Williams v Federal Commissioner of Taxation

[1972] HCA 48

HIGH COURT OF AUSTRALIA

. Stephen J.

WILLIAMS v. FEDERAL COMMISSIONER OF TAXATION.

(1972) 128 CLR 645

11 October 1972

Income Tax (Cth)

Income Tax (Cth)—Deductions—Double deductions—Moneys paid on shares for the purposes of petroleum exploration—Shares bought for profit-making by sale—Business of dealing or trading in shares—Whether right to deduct amounts paid on petroleum shares—Income Tax Assessment Act 1936-1969 (Cth), ss. 26 (a), 77A, 82.

Decision

October 11.
STEPHEN J. delivered the following written judgment:-
This case concerns the provisions of s. 77A of the Income Tax Assessment Act 1936-1968. (at p647)

2. The taxpayer, Mr. A.C. Williams, by his return of income for the year ended 30th June 1969, disclosed a loss of $26,232. The Commissioner, however, by an assessment issued on 9th July 1970, assessed the taxpayer to tax on an assessable income of $30,913. (at p647)

3. The difference between the loss claimed by the taxpayer and the assessable income asserted by the Commissioner, some $57,000, is, in large measure, attributable to the disallowance by the Commissioner of a deduction of $50,000 claimed by the taxpayer in his return in respect of application moneys paid by the taxpayer to Bridge Oil N.L. in respect of 500,000 shares of twenty-five cents each in its capital paid to ten cents each which the taxpayer took up towards the end of the relevant year of income. (at p647)

4. There were certain other items of a smaller value which also went to make up the discrepancy between the taxpayer's claimed loss and the substantial assessable income asserted by the Commissioner but these were not the subject of this appeal when it came to be heard before me; it was confined to the entitlement of the taxpayer to deduct the sum of $50,000 paid as application moneys on the allotment to him of these shares in Bridge Oil N.L. (at p647)

5. As appeared from the taxpayer's return of income, he had, in the year ended 30th June 1969, made large profits from the purchase and sale of certain speculative mining shares; these amounted to some $80,000 in that year; Mr. Williams was also the managing director and major shareholder in a company engaged in the import and export business and from that activity derived, by way of fees and dividends, some $11,500. Early in 1969 Mr. Williams estimated that he would, were no steps taken to avert such a situation, have a taxable income of some $100,000 in that year of income and he decided to seek to reduce his taxable income by subscribing for shares which would entitle him to claim deductions pursuant to s. 77A. He accordingly made arrangements, through his brokers, whereby he ultimately applied for one million twenty-five cent shares in Bridge Oil N.L. paid to ten cents, at a cost of $100,000, and half a million twenty-five cent shares in that company paid to one cent, at a cost of $5,000, and these shares were allotted to him on 14th June 1969. He said that he had originally arranged to take up a total of one million of the shares paid to one cent but had been asked to limit his application to only half of that class. Of these shares he sold, on 25th June 1969, the day before the shares were first quoted on 'change, half a million of the ten cent paid shares in Bridge Oil N.L. for their cost price, $50,000, less $950 for brokerage and duty. It is in respect of these half million shares that the Commissioner has disallowed a deduction under s. 77A. (at p648)

6. There emerged three distinct grounds for disallowance of the claimed deduction; first, that s. 77A was inapplicable because at the date of allotment of the shares to the taxpayer he was not the "owner" of the shares and the "beneficial owner" was a non-resident; secondly, and in the alternative, s. 260 operated to deny a deduction by entitling the Commissioner to disregard altogether the payment by the taxpayer of the application moneys on the shares and to treat the shares as in truth being acquired initially by the non-resident which later purchased them from the taxpayer; thirdly, failing acceptance of either of these views, the taxpayer should be treated as a trader in shares, engaged in an adventure in the nature of trade, and entitled under s. 82 (1) either to a deduction of the cost to him of the shares under s. 51 or to a deduction under s. 77A but not to both. (at p648)

