The Applicant and Commissioner of Taxation
[2004] AATA 1293
•3 December 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 1293
ADMINISTRATIVE APPEALS TRIBUNAL )
) NT2002/59
TAXATION APPEALS DIVISION ) Re The Applicant Applicant
And
COMMISSIONER of TAXATION
Respondent
DECISION
Tribunal P.J. Lindsay, Senior Member Date3 December 2004
PlaceSydney
Decision The tribunal affirms the decision under review.
..............................................
Senior Member
P.J. Lindsay
CATCHWORDS
Private ruling – deductibility of loss - line of credit source of funds for purchase of overseas shares – purchase money misappropriated – whether money is or was included in purchaser’s assessable income – whether purchaser conducting a business of share trading – decision under review affirmed
Taxation Administration Act 1953 ss. 14ZAM, 14ZZK
Income Tax Assessment Act 1997 ss.8(1), 25-45
Income Tax Assessment Act 1936 ss.6, 71
Commissioner of Taxation v McMahon & Anor (1997) 79 FCR 127
Re Sommer and Commissioner of Taxation (2001) 48 ATR 1,127
EHL Burgess Pty Ltd v Federal Commissioner of Taxation 88 ATC 4,517
Re Grima and Commissioner of Taxation 2000 ATC 2,005
Ferguson v Federal Commissioner of Taxation 79 ATC 4,261
John v Federal Commissioner of Taxation (1989) 166 CLR 417
A.C. Williams v Federal Commissioner of Taxation (1972) 128 CLR 645
Federal Commissioner of Taxation v Shields 99 ATC 4,783
Re Shields and the Federal Commissioner of Taxation 99 ATC 2,037
Case X86 90 ATC 621
Case 1/94 94 ATC 101
Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187
REASONS FOR DECISION
P.J. Lindsay, Senior Member 1. At the applicant’s request, the hearing was in private in accordance with s.14ZZE of the Taxation Administration Act 1953 (the Administration Act). The background is that the applicant suffered a loss in purchasing parcels of overseas shares.
2. On 6 August 2001 the applicant requested a private ruling from the Commissioner of Taxation (the respondent) that a deduction was allowable for the loss of $157,910.02. Before issuing the ruling, the Commissioner acted under s.14ZAM of the Administration Act to seek additional information regarding the applicant’s share trading experience, the reason for selecting the particular companies in which he lost the funds invested and details regarding his skills in and approach to share trading. After receiving a response, the Commissioner requested further information on 28 September 2001 to establish whether the shares had in fact been acquired or whether the applicant’s funds been misappropriated by the investment adviser in Bangkok.
3. By notice dated 25 October 2001 the Commissioner ruled that a deduction was not allowable under either s.8-1 of the Income Tax Assessment Act 1997 (the 1997 Assessment Act) or s.25-45 of that Act. The applicant objected against the private ruling. The objection was unsuccessful. He then applied to the tribunal for review of the objection decision dated 22 November 2001.
4. At the hearing, the applicant sought an order that the grounds of his objection be extended to include the argument that the loss was incurred in his business as a share trader. The application was not opposed and an order was made under s.14ZZK(a) of the Administration Act extending the objection, and this topic was argued when the hearing ultimately resumed. The applicant represented himself and Mr D Ong from the Australian Taxation Office represented the Commissioner. The tribunal had before it the documents lodged under s. 37 of the Administrative Appeals Tribunal Act 1975 and the exhibits tendered during the hearing.
5. The provisions to be considered are:
·section 25-45 in the 1997 Assessment Act:
Loss by theft etc.
You can deduct a loss in respect of money if:
(a) you discover the loss in the income year; and
(b) the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or *agent (other than an individual you employ solely for private purposes); and
(c) the money was included in your assessable income for the income year, or for an earlier income year.
Note: If you receive an amount as recoupment of the loss, the amount may be included in your assessable income: see Subdivision 20-A.
