Tanner, R.J. v Commissioner of Taxation

Re: RICHARD JOHN TANNER and LYNETTE HELEN TANNER
And: COMMISSIONER OF TAXATION
Nos. G358 and G432 of 1990
FED No. 329
Income Tax
91 ATC 4533/22 ATR 118

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH DISTRICT REGISTRY
GENERAL DIVISION
Davies J.(1)

CATCHWORDS

Income Tax - shares acquired with a mixed purpose of gaining a rebate and obtaining a profit on resale - whether the Tribunal failed to weigh up the relative importance of the rebate and of profit-making - onus of proof.

HEARING

SYDNEY

#DATE 13:6:1991

Counsel for the applicant: The applicant in person

Counsel for the respondent: Mr M. Brabazon

Solicitor for the respondent: Australian Government Solicitor

ORDER

The appeal be allowed.

The decision of the Administrative Appeals Tribunal to be set aside and the matter remitted to the Tribunal to be heard and decided again with or without the hearing of further evidence.

The respondent pay the the applicant's costs of the application.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

These are appeals brought by Mr and Mrs Tanner from decisions of the Administrative Appeals Tribunal ("the Tribunal"), which disallowed their objections to income tax assessments issued by the Commissioner of Taxation for the year ended 30 June 1981 and affirmed the assessments for that year.

The issue involved the operation of s.26(a) of the Income Tax Assessment Act 1936 ("the Act") which read:-
"26. The assessable income of a taxpayer shall include -
(a) profit arising from the sale by the taxpayer of any property

acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;".

I need not discuss the principles governing the application of this provision. For present purposes, they were sufficiently expounded by Mason J. in his Honour's well known remarks in Admin Exploration Pty Limited (In Liq) v Federal Commissioner of Taxation (1972) 72 ATC 4253 at 4259-60.

The facts before the Tribunal showed that Mr Tanner, a sharebroker, and his wife jointly took up shares in a mining exploration company, Cosmos Explorations and Minerals N.L. which company later in 1979 was the subject of a reorganisation and changed its name to Pan Pacific Petroleum N.L. I shall refer to it as "Cosmos". This acquisition occurred in June 1979. The shares were sold between July and September 1980 at a profit of $160,247. That profit was the subject of the objections lodged by Mr and Mrs Tanner.
The case put on behalf of Mr and Mrs Tanner was that the factor actuating the acquisition of the shares was the desire, particularly that of Mr Tanner, to obtain a rebate of tax under s.160ACA of the Act, a rebate of $12,000 being available for the subscription of the $40,000 which Mr and Mrs Tanner paid for the shares.
The Tribunal held that the shares were acquired with mixed purpose of gaining that rebate and obtaining profit on resale. The Tribunal said:-

"I accept that one of the purposes of the husband and wife in acquiring the shares was to gain the rebate (which they in fact received). This purpose, however, is not inconsistent with a purpose of acquisition with a view to resale at a profit. They are not mutually exclusive. In my view, a mixed purpose is pointed to by all the evidence."

That finding was a question of fact and there was evidence before the Tribunal on which the Tribunal could so find. But that does not conclude the matter, for the Tribunal did not in that paragraph state that profit-making by sale was the predominant actuating factor. Nor did the Tribunal say that the taxpayers had failed to satisfy the onus of proof of showing which of the two factors was predominant.