7. This is a case in which, of the number of questions of law debated before me, few will arise for determination if the taxpayer's version of the facts be accepted. The primary contest on matters of fact relates to the circumstances in which the taxpayer came to be allotted shares in Bridge Oil N.L. and to sell them soon afterwards; upon the outcome of this contest will depend the applicability of s. 77A and s. 260. The secondary contest of fact is as to the status of the taxpayer as a trader in shares; on this is said to depend the operation of s. 82 (1). (at p648)

8. In examining the circumstances in which the taxpayer acquired and sold the 500,000 shares in Bridge Oil N.L., it is useful, as a preliminary, to state shortly the opposing contentions. For the taxpayer, it is said that the situation was a simple and straightforward one. He wished to subscribe for about $100,000 worth of shares which would confer upon him a right to a deduction of that amount under s. 77A; he inquired from his brokers and learned that they were shortly to underwrite an issue of suitable shares by Bridge Oil N.L.; he was told that he would be entered upon the broker's list of persons to whom shares would be allotted; he in due course received a prospectus and application forms, applied for a specified number of shares which he was told would be available for him and these were subsequently allotted to him. The disposal of half a million of the ten cent paid shares, it was said, came about in this way; before receiving the prospectus he was asked by the brokers whether, after allotment and before stock exchange listing, he would be prepared to sell half a million of the ten cent paid shares to unspecified buyers known to the brokers to be anxious to acquire shares in the company. He replied that he would consider the matter once he received the shares; he later was told that these, still unidentified, buyers were overseas residents. When the shares were allotted and he received the scrip, he was again asked if he would sell his half million shares and he agreed to do so and in fact did so, at no time being aware of the identity of the buyer. (at p649)

9. For the Commissioner it is said that the taxpayer at all material times knew that, of the total number of shares reserved for him by the brokers and later applied for by and allotted to him, he would be required to sell before listing those which he in fact sold; they were either "pre-sold" by him before allotment to him or were alloted to him only on condition that he should sell them to the overseas buyer which ultimately bought them. The Commissioner was not concerned to prove which of these two situations prevailed or what precise legal consequences would flow from either of them; it was sufficient that I should not be satisfied that the taxpayer's version of his mode of acquisition was true. I should then, instead, accept evidence tendered on behalf of the Commissioner of an interview in which the taxpayer described his acquisition of the shares in terms which should lead me to conclude that he was not the "owner" of the shares, as that term is used in the definition of "money paid on shares" in s. 77A (1), or that the overseas buyer was, at the time of allotment, "the beneficial owner" of the shares within the meaning of that phrase in par. (c) of that definition. In either event s. 77A would, it was said, be inapplicable. Even if this were not the legal consequence of the facts as allegedly described by the taxpayer in that interview, those facts would entitle the Commissioner to invoke s. 260 and to treat the taxpayer as never having paid moneys on shares so as to attract the provisions of s. 77A. (at p650)

10. (His Honour then considered the evidence relating to the circumstances in which the taxpayer came to be allotted shares in Bridge Oil N.L. and to sell some of them soon afterwards.) (at p650)

11. Having examined these various considerations, I am confronted with a position in which two witnesses, the taxpayer and Newman (a partner in the firm of brokers in question who had made all arrangements with the taxpayer for his acquisition and subsequent sale of the shares), give clear and consistent evidence in a convincing manner of the form which the transaction took; they are uncontradicted by such scant documentary evidence as is available and if they are to be disbelieved this cannot be on the score of mistaken recollection or the like; they must, on the contrary, have concocted an elaborate and untrue version of the transaction. On the material before me I am not prepared to reject their evidence. If, then, I accept the taxpayer's version of the facts it must follow, as counsel for the Commissioner conceded in argument, that the taxpayer has satisfied me that he was the "owner" of the shares and that there was no "beneficial owner" who was a non-resident, using those two terms in the sense in which they are employed in s. 77A (1). The taxpayer did accordingly qualify, under s. 77A (4), to a deduction in respect of the $50,000 subscribed by him for half a million ten cent paid shares in Bridge Oil N.L. which he later sold before listing. It also follows that no question arises of s. 260 having any application to this situation. (at p650)