· section 8-1 in the 1997 Assessment Act:
General deductions
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
6. When reviewing a decision of the Commissioner about an objection to a private ruling, the tribunal is confined to the terms of the arrangement identified in the private ruling. The taxpayer has the burden of proving that the ruling should have been made differently (s 14ZZK(b)(iii) of the Administration Act). The review process the tribunal must follow was described by Lockhart J in Commissioner of Taxation v McMahon & Anor (1997) 79 FCR 127 as follows:
In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to "go over again" the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement: Comptroller-General of Customs v Akai Pty Limited (1994) 50 FCR 511 at 521 and the cases there cited. (at 133)
and by Beaumont J in these terms:
It is, I think, plain from the language of s 14ZAF, and from its evident purpose, that the statutory character of the private ruling is that of an advisory opinion on a particular question, that is, the way in which the tax legislation would apply to the person in respect of a year of income in relation to an "arrangement".
It is equally plain from the language of s 14ZAZA(1), and from its evident purpose, that the subject of any objection to the ruling is the same question, that is, the way in which the tax legislation would apply to the person in respect of the year of income in relation to the arrangement.
It must follow, in my opinion, that the subject of any review of that taxation decision and of any review or appeal relating to the ruling will be that question, and no other or different question. In that sense, `the stream can rise no higher than its source' and that source is the construct constituted by the "arrangement", as nominated and identified by the applicant for the ruling. The Tribunal's jurisdiction is thus limited to a review of the Commissioner's opinion on that question, so that the Tribunal has no power to address any other question. In particular, neither the Commissioner nor the Tribunal on review, has jurisdiction or power to "redefine" the "arrangement" the subject of the Commissioner's ruling. (at 140-141)
I endorse the remarks made by Senior Member Pascoe in Re Sommer and Commissioner of Taxation (2001) 48 ATR 1,127 that it “ … would appear much more satisfactory and enable a complete examination of all of the facts if a taxpayer awaits the relevant assessment, which gives effect to the ruling before objecting.” (at [13]) I stress, however, that I am not implying any deficiency in the respondent’s procedures in this matter for requesting information required for making the private ruling or in other respects, and he was able to make the private ruling.
7. It is appropriate to set out the terms of the private ruling that the respondent issued on 25 October 2001.
YEAR(S) OF INCOME TO WHICH THIS RULING APPLIES:
Year ended 30 June 2001
TAX LAW:
Section 8-1 Income Tax Assessment Act 1997
Section 25-45 Income Tax Assessment Act 1997
Section 100-50 Income Tax Assessment Act 1997
WHAT THIS RULING IS ABOUT:
Can you claim a deduction for the loss incurred from your share trading activities?
THE SUBJECT OF THE RULING:
In April 2001, you were approached by a foreign investment company, Berkeley Samson International, to buy shares for short term trading. The shares were to be held for short periods of time, selling half when they doubled in price and the next half when they met a goal price.
Your intention was to generate income from share trading.
Your knowledge and experience in share trading was developed from: attending courses on share trading with FreeMan Fox; visiting various stock sites on the internet and from newspapers and share magazines. You read information from the IRIS successfully Personal Investment Series and relied on advice provided by the investment advisers, Berkeley Samson International.
You invested $157,910.02 in three purchases as recommended by the investment company as follows:
Date
Company
Number of shares purchased
Total invested ($A)
23 April 2001
ChinaNet TV Holdings
2,000
$12,919
28 May 2001
The Right Solutions
20,000
$97,246.29
12 June 2001
ChinaNet TV Holdings
8,000
$47,744.73
The investments were financed by money borrowed through a line of credit facility.
You expected the investments to return approximately $400,000 over a short period of time due to company takeovers and the signing of a major contract. You intended to sell the shares within 3 to 6 months of purchase.
The investment company told you they had been involved in raising venture capital for one of the companies in which you invested and that they were looking at signing a large contract that would result in short term high increases in the share price.
You invested in the second company due to advice received from the investment firm. You were told there was going to be a takeover of the company and so share prices would again increase dramatically.
