year.
Having regard to the concessions made by the Respondent all that remains in dispute between the parties and therefore all that is the subject of this decision is the substantive issue as to whether the Applicant was a share investor in the 2010 and 2011 years as the Respondent asserts or a share trader as the Applicant asserts.
Nature of the Activity
The share market activity appears to have been fairly active although the evidence suggests a slowing of such activity in recent times. There was some conjecture as to the exact reason for the slowing – it appears that both the after-effects of the Global Financial Crisis which made the Australian market turn negative for a lengthy period of time and the fact that the Applicant over-stretched himself financially through the purchase of property in December 2010/January 2011 had something to do with that slowdown in activity.
In the 2010 year there appears to have been 40 transactions with turnover of $934,575 and in the 2011 year there appears to have been 25 transactions with turnover of $385,938 (Exhibit A4). The sales that took place were on average for an amount in the order of $40,000 per parcel (Exhibit A2).
LEGISLATIVE FRAMEWORK
Section 8–1 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.
At its most fundamental level, the parties here are in dispute as to whether or not the Applicant in this case was carrying on a business as required by this statutory provision.
The Applicant asserts that he was carrying on a business, namely, a business as a share trader; by contrast, the Respondent asserts that the Applicant was a share investor or, possibly, a speculator and the shares should be treated as assets only for the purposes of capital gains tax and any gains or losses made from the disposal of the shares would be of a capital nature and subject to the capital gains tax provisions contained in Part 3-1 ITAA 1997.
Whether or not someone is engaged in a business is a question of fact, but in many cases it is a question that does not admit of an easy answer.
Essentially, the answer depends on the impression which the decision-maker forms having regard to all the circumstances, and in doing so, no single factor is necessarily determinative (see Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187 at 202 per Hill J).
Although some attempts have been made to define the notion of “business” for taxation purposes (see, for example, s 195–1 of the A New Tax System (Goods and Services Tax) Act 1999 defining business as “any profession, trade, employment, vocation or calling, but does not include occupation as an employee”) the more usual approach and the one adopted in the income tax context is to assess whether a business exists by considering a number of accepted factors which point in one direction or the other. Perhaps the most helpful summary is that suggested by Deputy President Todd in AAT Case 6,297 (1990) 21 ATR 3747 which was cited with approval by Senior Member Block (as he then was) in Re Shields and Deputy Commissioner of Taxation (1999) 41 ATR 1042 at 1048:
The question 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
Although not strictly necessary to do so, I find it helpful to now consider each of these matters sequentially in the context of the facts of this case.
‘The General Factors’
Nature of the activities and profit-making purpose - I am satisfied from the evidence provided by the Applicant that the nature of the activities was something more than a mere academic pursuit or a hobby. I am also satisfied that there was, at the very least, an intention to make a profit out of the purchase and sale activities in question and it was the intention that such profits would be generated in a reasonably short time frame.
This factor supports the view that the Applicant was conducting a share trading business.
Complexity and magnitude of the undertaking - the Respondent contended that the trading activities of the Applicant were far from complex with the share purchasing being generally directed towards blue chip companies and that speculative shares made up but a small portion of the overall shareholding. It is true that the activities in question did not appear especially complex with most of the activity being restricted to the straightforward purchase and sale of shares. There appears to have been very little in the way of risk minimisation such as stop-loss orders or the use of derivatives for hedging purposes. I do note, however, that particularly in the year to 30 June 2010, a rather large number of share transactions occurred in many different companies although, as noted by the Respondent, most of these involved what might loosely be described as ‘blue chip’ companies listed on the Australian Stock Exchange.
However, I am not convinced that merely restricting one’s activities to mainly ‘blue chip’ companies makes the activity less complex in a material way than if a broader cross-section of shares was being transacted. It can show some intent to derive dividends rather than buy and sell shares to derive profit, but the facts here do not necessarily point in that direction.
The taxpayer utilised the services of Comsec and a number of other brokers and advisory institutions to assist in his research and decision-making.
As indicated above, the magnitude of the transactions in question was reasonably substantial with turnover in excess of $900,000 in the 2010 year and almost $400,000 in the 2011 year. In addition, there appears to have been some 40 transactions in the 2010 year and 25 transactions in 2011. While these figures are perhaps not all that large by some standards, for a private individual with a salary below $200,000 a year they are not insignificant turnover amounts and the number of transactions, while not huge, are reasonably large.
Thus, this double-barrelled factor points in both directions: complexity against and magnitude in favour of the Applicant having conducted a share trading business.
Intention to engage in trade regularly, routinely or systematically - looking at the totality of the evidence it could not be said that the Applicant’s activities demonstrate an intention to trade regularly or routinely. In particular, the Applicant did not purchase any shares at all in seven of the 12 months in respect of the year ended 30 June 2010 and no share sales took place in five of those months. In the year ended 30 June 2011 only eight purchases appear to have been made in a three month period. 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 the share trader.
In one sense there was a system involved in which the Applicant purchased and sold shares. This was partly explained through the belated preparation of a so-called “Business Plan” which suggested a system whereby the market would be evaluated on a day by day basis each morning with research being conducted at night. Shares would be acquired either because they provided potential capital growth, good dividends or some special circumstance applied to make the shares cheaper than they might otherwise have been. The shares were then held until such time as better alternatives arose. While this was a plan of sorts it was neither particularly sophisticated nor intricate. and for the most part appeared to be as much in the head of the Applicant as it was in writing.
This factor points against the Applicant having conducted a share trading business.