12. There remains the question of the applicability of s. 82 (1) which provides that where, in respect of any amount, a deduction would be allowable under more than one provision of the Act it shall be allowable only under whichever provision of the Act the Commissioner considers is most appropriate. The Commissioner contends that it applies in the present case so that if the taxpayer is entitled to a s. 77A deduction in respect of the moneys payable on application for the shares, he is also entitled to a s. 51 deduction in respect of the same amount, being the cost to him of the shares, and that, in view of s. 82 (1), one only of these two entitlements can be availed of. The taxpayer, on the other hand, claims that s. 82 (2), not 82 (1) , is applicable to his case and then relies upon s. 82 (3) (c), which qualifies the operation of s. 82 (2), but not 82 (1) , and which, he says, produces a result favourable to him. (at p650)

13. It will be convenient to set out in full s. 82(1), (2) and (3) as they stood at the relevant time, before the amendment made in 1969, which repealed s. 82(3) (c).

"82. (1) Where in respect of any amount, a deduction would but for this section be allowable under more than one provision of this Act, and whether it would be so allowable from the assessable income of the same or different years, the deduction shall be allowable only under that provision which in the opinion of the Commissioner is most appropriate. (2) Where the profit arising from the sale of any property is included in the assessable income of any person, or where the loss arising from the sale is an allowable deduction, and any expenditure incurred by him in connexion with that property is an allowable deduction under this Act or has been allowed or is allowable as a deduction in assessments under the previous Act, that expenditure shall not be deducted in ascertaining the amount of the profit or loss. (3) The reference in the last preceding sub-section to expenditure incurred by a person in connexion with property shall be read as not including a reference to expenditure that has been allowed or is allowable as a deduction - (a) under section seventy-five or section seventy-six of this Act (including either of those sections as in force at any time before the commencement of this subsection); (b) in assessments under the previous Act by virtue of a provision of that Act corresponding with section seventy-five or section seventy-six of this Act; or (c) under section seventy-seven A, section seventy-seven C or paragraph (b) of sub-section (1.) of section seventy-eight, of this Act." (at p651)

14. Section 82 (1) is general in character, dealing with the case of double "deductions", that is, where, in respect of one amount, the right to two distinct allowable deductions is conferred by different provisions of the Act. Section 82 (2) is more specific in its application; it takes as its subject matter those cases in which assessable income is affected by the inclusion of a profit or the allowance of a loss arising from the sale of any property. It then requires that, in the calculation of that profit or loss, expenditure incurred in connexion with that property be not deducted if it be expenditure which is itself an allowable deduction. Thus, unlike sub-s. (1), it does not prevent advantage being taken of two allowable deductions in respect of the one expenditure; but instead it imposes a rule upon the process of calculation of profit or loss on the sale of property, the operation of the rule being (to take the case of a profit) that if in calculating the profit any debit item to be deducted from the sale price is itself an allowable deduction under the Act it is not to be deducted. As the chairman of the No. 3 board of review points out in reference no. B110/1971 17 CTBR (NS) 752; 72 ATC 150 , what it operates on is what he described as the "property deduction" as distinct from any allowable deduction a right to which is conferred by the Act. (at p652)

15. Sub-section (2) thus presupposes a method of assessment under which the profit or loss of which it speaks is included in, or allowed as a deduction from, assessable income; ss. 26 (a) and 52 provide an example of such a method, although not the only example, e.g., s. 43, which contains in sub-s. (2) a provision somewhat akin to s. 82 (2). As a matter of convenience, I shall refer to it as the s. 26 (a) method, in contradistinction to the conventional method of assessment where income is assessable under s. 25 (1) and deductions are allowed under s. 51. The effect of sub-s. (3) (c) is, then, to exclude from the operation of sub-s. (2) cases where a "property deduction" is also an allowable deduction under (inter alia) s. 77A. In such a case the calculation of profit or loss under this method of assessment may proceed unaffected by the rule created by sub-s. (2). (at p652)

16. Is then the taxpayer, in respect of the relevant year of income, a person to whom the s. 26 (a) method is applicable? If so, he obtains the benefit of s. 82 (3) (c); if not, he is, by s. 82 (1) , denied a double deduction. He was in fact treated by the Commissioner, in the assessment at present under challenge, as a person to whom this method was applicable but the Commissioner is not now, of course, estopped from asserting the contrary. (at p652)

