Unitraders Investments Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia

[1991] FCA 240

JUDGMENT No. a+	l . "i/ ......
NOT PO? DISTRIBU'IION

IN TBE FE D E W COURT OF AUSTRALIA	)
1
VICTORIA DISTRICT REGISTRY	) No. VG 99 of 1988
) No. VG 100 of 1988
GENERAL DIVISION	1

INVESTMENTS PTY LIMITED

Applicant

- and-
THE COMMISSIONER OF TAXATION
OF THE COMMONWEALaTH OF AUSTRALIA

Respondent

JUDGE:  Heerey J .

PLACE	: Melbourne
DATE
--	8 May 1991

RULING

Mr Forsyth QC on behalf of the applicant has tendered an affidavit sworn by Mr Robert David Evans, an institutional dealer employed by Were Stockbroking Limited. On 7 May 1991 I heard argument from counsel and ruled that the affidavit should not be received in evidence. I said then that I would give reasons for this ruling during the subsequent course of the hearing, which I now do.

stocks and securities for a considerable period.

Mr Evans has been employed as an institutional dealer by Were Stockbroking Limited and its predecessor J B Were & Son in London and Australia since 1970. No question arises as to his qualifications to speak on matters relating to stock market investments. The substantive part of his af fidavit is in the following terms:

"6. in my experience, persons who deal in stocks and securities tend to be either investors ('Investors') or short term traders and dealers. I have provided advice to both Investors and traders and dealers in relation to the acquisition and disposition of

7.   In my view, the main criteria used by Investors in evaluating which shares to buy is to look for companies that will produce a growing stream of dividend income over a period of years. Such companies are usually perceived to have good management, a good balance sheet structure and a history of profit growth. A perusal of the investment record of Investors tends to show that they do not dispose of stocks and securities with great rapidity.

8.    On the other hand, short term traders and dealers invest in stocks and securities for the purpose of and with the intention of obtaining short term gains as a result of a relatively rapid disposition of those stocks and securities. There is a greater tendency on the part of short term traders and dealers to buy and sell mining stocks and a much greater spread of what might be called speculative stocks. Short term traders and dealers tend to be more active in what are described as bull markets and quieter in what are described as bear markets.

9.    Short term traders and dealers tend to be much more active than Investors in the disposition of stocks and securities. The dollar value of turnover of stocks and securities by short term traders and dealers is often large when compared with the value of stocks and securities held by such traders and dealers at any point in time.

10.  I have examined the following documents:

(i) Unitraders Investment Pty Ltd - schedule of investments held between 1983 and 1990; and

(ii) computer spread sheet in respect of purchases and the sale of investments by Unitraders Pty Ltd between 1976 and 1987.

11.  The majority of the stocks and securities held by Unitraders Investments Pty Ltd at the end of each calendar year on the schedule of investments are what are commonly referred to as top 100 stocks. Significantly, the majority of those holdings are in stocks which are, in my opinion, stocks held in quality companies. In my opinion, the portfolio of stocks and securities held by Unitraders Investments Pty Ltd in each of the aforementioned years is consistent with the type of portfolio which would be held by an Investor rather than a short term dealer or trader.

12. I have also examined the stock movements in the portfolio of Unitraders Investments Pty Ltd during those years (ie. acquisitions and dispositions). In my opinion, the level of activity in those stocks and securities is consistent with the level which I would expect of an Investor, rather than a short term trader and dealer.

13.  By reason of the above, it is my opinion that Unitraders Investments Pty Ltd has operated its aforementioned portfolio of stocks and securities throughout the years in a manner which is consistent with that of an Investor rather than that of a short term trader and dealer."

The issues in this case are whether the applicant is subject to tax on profits it made on the realisation of securities either because such profits are, in the circumstances of the case, income according to ordinary usages and concepts or fall within s.26(a) of the Income Tax Assessment Act 1936 ("the Act") in the form that provision took in 1983 and 1984.

It will be seen that the approach of Mr Evans is to divide "persons who deal in stocks and securities" into two categories viz "Investors" and "short term traders and dealers". He then states how persons within those respective categories approach the purchase and sale of stocks and securities. He then looks at the investments held by the applicant and a record of its purchases and sales and finds that those facts indicate to him that the content and

operation of the applicant's portfolio is consistent with that
of "an Investor" rather than "a short term trader and dealer".

In my opinion, the basic problem with this approach in terms of relevance and admissibility is that it creates false issues. It erects criteria which are quite different from those which the Act provides to determine liability for taxation. The Act does not tax the profits of "short term traders and dealers" or exempt the profits of "Investors".

As Mr Graham QC for the respondent points out, a person or company could be "an Investor" within Mr Evans' definition but still be liable for tax by virtue of the operation of s.26(a) or on general principles established by cases such as London Australian Investment Com~anv Limited v FCT (1977) 138 CLR 106.

The Act directs attention to the transactions carried by the particular taxpayer and not to the taxpayer's alignment or otherwise with descriptive categories which are not found in the Act and which I can well imagine would involve substantial definitional problems of their own.

Nor do I think that M r Evans' evidence is admissible for the purpose of giving what Mr Forsyth called a "factual background against which these matters can be judged". This is, amongst other things, a commercial court and the parties are entitled to proceed on the assumption that court is possessed of general commercial knowledge, for example that there are stock exchanges on which securities of different kinds are bought and sold, that investors buy and sell securities for different purposes, that some types of securities are riskier than others and might suit some investors more than others. None of these kind of matters need to be proved in evidence and do not in my opinion justify the reception of Mr Evans' affidavit.

taxation liability in respect of the profits on the sale of	I regard it as significant that although litigation over
securities has engaged the attention of courts in the common law world for a long time, no authority was put to me suggesting that evidence of the kind proffered is admissible.

I certify that this and the

preceding four (4) pages are a true copy of the Reasons for Judgment of the Honourable ME Justice Heerey

ADuearances

Counsel for the Applicant:	N H M Forsyth QC with
J W De Wijn
Solicitors for the Applicant:	Corrs Chambers Westgarth
Counsel for the Defendant:	D Graham QC with
H symon
Solicitors for the Defendant:	Australian Government Solicitor