Operating in a business-like manner and the degree of sophistication involved - as has previously been mentioned (see Re The Taxpayer and Commissioner of Taxation (2011) 84 ATR 659; [2011] AATA 545 at [21]) the question of whether or not a taxpayer operated in a business-like manner is becoming “increasingly fluid” and it should not be necessary to stick rigidly to somewhat antiquated concepts involving a business office and activity conducted therefrom. Modern technologies such as a laptop and an internet connection combined with a mobile phone can facilitate the conduct of a business from any location, at any time, with research and transactions being conducted online or, perhaps, by phone. Nonetheless, in this case, the Applicant did dedicate an area at his domestic residence as an office for the purpose of conducting research and share purchase and sale activities, and utilised modern technologies as needed.
As mentioned previously, the degree of sophistication involved in this case was not substantial, though it did involve the use of a margin loan facility and the Applicant did enlist the assistance of Comsec and other broking/research enterprise to assist in his research and transactional activities.
On balance, while there are some elements suggesting business-like activities (e.g. the dedicated office) the operation was very simple, lacked any real sophistication and overall was not consistent with the operation of a business. This factor points against the Applicant having conducted a share trading business.
Did profits/losses arise from a discernible pattern of trading? – it remains unclear to me as to what exactly is meant, in this context, by a “discernible pattern of trading”. From the evidence it would appear that the Applicant did have a plan albeit a rudimentary one, but this plan did not incorporate a pattern of trading and the execution of the plan revealed no pattern as such. To the extent that it is relevant, which in my view is questionable, this factor points against the Applicant having conducted a share trading business.
The volume of the taxpayer’s operations and the amount of capital employed by him - I have already commented on the volume of the operations and on the amount of capital employed by him and I am satisfied that those numbers are adequate to be suggestive of a share trading activity.
Thus, this factor supports the view that the Applicant was conducting a share trading business during the relevant period.
‘Specific Share Trading Factors’
In relation to the remaining six items which are more particularly targeted at share traders some factors favour the Applicant and some the Respondent.
Favouring the Applicant are the following factors:
·turnover in gross terms was quite large, particularly having regard to the Applicant’s salary;
·the Applicant maintained an office specifically for the purpose of conducting his share purchase and sale activities; and
·records of transactions were kept for the purposes of doing accounting and tax calculations (although not necessarily on the gross receipts basis).
Favouring the Respondent are the following factors:
·the buying and selling of shares was not regular or routine;
·there appears to have been very little in the way of a plan although belatedly a written plan was produced; very little appears to have been done in terms of setting budgets and targets; and the trading and the background research was simple and unsophisticated; and
·the taxpayer was engaged in another full-time profession as a council employee.
This last point is particularly troubling since the employment of the Applicant on a full-time basis is hardly consistent with the conduct of an on-going business which requires, at its very essence, the purchase and sale of shares during the hours in which he was engaged in full-time employment.
The Applicant indicated in his evidence that his employer gave him some flexibility in this regard so as to enable the Applicant to conduct the share purchase and sale activities during standard work hours but this was merely a broad, vague and largely unsubstantiated assertion.
In my view a business can rarely be conducted by a person where that person is engaged in a full-time occupation as an employee and the activities that are said to constitute that business requires that person’s participation during standard work hours on a flexible and frequent basis.
On balance, the specific share trading factors point against the conduct of a share trading business.
‘Other Possibly Relevant Factors’
Overall, the Applicant was a very credible witness who conceded points that were against him and appeared to give a candid exposition of his thinking in relation to the share activities in question. His verbal evidence was broadly consistent with the objectively ascertainable facts and he readily conceded the belated preparation of the Business Plan.
I am inclined to accept his evidence as an accurate account of his intentions and behaviour and, to the extent that it matters, the Applicant certainly viewed himself as a trader and was of the view that he was conducting a business, albeit on a part-time basis.
Counsel for the Respondent referred to an additional fact that arose primarily in verbal testimony – at some time in early 2013 it seems that part of the share portfolio was sold down largely so as to fund a property acquisition that had not gone particularly well. Counsel sought to argue that the fact that the plan, such as it was, and the share market activities arising from that plan, were derailed or at least curtailed by the property investment somehow indicated the lack of a plan or even the lack of a business. In my view while all this might point to a lack of commitment to the originally conceived strategy, if a business otherwise existed based on the other factors, I do not believe that the reduction in share market activity and the redirection of funds, in and of themselves, significantly detract from the existence of the original plan or business. All plans and businesses, even good ones, come asunder or can be curtailed when crises hit and the property investment in this case appears to have been one such crisis that derailed the Applicant’s plan and curtailed his activities under that plan. The plan, such as it was, still existed and so would the business, if it existed as a result of the other factors.
On the other hand, it is significant that there was very little in the way of contemporaneous documentary evidence showing that the Applicant conducted research in respect of companies in which he either purchased shares or considered purchasing shares.
Further, it is also important to note that there was little in the way of profit forecasts, risk management strategies, periodic performance reviews or forward planning.
Overall these “other possibly relevant factors” are evenly balanced and do not support one view or the other.
DECISION
In my view, while the matter is finely balanced, having regard to the evidence and to all the factors considered above, those factors pointing against the existence of a share trading business are more significant than those pointing in favour of the existence of a share trading business.
Accordingly, the objection decision is affirmed.
I certify that the preceding 51 (fifty one) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President.
...............[sgd]....................................................
Associate
Dated 26 August 2013
Date of hearing 3 July 2013 Applicant In person Advocate for the Applicant Mr T Murphy, Accountants and More P/L Counsel for the Respondent
Solicitors for the Respondent
Mr G O'Mahoney
ATO Legal Services Branch
3
2
0