There are several matters which concern me. The first is that the Tribunal in that finding left the matter as "mixed purpose". Another is that the Tribunal later used the expression "a dominant purpose" not "the dominant purpose". Another is that nowhere in dealing with the evidence of Mr and Mrs Tanner did the Tribunal discuss or weigh-up the relative significance of the non-rebate on the one hand and the possible future profit on the other. And another is that, when the Tribunal said in paragraph 20, "I consider that the facts established a dominant purpose of resale at a profit for five reasons", the Tribunal went on to give five reasons respecting only "intention to sell".
Mr Tanner, being a sharebroker, was a trader in shares and therefore, because of the operation of s.160ACA(25), could not have obtained the rebate if he had acquired the shares in his own name. Mrs Tanner was not a trader though she had some investments in shares and had returned some profits from the sale of shares as assessable income under s.26AAA. Becoming aware that a subscription to certain shares in Cosmos would attract a rebate under s.160ACA, Mr Tanner, who in the last days of the 1979 year of income was looking for ways and means to reduce his potential tax liability, formed a partnership with his wife and that partnership subscribed $40,000 to shares in Cosmos. Mr Tanner subscribed 99% of the capital and Mrs Tanner 1% of the capital of the partnership with the practical result that the rebate of $12,000 went as to 99% to the benefit of Mr Tanner and as to 1% to Mrs Tanner.
There were two documents of contemporary significance. The first was a note from the bank manager, whose bank lent Mr Tanner the $40,000 for the transaction. The note was dated 19 June 1979 and read inter alia:-

"Mr. Tanner, who is a partner in Clinton Jones and Co. called. Currently he looks like having a taxable income of some $100,000 made up of $60,000 from Clinton Jones and Co. and $40,000 from his 1,000 acre grazing property at Coolah. He is working on reducing the taxable income to about $45,000, $25,000 of which will be represented by equalisation bonds. The above accommodation will be used as to approximately $40,000 to purchase shares in Cosmos Exploration N.L. which are currently on the market at between 6 and 7[ each. The investment will give him a tax rebate of 30[ in the $.

He offers these shares as security, together with shares currently held which he values at approximately $25,000. The borrowing will be cleared within four months from possibly three sources - sale of cattle, income from the partnership, and resale of the Cosmos shares."

This memorandum was strongly supportive of the case put by Mr and Mrs Tanner for it referred to Mr Tanner's "working on reducing the taxable income" and to the fact that "This investment will give him a tax rebate of 30[ in the $." However, the Tribunal laid emphasis upon the reference in the last few words to "resale of the Cosmos shares" and drew from this the conclusion that Mr Tanner intended to resell the Cosmos shares to repay the $40,000. That may be so, but it says nothing as to the relative significance of the rebate on the one hand and of profit-making on the other.

There was also a letter from Mr Tanner of 20 June 1979 which read as follows:-
"Further to our discussion yesterday, I am enclosing a personal
statement of my assets and liabilities in connection with an
application for overdraft accommodation of $45,000 to allow me to
take action in respect of my income for the financial year about to end.
My income in respect of Clinton Jones and Co. is expected to be
$80,000 and my rural income $30,000. The following avenues are
available to me in respect of that income:

. Distribution by way of trust to wife $10,000 . Past tax losses from development of `Brooksby' $12,000 Oil drilling fund $10,000 Income Equalisation Deposits (60% of gross farm income to be paid by 31/8/79) $25,000 Development expenses on `Brooksby' $10,000 $67,000

To deal with the balance of my income, I should have the opportunity

to subscribe prior to the end of June $40,000 to an oil exploration

company which intends to dodge declarations that the funds raised by

way of the intended placement will be spent on offshore oil

exploration and as such will qualify for a rebate of 30 cents off tax

payable. It is intended that the moneys borrowed from the bank will

be repaid within four months, either by withdrawal from Clinton Jones

and Co., the sale of shares or the sale of livestock."

The Tribunal thought that the reference in this letter to "the sale of shares" was not as significant as the bank manager's reference to "resale of the Cosmos shares". But whether or not that was so, the letter supported the taxpayers' evidence that the obtaining of the rebate was the main actuating factor. The letter said nothing whatever about profit-making but explained how Mr Tanner proposed to reduce his potential tax liability.