You followed the share prices via websites, including the Bloomberg US stock site and the Yahoo US stock site, on most trading days. You were in regular contact with the investment company by phone and fax.
You state that you followed both stocks closely and watched for the increase that was supposed to happen. The initial increases were supposed to happen very quickly then rise steadily after that. The investment company told you that both companies were delaying announcing the signing of the major works and the takeover as they were waiting for an opportune time to maximise the impacts on the market.
You decided to sell the shares because you got nervous. You asked the broker to sell but were told you couldn’t because they hadn’t received the share certificates. You state that you would have made a small profit had you been able to sell at that time. You could not understand how the investment company could not follow your instructions to sell.
You became increasingly suspicious of the investment company. When they initially approached you, you researched them and made enquiries with the Office of Fair Trading who could not raise any problems with the company. After becoming suspicious, you rang Fair Trading again who suggested you ring the Australian Securities and Investment Commission (ASIC). ASIC told you that the investment company was on a warning list and they advised you not to trade with the company. ASIC suggested you look up the Thailand Securities Organisation (TSO) on the Internet. TSO had a listing saying that they had warned the company and it had ceased trading. You tried to contact the investment company but could only speak to reception. You sent a fax demanding that all of your shares be sold and the money transferred to your account. You rang the next day and the company had ceased operations.
Further talks with ASIC revealed that the investment company and a number of other companies had been operating in this manner. Some would keep money from apparent share purchases, other would actually make the share purchases but not in the name of the client. ASIC told you that the companies were very well set up organisations and extremely professional and convincing in every manner. You were told these companies had been operating since last year targeting Australians.
…
You have documentation regarding your investments with Berkeley Samson International, including the following:
·Correspondence/facsimiles from Berkeley Samson International.
·A copy of a Customer Agreement between you and Berkeley Samson International.
·Copies of International Money Transfer Applications showing the transfer of money from you to the two companies in which you believed you invested.
·Berkeley Samson International produced Trade Confirmation and Stock Purchase Confirmation receipts.
You claimed that you went into the venture to make income from short term trading, not to make a loss or even long term gain.
You have assumed that Berkeley Samson International have either bought and registered the shares in their own name or used your money for other purposes.
You have stated that you will never enter such a venture again.
RULING:
Can you claim a deduction for the loss incurred from your share trading activities?
Answer: No, the loss is capital in nature.
Consideration of the issues
Section 25-45
8. The respondent conceded at the hearing that the loss was of ‘money’. The money lost was the applicant’s funds that his bank transferred overseas to pay for the shares he wished to acquire. Further, it was conceded that the applicant discovered the loss of money in the year of income ended 30 June 2001 and that the loss of money was caused by theft, embezzlement or misappropriation by an agent. Subject to what I say below in respect of s.25-45(b), these concessions appear to be properly made. The issue, therefore, was whether his circumstances were covered by s.25-45(c) which reads: “the money was included in your assessable income for the income year, or for an earlier income year.”
9. In the application made on 6 August 2001 for a private ruling (T3), the taxpayer described how he financed his share purchases. He stressed at the hearing that he was deeply upset at the time he wrote the letter. This is quite understandable, as he had suffered a very substantial loss of around $158,000. He wrote:
I borrowed money through a line of credit facility to fund this venture. I was aiming at negative gearing the interest and then recouping the profit and using it to pay back the loan, paying income tax, pay tax on the income from the shares and then continue trading with remaining profits.
…
If I cannot claim this loss as part of my regular income, I will be forced to take out further loans to pay my tax. The loan for tax will be on top of the loans I already have for these shares. If I am forced to do this I will be financially crippled. Even with the deduction I will need a loan to cover tax. (T3-10)
10. Subsequent to the issue of the private ruling, the taxpayer wrote to the respondent on 6 November 2001 (T7-58) stating that “The money $158,000 (approx) was money from my assessable income. My income for the year was approximately $240,000. $50,000 of this was taken as salary with PAYE tax taken out. The $158,000 is from the $190,000 balance which is taken as profit sharing – i.e assessable income that I have yet to pay tax on. This money was placed directly into a line of credit facility. The line of credit facility was in the positive in preparation for paying tax on my assessable income.” It was pointed out to the applicant that this letter, which the respondent treated as an objection to the ruling, does not form part of the arrangement on which the ruling was made. In accordance with McMahon, the tribunal does not have the power to redefine the arrangement by reference to material in the letter of 6 November 2001.