17. Since the benign effect of s. 82 (3) (c) is limited to cases to which s. 82 (2) applies but will not aid a taxpayer to whom s. 82 (1) applies, it becomes necessary to determine whether in a particular case, and this is such a case, sub-s. (1) or sub-s. (2) is the appropriate provision. It would seem that this is to be determined by whether or not the s. 26 (a) method of assessment, as distinct from the conventional method, is applicable. But such a determination presupposes that as between the two methods one only will, in any given case, be properly applicable. There are, however, a number of passages in judgments in this Court which suggest that s. 26 (a) may be applied to ascertain the assessable income of a taxpayer in situations to which the conventional method of assessment is also applicable. It suffices to refer to the joint judgment of Latham C.J., Dixon and Williams JJ. in Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation (1946) 73 CLR 604 , the judgment of Webb J. in Producers' and Citizens Co-operative Assurance Co. Ltd. v. Federal Commissioner of Taxation (1956) 95 CLR 26, at p 33 , and that of Kitto J. in Federal Commissioner of Taxation v. McClelland (1970) 118 CLR 353, at p 377 , with which Menzies J. and Owen J. both expressed agreement. However, in none of these cases was there an issue such as here arises; in those cases the issue was whether amounts received were assessable at all and it mattered not under which provision, if any, the receipt in question was assessable. (at p653)

18. On the other hand, there are to be found in the cases a number of statements to the effect that s. 26 (a) has a quite distinct field of operation from that covered by the conventional method of assessment. In Australasian Catholic Assurance Co. Ltd. v. Federal Commissioner of Taxation, Menzies J. said (1959) 100 CLR 502, at p 509 :

"... I am not disposed to rely upon s. 26 (a) at all because I doubt whether it applies to the taxpayer's life assurance business as a whole and, if it does not, I doubt, further, whether it would be proper to extract from such business a series of transactions such as the purchase and sale of the flats and to label them 'the carrying on or carrying out of' a 'profit-making undertaking or scheme'. It is to be observed that in the definition in s. 6 of the Act of 'income from personal exertion', the 'proceeds of any business carried on by the taxpayer' and 'any profit ... from the carrying on or carrying out of any profit-making undertaking or scheme' are mentioned separately, and I am disposed to think that the former description is that which is applicable to a case such as the present and the latter is concerned with some special venture rather than with anything that falls within the category of ordinary business." (at p653)

19. In Federal Commissioner of Taxation v. McClelland (1967) 118 CLR 353, at p 358 , Windeyer J., at first instance, described the operation of s. 26 (a) as that of bringing to tax profits which, because of the singular or isolated transactions out of which they arose, might not otherwise be income of the taxpayer; the Chief Justice, on appeal, distinguished, at p. 371, between the application of s. 26 (a) and liability to tax on that which is income according to ordinary concepts. The majority in the Judicial Committee (1970) 120 CLR 487 regarded s. 26 (a) as introducing no new element into the problem not already requisite to be considered in determining whether the taxpayer's receipt was income according to ordinary concepts; but I do not understand any of their Lordships to imply that a particular receipt could appropriately be brought to tax under either head. (at p653)

20. In Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation, the Chief Justice said (1971) 125 CLR 249, at p 255 :

"In the first place it is an error in my opinion to think that the transactions of a business can be taken item by item and each treated as falling within s. 26 (a). The business must be regarded as a whole its receipts being assessable income from which the permitted deductions are to be deducted. Section 26 (a) is intended in my opinion to deal with transactions which are entire in themselves and do not form part of a more extensive business. In that event they are regarded as yielding a profit which will be calculated according to the circumstances of the transaction, the profit only being assessable income."

Menzies J., in two passages said (1971) 125 CLR 249, at p 264 :

"I do not think that every business that involves the buying and selling of stock-in-trade is to be fragmented into a large number of separate transactions and the dealer taxed on the aggregate of the profits derived from each transaction considered separately."