Later in 1979, Mr Tanner sold other shares to repay the loan granted by the bank in June 1979. And later in 1979 there was a reorganisation of Cosmos. Mr Tanner had the opportunity to take up further shares in the company. It may be inferred that, by this time, profit-making was very much to the fore of his mind. In late 1979, Mr and Mrs Tanner borrowed a large sum from the bank and took up a substantial parcel of shares in the company. To secure the borrowing, the matrimonial home was mortgaged to the bank. According to the evidence of Mr and Mrs Tanner, it was necessary to sell the first parcel of shares as soon as practicable to repay the new borrowing. The sale took place after the expiration of 12 months from their acquisition.
I turn now to the five reasons which the Tribunal, when discussing the evidence of Mr Tanner, gave for holding that there was "a dominant purpose of resale at a profit"; but note that the Tribunal did not say "the dominant purpose".
The first reason given was as follows:-
"The amount subscribed was relatively large and involved a temporary
borrowing from the bank. Although the husband was on the highest
marginal rate of tax and would have gained a significant advantage
from the rebate, it would have availed him nothing in the repayment
of his debt to the bank if the shares had not increased in value.
His evidence leads me to believe that he thought they would so
increase and that he would turn this `paper profit' as he called it
into an actual profit. He had a long history as a trader in shares
in companies of a similar nature to that of the exploration company.
My first reason, therefore, is that his intention is demonstrated by
the short term nature of the necessary borrowing and the undertaking
of the concomitant obligation to discharge that borrowing."
In this reason, the Tribunal may have confused the subject dealing with the second dealing in 1979. The later dealing was a large one and, in his application for a loan, Mr Tanner had given to the bank manager a handwritten note which disclosed, inter alia, that, from the acquisition of the shares, there would be a "`Profit' $79,000", being the difference between the market value and the cost of taking up the shares. But no such paper profit was suggested with respect to the subject transaction. That is, of course, an issue of fact and we are not now concerned with it.
The important point for present purposes is that the short term nature of the borrowing and the obligation to discharge that borrowing were not matters which in themselves made profit-making more important than the obtaining of the rebate.
I should also note that the Tribunal could not have been aware of the provisions of s.160ACA(25), for the Tribunal should have realised that an intention to sell at a profit within the space of a few months would have been inconsistent with an intention of gaining the rebate under s.160ACA. Yet, the Tribunal found that the taxpayers had the two ends in view. The two ends, profit-making and rebate, were incompatible if the shares were to be sold within 12 months. But this is a point which goes rather to the facts than to the law.
The third and fourth reasons given by the Tribunal concluded that, at the time of the acquisition of the subject shares, sources for repayment other than the sale of the shares seemed unlikely. In fact, Mr Tanner did repay the loan from the sale of other shares but, putting this matter on one side, the question is again, what relevant inference was to be drawn from the fact that the subject shares were to be resold to repay the loan?
The Tribunal concluded its fifth reason in these terms:-
"The proposal put to the bank exhibits features which give the
character of a `business deal' (McClelland v Federal Commissioner of
Taxation 70 ATC 4115). The money was advanced to enable the
partnership to acquire shares which were to be used to obtain
significant tax advantage, and which were to be disposed of later in
order to repay the advance. The fact that they were not sold to
repay that advance, but to repay a later advance, does not in my view
detract from the intention of the parties formed at the time of
acquisition of the subject property."
This passage is of great significance for it seems to state the essence of what the Tribunal had in mind. The Tribunal seems to have found as a fact that Mr and Mrs Tanner, when they acquired the shares, intended to resell them to repay the loan. On this basis, the Tribunal was guided by the reference to "the character of a business deal", the term used by Lord Donovan, Viscount Dilhorne and Lord Wilberforce in McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487 at 495. The Tribunal seems to have thought that, because there was an intent to resell within a short time of acquiring the shares and to do so in order that the loan be repaid, the transaction had the character of a business deal and therefore fell within s.26(a). But an intention to resell within a short time of acquisition will not bring a profit made on the sale within s.26(a) unless profit-making by sale was the end in view which predominated at the time of acquisition.
I draw the conclusion from the Tribunal's reasons for decision that the Tribunal did not weigh up the relative importance to Mr and Mrs Tanner, particularly to Mr Tanner as he was the driving spirit, of the rebate on the one hand and of profit-making on the other. Yet that is the task which the Tribunal had to do.