11. The respondent advanced three arguments for not allowing the deduction claimed under s.25-45. First, it was noted that the arrangement identified by the applicant in his ruling request referred to obtaining a line of credit to finance the share purchases. Any loss of money obtained under the line of credit has not been included in assessable income because, as the respondent contends, a drawing from the line of credit constitutes a loan and that money has not been or will not be included in that year’s assessable income. I accept the submission. The applicant’s initial letter requesting the private ruling referred to his arranging a line of credit with the aim of “negative gearing the interest” (T3-10).
12. Secondly, the respondent cited EHL Burgess Pty Ltd v Federal Commissioner of Taxation 88 ATC 4,517 in support of the submission that the applicant bears the onus of proof under s.190(b) of the 1936 Assessment Act (see now s.14ZZK(b) of the Administration Act) to show not only that there is an entitlement to a deduction but also the amount of the deduction. In that case a deduction was claimed under s.71 of the Income Tax Assessment Act 1936 (the 1936 Act), an equivalent provision to s.25-45, for a loss being the misappropriation of an amount of money that included the taxpayer company’s profits, and represented its taxable income for the year in question. In considering the deductibility of the loss of money, the Full Federal Court said:
The section requires that there be a tracing of moneys so that what has been misappropriated can be identified with that which has been or is included in the assessable income. There is no deduction for all losses arising from misappropriation.
If income, when received, has been used to pay off the taxpayer’s debts and so has left the taxpayer’s hands, there can be no misappropriation of or in respect of that money. The benefit arising from the reduction in the liabilities of the taxpayer cannot be the subject of a relevant misappropriation. Likewise, income which has been or is to be included in the assessable income of a taxpayer, but has been dealt with in such a way that it has become mingled generally in the finances of the taxpayer and can no longer be traced or identified as income of that description cannot be the subject of a s 71 deduction. The section requires that the misappropriation be of or in respect of money that is or has been included in assessable income. That criterion must be established on the facts of the case. It should perhaps be added that the criterion may be established (as is demonstrated by the words “or has been”) although the loss has occurred after the derivation of the income, provided the identity of the money lost as assessable income has not been obliterated. (at 4,524)
13. The material put before the respondent prior to his making the private ruling, identified the arrangement simply as a line of credit. The applicant wrote “I borrowed the money through a line of credit facility to fund this venture.” I accept the respondent’s submission. The onus is on the taxpayer to trace the money that has been misappropriated, to identify the money as being or having been included in his assessable income. However, he has not discharged the onus of showing that it was his money, that it is or was included in assessable income, and tracing it into the funds used to pay for the shares but ultimately misappropriated. The applicant sought to address this point in his objection, which of course comes at a point too late to be taken into account on review by the tribunal (McMahon). But the material in his letter dated 6 November 2001 does not establish on the balance of probabilities that the funds in the line of credit account that were drawn on for the share purchases, were the same funds deposited in the account from the applicant’s earnings and thus would be included in his assessable income of that year. That material was brief and did not include the documentation required to establish the applicant’s assertion as to the way in which he could operate the line of credit. So even if the material could be taken into account, I would not be satisfied on balance that the applicant’s letter demonstrates the requisite tracing of monies or that there was not an intermingling of his money with loan funds drawn from the line of credit.