And later:

"It is significant that s. 26 (a) defines but one item to be included in assessable income, and, in my opinion, the whole of the carrying on of a business of buying and selling is not to be comprehended within s. 26 (a), nor does the provision aptly apply to the particular dealings constituting, in total, the carrying on of a business".

His Honour concluded on this aspect by referring to what he had earlier said in the Catholic Assurance Case (1959) 100 CLR 502 , stating that further consideration had confirmed his views as there expressed. (at p654)

21. In a case such as the present the proper view appears to me to be that where share transactions are undertaken as part of a business of share dealing so that it is appropriate to apply to that business the conventional method of assessment laid down by the Act, then s. 82 (1) applies; the contrary will be the case when the circumstances are as referred to in the passages from the judgments of the Chief Justice and of Menzies J. in the Investment and Merchant Finance Case (1971) 125 CLR 249 . Cases in which it has been said that amounts were liable to tax under both methods of assessment are, I think, to be explained on the footing that it was there irrelevant to distinguish between the two methods; the relevant consideration was simply to determine whether or not a receipt was assessable income. (at p654)

22. The position is somewhat similar to that considered by the Court in Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612 in which the Chief Justice, although in a quite different context, disposed of the proposition that there may be two different methods of arriving at taxable income, each producing a different result; as his Honour said, the Act levies tax upon the amount of taxable income derived and there cannot be alternative figures for the assessable income which the Act requires to be ascertained and expressed as a figure and from which the amount of taxable income is derived. In Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (Carden's Case) (1938) 63 CLR 108 , it was said by Dixon J. that although the question of whether one method of accounting or another should be employed in assessing taxable income derived from a given pursuit might be regarded as a question of law, it was a mistake to treat such a question as depending upon a search for an answer in the provisions of the legislation. His Honour indicated the proper approach when he said (1938) 63 CLR, at p 152 : "The courts have always regarded the ascertainment of income as governed by the principles recognised or followed in business and commerce, unless the legislature has itself made some specific provision affecting a particular matter or question". In Carden's Case (1938) 63 CLR 108 , as in Henderson's Case (1970) 119 CLR 612 , the question in issue was quite different from that now arising but the approach of the Courts in these two cases does, I think, afford some guidance in determining which of s. 82(1) or s. 82(2), as qualified by s. 82(3) (c), is here applicable. I should, I think, first decide whether the taxpayer's assessable income derived from his share transactions can more appropriately be ascertained by treating him as conducting a business of dealing in shares, his income being ascertained by the conventional methods outlined by Menzies J. in the Investment and Merchant Finance Case (1971) 125 CLR 249, at p 264 , or by the application of s. 26(a). (at p655)

23. The former course would involve treating as trading stock at least those shares which the taxpayer acquired as a dealer in shares; it would treat his transactions as having the character of a continuing business enterprise the results of which could meaningfully be reflected by the process of annual accounting. In particular, it would bring to account, as representing unrealized profits, any excess value of stock-in-trade at the close of a year as compared with its value at the beginning of that year - s. 28. The provisions of s. 29 and s. 30 regulating valuation of trading stock would appear to me to be applicable - Investment and Merchant Finance Case (1971) 125 CLR, at pp 255, 264 - and all notion of ascertaining a profit on a particular share transaction by deducting, in the year of sale, cost price from sale price would be cast aside. (at p655)

24. To so state the matter appears to me to be to resolve the question in favour of the taxpayer. From his oral evidence and from an examination of those share transactions which are recorded in the books of his brokers, I conclude that such a method of assessment would have a gross air of unreality, whereas a basis of assessment founded upon s. 26(a) will, I think, accord well with the facts of the matter. It will treat the taxpayer for what 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 p656)

25. I will shortly summarize the taxpayer's share transactions for the relevant year of income and the immediately preceding years. In doing so I will use only very approximate figures and will refer to shares by abbreviations since the details are unimportant. I omit reference to some isolated transactions involving quite small sums. (at p656)