It was this lack of a discussion of the relative importance of profit-making which led counsel for the Commissioner to suggest that the Tribunal impliedly rejected the whole of the case put by Mr and Mrs Tanner on the basis that they had not satisfied the onus of proof of establishing that the predominant factor actuating the acquisitions was a factor other than profit-making by sale. This was a forceful submission and I have given it careful consideration. However, I have come to the view that the Tribunal did not reason in that manner but made an error of law in its approach to s.26(a), in that it failed to weigh up which of two factors which the Tribunal thought played a part in the acquisition was the dominant factor.
Like problems beset the Tribunal's consideration of Mrs Tanner's evidence. The Tribunal said:-
"The applicants contend that their purpose in acquiring the shares
was to get the advantage of the rebate to which reference has been
made. The applicant husband gave evidence that this was their sole
purpose. The applicant wife however readily agreed, in
cross-examination, that it was her impression the shares had been
acquired for resale like any other shares in which she had previously
traded. The difference was that the amount involved was much larger
than the amount she had been accustomed to. She was very conscious
of the provisions of s 26AAA of the Act and said that she had
discussed this with her husband on a number of occasions. Subject to
holding the shares for a period of more than 12 months however, she
agreed that it was always intended to sell them, hopefully, at a
profit. So far as the wife's application is concerned therefore,
there can be no doubt that she had the requisite purpose contemplated
by s 26(a) and the objection decision, in so far as it relates to her
own personal return, must be affirmed."
It is difficult to see how the Tribunal arrived at this conclusion, unless the Tribunal made the error to which I have already referred when discussing Mr Tanner's case.
In fact, Mrs Tanner did not say that "it was her impression that the shares had been acquired for resale like any other shares in which she had previously traded." Nor did she say that "She was very conscious of the provisions of s.26AAA of the Act". Nor was it accurate to say that Mrs Tanner "agreed that it was always intended to sell them, hopefully, at a profit." But the significant matter is that, in dealing with Mrs Tanner's evidence, the Tribunal did not discuss the point that there were two factors actuating the transaction, the first being the rebate and the second being possible profit-making. There was no comparison undertaken by the Tribunal of these two factors, notwithstanding that Mrs Tanner's evidence was that the obtaining of the rebate was a factor which influenced the acquisition and notwithstanding that the contrary was not put to her in cross-examination. In chief, Mrs Tanner's evidence was:-
"Right, well did you have anything to do with the acquisition of
500,000 shares in a company that subsequently was known as Pan
Pacific?---We discussed the fact - the first that I heard of Pan
Pacific was when my husband discussed it with me and he mentioned to
me, I think to my knowledge that it was off shore drilling company,
and that by purchasing the shares there was a tax benefit and we
formed Brooksby partnership with the intention that he would receive
the tax benefits from that and that by me taking out small percentage
of that I would in turn receive a tax benefit as well.
Yes, and you went ahead and formed this partnership acquired the
shares and then their subsequent disposal?---I was aware that it had
been mentioned to me quite a number of times that because of the
benefits of receiving the tax that I could not sell them under a year
so I was aware of that the whole time. Beyond that I really left it
to the discretion of my husband as to the selling of it."
The one question in cross-examination which went specifically to the issue was:-
"You no doubt assumed that you would be not only get (sic) a tax
benefit of some sort but also acquiring shares that had some value?"
I need not set out the response, which adds nothing to this question and may have been directed to the second transaction.
It therefore seems that the Tribunal approached the matter on the wrong basis and considered only whether profit-making by sale was a significant factor influencing the acquisition. This, and the anticipation of early sale were the matters with which the Tribunal dealt. The Tribunal did not weigh up the relative importance of the immediate tax rebate on the one hand and of the possible future profit on the other. It seems that the Tribunal thought that it was sufficient to find that resale at a profit was a factor which influenced in a significant way the acquisition of the shares, at least if the shares were to be resold in the short term. But that was not the question which the Tribunal had to answer.
For these reasons, I am of the view that the Tribunal failed to apply the test required by the first limb of s.26(a) of the Act. Accordingly, the decision of the Tribunal must be set aside and the matter remitted to the Administrative Appeals Tribunal to be heard and decided again with or without the hearing of further evidence. The respondent should pay the costs of this application.

[1991] FCA 329

13 JUNE 1991