14. Thirdly, the respondent submitted that, assuming that tracing was possible to establish that the misappropriated money is or was included in assessable income, the loss was not deductible because the applicant first appropriated the money and subsequently the agent misappropriated the money. The submission was based on Re Grima and Commissioner of Taxation 2000 ATC 2,005, where the taxpayers’ accountant misappropriated funds given to him for contribution to a superannuation scheme. The tribunal found that the accountant was given the funds for a particular purpose. It was not a case where the agent helped himself to the funds without authorisation and then misappropriated the funds. The taxpayers’ own act removed the causal link between the loss and the embezzlement or misappropriation that is required by s.71. I accept the submission, finding that here, the applicant’s loss was of a capital amount he set aside for investment and for that purpose was paid over to an investment adviser who later misappropriated the money.
15. There is a further ground for s.25-45 not applying in this matter. For the reasons set out below, I find that the applicant did not conduct a business of share trading. I am satisfied that the overseas investment adviser, his agent for effecting the share purchases, was employed or retained by him solely for a private purpose. The applicant’s purchases were private investment forays that were not related to his income earning activities as a professional person, which were the source of the money he claimed to have lost through the fraudulent activities. On the basis of the material provided to the respondent to be ruled on, I am not prepared to find that the agent was not an individual or series of individuals who in concert arranged to defraud the applicant. The condition in s.25-45(b) that the agent not be employed solely for private purposes is therefore not satisfied.
Business of share trading
16. The objection as amended raises the ground that the applicant placed his purchase orders for overseas shares, in the course of carrying on a business of share trading. The applicant’s letter requesting the private ruling stated that he engaged in “short term trading with the intention of making an income from these trades”. He thought he would receive around $400,000 on sale, a profit of approximately $240,000.
17. His ruling request stated that he decided to sell all three parcels of shares when he became nervous. When the ATO sought additional information before making the ruling, he advised on 21 September 2001,: “At the end of June I decided that although I had made a small profit, they did not seem to be giving the return that Berkley Samson had advised me. I decided the reality of share trading and watching the market everyday was a bit nerve wrecking, so I decided to exit the shares earlier than initially intended. I decided to sell both the stocks and take the profit and use the money towards real estate and more secure long term blue-chip type shares … .” (T4-15) This letter, part of the material making up the arrangement ruled on, refers to his unsuccessful demands that Berkeley Samson sell the shares and remit the proceeds. The Thai Securities Organisation had told him that foreign investors with Berkeley Samson had no chance of regaining their money. The basis for the deduction claimed is that a loss resulted from the applicant’s paying over approximately $158,000 to acquire shares, but without receiving title to the shares, repayment of the money or proceeds from selling the shares per his instructions.
18. In considering whether the applicant was conducting a business of share trading, I note the following was contained in material he put before the respondent when seeking the ruling:
· prior to buying the overseas shares, the applicant had attended courses on share and option trading, and gained information from various stock sites on the internet, newspapers and shares magazines.
· in deciding to buy shares in China Net TV Holdings and The Right Solutions in April 2001, he relied on the advice provided by Berkeley Samson, investment advisers. He researched Berkeley Samson and the two companies recommended. Berkeley Samson provided him with information about their previous recommendations.
· the investments would take advantage of the impact of a major contract and a takeover on the companies’ share prices. Berkeley Samson had advised him that “Within days of the public announcement, the shares would start increasing dramatically” and then more gradually (T4-14). He had a plan to sell half the shares when the price doubled and the remainder when they reached a certain goal price over the following 3-6 months (T4-17). He also informed the respondent that “the venture … was for short term trading income – 3 months. I was aiming at selling the shares to pay my income tax” (T3-11).
· he watched both stocks closely for the expected increases and kept in regular contact with Berkeley Samson. He followed the stocks on the Bloomberg and Yahoo US stock market sites on most trading days. He checked the internet sites of both companies.
· he sold out of the companies earlier than originally intended because they were not giving the return expected, there was no information being provided by Berkeley Samson about the predicted developments and watching the market was nerve wrecking. By the end of June 2001 he wanted to take the small profit available and use the money in blue chip shares and real estate.