26. In 1966, the taxpayer bought shares in Amad and Vam two speculative mining companies (a term I will use to include petroleum exploration companies) for $1,900 and sold, for $1,700, shares in three others. In 1967, he on one occasion bought for $2,500, shares in Pioneer Mining and at the same time sold a very small parcel of shares in Vam. In 1968, in May, he bought $13,000 worth of shares in Vam, which had greatly appreciated in value, and also later in the month, sold some of them for $7,500 and also sold some of the shares in Pioneer Mining, which had also appreciated, for $1,300. In about October 1968 he again sold some Vam shares for $10,000 and one parcel of other shares for $3,600; later in that month he bought back for $8,300, a quantity of Vam shares when their price had fallen and also bought a large parcel of Surveys shares for $5,100, a few of which he sold in December for $500. In 1969, to the end of June, he bought only one small parcel of Surveys shares. He sold, on one day in February, Vam shares for $66,000 and on one day in March Surveys shares for $43,000. Later in March and again in May he sold very small parcels of various shares and of course sold in June his half a million Bridge Oil shares to the overseas buyer. (at p657)

27. Looking then at the foregoing it is clear that in 1966 and 1967 the transactions call for no comment; the same may, I think, be said of the transactions undertaken in 1968. In all three years, they are consistent with the engaging in the occasional buying of shares with a view to their resale at a profit. No different conclusion flows, I think, from his share transactions in the first half of 1969. I have not set out his transactions during the second half of that year, after the close of the relevant year of income; that was a period of greater activity on his part but cannot I think serve to affect the characterization of his earlier transactions. If it were thought that the sale of Bridge shares in June 1969 was itself of particular significance it would, I think, be proper to regard it as involving no trading activity in itself but rather a fiscal measure, a transaction when "the fiscal element has so invaded the transaction itself that it is moulded and shaped by the fiscal elements": Lord Morris in F.A. &A.B. Ltd. v. Lupton (1972) AC 634, at p 648 . I do not understand anything said in the judgment in the Investment and Merchant Finance Case (1971) 125 CLR 249 to gainsay this proposition, enunciated as it was by each of their Lordships although in somewhat different words. However, even if that transaction were to be included as proper for consideration in relation to activities in the year ended on 30th June 1969, it would not, I think, alter the conclusions which I have reached. (at p657)

28. The taxpayer's evidence of how he undertook his stock exchange transactions indicated nothing in the nature of a system or method or the carrying on of a business; he simply relied upon his own knowledge of the prospects of particular companies, gained very largely from his contacts with their managements in the course of the export and import business which he managed and which brought him into contact with a number of mining companies. (at p657)

29. It is for the foregoing reasons that I have concluded that the taxpayer is properly assessable under s. 26(a) and that, being entitled to a deduction under s. 77A, the provisions of s. 82(2) and (3) (c) apply, rather than those of s. 82(1). In examining the taxpayer's share transactions I have restricted myself to those which were investigated in the course of the hearing. Passing reference was made, in the course of evidence, to the fact that the taxpayer did also on a few occasions employ two other firms of brokers; also the records which were subjected to close examination would not reveal the acquisition of shares by original allotment as distinct from purchase through brokers, although any subsequent sales of shares so allotted would be disclosed. However the scant evidence of dealings with other brokers suggests that those dealings would not be of a frequency such as to affect the conclusions which I have reached; there was very little evidence of the acquisition of shares by allotment and such as there was should also not, in my view, affect my conclusion. Accordingly I find that the taxpayer is entitled both to a deduction under s. 77A in respect of the expenditure incurred by way of application moneys paid on the issue to him of 500,000 ten cent paid shares in Bridge Oil N.L. sold on 28th June 1969 to overseas buyers as well as being entitled, in calculating the profit on the sale of those shares, to deduct their cost from their sale price. This is, however, subject to the effect, if any, of s. 82(4) upon the taxpayer's right to deduct that cost in calculating his profit. This matter was not adverted to in argument before me; it would appear to involve no more than some mathematical calculations upon which the parties may be able to agree. Failing agreement the matter can be mentioned to me hereafter. Subject to this aspect my order will be that the taxpayer's appeal be allowed, with costs, and that the assessment be remitted to the Commissioner so that it may be amended accordingly. (at p658)

Orders

Order accordingly.