19. There is a definition of ‘business’ in s.995-1 of the 1997 Assessment Act. The Federal Court observed that, in relation to the equivalent definition in s.6 of the 1936 Assessment Act, the definition does not provide much assistance in determining whether a person is conducting a business and went on to say it was necessary to refer to the cases which have established that
There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial. (Ferguson v Federal Commissioner of Taxation 79 ATC 4,261 per Bowen CJ and Franki J at 4,264)
20. In the context of deciding whether a person is conducting a business of share trading, the High Court in John v Commissioner of Taxation (1989) 166 CLR 417 discussed the relevance of purpose or intention:
Whether or not a person is a trader seems to us to be a question of fact, albeit that in some cases the determination of that fact may depend on questions of impression and degree. If trading has not commenced or if there is no discernible trading pattern, the question of intention or purpose may be relevant in the sense that if there is an absence of intention or purpose to engage in trade regularly, routinely or systematically then the person may well not be a trader. A fortiori if some contrary or inconsistent intention or purpose is present. (at 430)
In this matter, the applicant asserted a profit making intention. He wrote in his first letter to the respondent (T3-10):
My intention was to hold short term and make an income from trading these shares (and others). If I was able to sell when I asked I would have made a small profit. If the shares had done what they were advised they would do then it would be a large profit. …
My intention was to make an income through share trading. I have paid huge amounts of tax in the past and have made only miniscule deductions.
21. If a person’s transactions in shares are considered to be those of a speculator, the transactions will not constitute the conduct of a business as a share trader. The authority is A.C. Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 which involved the deductibility of a loss on shares sold within days of their allotment to the taxpayer, who in preceding years had bought and sold parcels of shares in a number of mining companies. The taxpayer was the managing director of a company involved in import and export. Decisions about the companies in which to invest were found to be dependent on his own knowledge of their likely prospects, and were not illustrative of any system or method. Stephen J held that the taxpayer’s transactions should be assessed as separate transactions entered into as part of a profit-making undertaking or scheme, rather than as dealings in shares that had the character of a continuing business. At the time, a profit from such transactions would be assessable under s.26(a) of the 1936 Assessment Act but the loss would not be deductible, whereas now the profit or loss would fall within the provisions covering capital gains and losses (Part 3-1 of the 1997 Assessment Act). Stephen J stated his reasons for holding that the transactions did not form part of a business:
… he was … a speculator in mining and oil exploration shares who, having had only very modest and infrequent share transactions before the onset of Australia's minerals boom, during the period of the boom, indulged in quite considerable stock market speculations and did so with remarkable success. Those speculations were, I think, viewed by him as, and indeed had the character of, individual forays in particular stocks which he bought with a view to resale. To regard such shares as trading stock to which might appropriately be applied the provisions of ss.28 to 31 is to give both them and the whole of the taxpayer's speculative activities a colour which they never bore. (at 656)
22. The applicant submitted that his circumstances were similar to those of the taxpayer in Federal Commissioner of Taxation v Shields 99 ATC 4,783 who was found to be carrying on a business and thus a loss incurred on certain shares was an allowable deduction under s.51(1) of the 1936 Assessment Act (equivalent to s.8-1 in the 1997 Assessment Act). It is the case that both the taxpayer in Shields and the applicant each had an intention of profit making from their transactions, each worked full-time in their chosen occupation and quite large sums of money were at stake. I am not inclined, however, to find any greater similarity in their circumstances, mainly because the taxpayer in that case was found by the tribunal (Re Shields and the Federal Commissioner of Taxation 99 ATC 2,037) to have many years of experience in finance and investments, his experience was of assistance to his undertaking the relevant transactions of arbitraging share price movements of bank stocks that went from cum dividend prices to ex dividend prices, and he had to pay careful and constant attention to sales volume and bids as those factors could affect market prices. In further stark contrast to this matter, the tribunal found that there was a series of transactions, the transactions were complex, there was a systematic trading pattern, and the operation was business like and required sophistication.
23. The respondent on the other hand drew support for his position from the tribunal decisions in Case X86 90 ATC 621 and Case 1/94 94 ATC 101. Case X86 involved a dentist who claimed a loss of $19,466, realised in the 1988 year of income on selling two parcels of shares in different companies that had been purchased earlier in that year. In the previous year, he had bought and sold a number of parcels of shares in six companies. Deputy President Todd decided that the taxpayer was a speculator, not someone who was conducting a business of share trading. He referred to the following facts as supporting the decision: the taxpayer did not employ sophisticated share trading techniques in managing his share acquisitions; although he sought advice from his accountant and read the financial press, he did not operate any particular plan apart from a goal of maximizing profit and he had no contingency plans in the event of a major shift in the market (as happened in the income year, in October 1987); the volume of transactions was quite small; and he did not acquire multiple of parcels of shares in the companies.
24. The applicant countered by asserting that he had dealt with Berkeley Samson, whom he thought were professionals in investment advice. But this contention needs to be seen in context. The taxpayer was approached (at the hearing he described it as ‘cold calling’) by an overseas investment advisers. Then, after being given referrals, checking their internet site and with the Department of Fair Trading but not at this stage with the Australian Securities and Investments Commission, Australia’s market regulator, he proceeded to transfer substantial sums of money to them for investments that they forecast would double in price on signing a large contract that was not yet public knowledge (China Net TV Holdings) and increase dramatically on the public announcement of a takeover (The Right Solutions). In June 2001 the taxpayer paid a lower price to add to his initial holding in China Net TV Holdings that was acquired in April 2001, after again being advised by Berkeley Samson that the price would rise “as soon as the deal became public knowledge” (T4-14). There was no discernible pattern of share trading, simply discrete decisions to invest in shares that had been tipped to him. This approach to investing is closer to that of the speculator – the applicant followed the advice of a cold calling, overseas based investment house in the expectation of a premium gain not available to others who were not privy to the inside knowledge - than to a trader who takes calculated decisions based on thorough analysis of relevant market information. Moreover, he continued to pay large sums to an offshore entity over a period of months without first receiving proof of purchase, which implies a preparedness to accept a level of risk that would not be associated with an organised and experienced trader.
25. In addition, the applicant sought to differentiate his position from Case X86 on the basis that his plan did not require holding the shares indefinitely, and in fact he attempted to take a small profit as part of his contingency plan. Again, I do not consider that this argument accurately reflects the arrangement put forward for the ruling, as it discussed making sales as the price doubled and a complete sell out at a point 3-6 months hence. I infer that the applicant decided to sell because the predicted events had not happened and the explanations given by Berkeley Samson were not convincing, hence his nervousness.
26. On the advice of a business associate, the taxpayer in Case 1/94 invested very large sums in shares and options. He had invested smaller amounts in previous years. It was held by the tribunal that the shares were acquired for profit-making purposes. However, there was no evidence of regular, routine or systematic trading in shares and the shares in question were purchased without any indication of a business-like approach. The applicant’s approach also was passive: deciding to buy shares on the unsolicited suggestion of an overseas group, and not as the result of a business like trading plan. These two companies were the only ones in which the applicant invested during the period from April to June 2001, indicating that the purchases were “individual forays in particular stocks” (AC Williams at 656) rather than the commencement of a business of trading in shares.
27. Whether a taxpayer is carrying on a business of dealing in shares “ … is a question of fact and degree, a question of impression” (Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 102 ALR 187 per Hill J at 205). For the reasons stated above, it is my impression that the applicant was not conducting a business of share trading. The respondent’s answer to the private ruling request was warranted and in consequence, there is no deduction allowable under s.8-1 for the loss of the money paid over for shares in circumstances where title was not gained and the money was not repaid. It is a loss on capital account.
28. The decision under review is affirmed.
I certify that the 28 preceding paragraphs are a true copy of the reasons for the decision of P.J. Lindsay, Senior Member
Signed:
Associate
Final Hearing 28 January 2004
Decision 3 December 2004
Applicant Self-represented
Respondent’s representative D Ong, Australian Taxation Office
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