Trent Investments Pty. Ltd. v. Federal Commissioner of Taxation.
Judges:Mahoney J
Court:
Supreme Court of New South Wales
Mahoney J.: These proceedings concern the transactions of Trent Investments Pty. Limited (``the taxpayer'') in relation to certain shares during the years of income ended 30th June 1967, 1968 and 1969. The Commissioner of Taxation has claimed (to the extent to which I shall refer) that the taxpayer is a company liable to be assessed to income tax not merely upon the income derived by it from the shares held by it, but also upon:
(i)the surpluses which accrued to it in each of these years upon the sale of such shares and
(ii)the benefit which accrued to it by reason of bonus share issues made in respect of the shares held by it.
The Commissioner has made this claim upon two main basis:
- (a) that the taxpayer carried on a business such that, by reason of sec. 25 of the Income
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Tax Assessment Act 1936 (as amended) it became so liable; or - (b) that, in respect of certain of the shares in question, they were acquired by the taxpayer for the purposes of resale at a profit, within sec. 26(a).
1. The facts
The details of the transactions entered into by the taxpayer are evidenced by a large amount of documentary material. The parties, by agreement, have tendered the evidence which was before the Taxation Board of Review, both the transcript of oral evidence and the exhibits and they have, in addition, tendered the judgments of the Board of Review members, and have supplemented that evidence by oral evidence before me.
The facts have been stated at length in the judgment of the members of the Taxation Board of Review (Ex. D). (A report of the proceedings before the Taxation Board of Review appears in 73 ATC 24-51). Counsel have not taken any objection to the accuracy of the facts as so stated, or to the schedules and summaries which have been incorporated in those judgments, although of course, they are not agreed upon the inferences which are to be drawn from such facts. Counsel have indicated no objection to my adopting these facts as so stated, as part of my judgment and it will be convenient so to do. I shall therefore not recapitulate the facts but record the inferences which I have drawn and the conclusions which I have based upon them.
The Delasala interests have been, at all relevant times, possessed of considerable wealth. Since at least July 1959, they have spent considerable sums in acquiring assets in Australia. More than $1,000,000 was invested in the acquisition of real estate and, by 1965, funds approximating $2,400,000 had been expended in the purchase of shares listed on Australian stock exchanges. In addition to the amounts invested in Australian assets, the Delasala interests (which include individuals and companies) held assets in Hong Kong and in other parts of the world.
One of the companies involved, Delasala Pty. Limited, carried on, inter alia, the business of buying and selling shares as a share trader and it held shares in certain Australian companies listed on stock exchanges. The taxpayer, a company incorporated in New South Wales, has been at all relevant times, a wholly-owned subsidiary of Delasala Pty. Limited and it was used by the Delasala interests as ``the investment arm'' of Delasala Pty. Limited.
Between 1959 and 1965, the taxpayer had acquired a small number of shares in four listed companies; during this time, it had few activities. The shares relevant in the present proceedings consisted of three groups acquired on and after 12th March 1965. These three groups comprise:
- (a) shares purchased at market value from Delasala Pty. Limited in March 1965;
- (b) shares purchased, through the broker, Mr. Curran, in May 1967 upon instructions from Mr. Delasala Snr. shortly before his death; and
- (c) shares purchased through Mr. Curran thereafter upon the instructions of Mr. Ernest Delasala.
Details concerning the acquisition and dealing with these shares are conveniently set forth in the schedule (Ex. 2.).
2. Claim as based on sec. 26(a)
The Commissioner did not, in the argument before me, contend that the taxpayer was, in respect of any of these shares, a share trader, i.e., a company carrying on a business for the purpose of deriving profit from the buying and selling of shares. However, he did contend that, in respect of certain of the shares in question, sec. 26(a) applied.
As to the first group, the Commissioner relied upon the finding in his favour by the majority of the Board of Review (see para. 16 and 29-32 of their judgment in Ex. D [see 73 ATC at pp. 29 and 32 respectively]). He submitted that the proper inference was that, when the shares were acquired from Delasala Pty. Limited, the dominant purpose of the taxpayer was the resale of them at a profit.
As to the shares in group (b), the Commissioner again adopted the reasoning and the finding in his favour of such members of the Board of Review.
As to group (c) the Commissioner, whilst not accepting the decision of the Board of Review that these shares were ``purchased on capital account as investments and not for resale at a profit'', did not advance any arguments why sec. 26(a) should be applied in respect of them and confined his argument, in relation to such shares, to the argument based on sec. 25.
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At the end of the arguments of Counsel, both Counsel assented to the view that I should treat the shares held by the taxpayer (with the exception to which I shall refer) as having been dealt with from May 1967 in accordance with the ``portfolio management principles'' to which reference was made in evidence, and in particular, in the evidence of Mr. Curran. The exception to which I have referred is the shareholding in R.W. Miller Holdings Limited, it being submitted by the taxpayer that Mr. Ernest Delasala had directed the sale of these shares for a reason (certain information obtained by or views formed by him) other than a reason dictated by ``portfolio management principles''.
In my opinion, none of the shares acquired by the taxpayer were acquired for a purpose within sec. 26(a). I accept that the taxpayer was seen by those controlling it as being a vehicle for the acquisition of shares for purposes not including the purpose of profit-making by sale: it was ``the investment term'' of the relevant part of the Delasala interests. There was within the Delasala control, another company or companies by which appropriately shares intended to be resold at a profit, could be acquired; the basis for use by the Delasala interests of the taxpayer, and the reason for the taxpayer acquiring from Delasala Pty. Limited the first group of shares, in March 1965, was to mark those shares as being shares as being not held for any purpose of resale. I do not accept that there was, in the transfer of the first group of shares to the taxpayer, any purpose such as was suggested, of attempting to create a false impression as to the purpose of acquisition of those shares. I accept that, as it was put in argument, the taxpayer was seen as ``a clean company'' for this purpose, i.e., a company whose assets would not be seen to attract tax upon disposal.
If therefore particular shares were subsequently acquired by the taxpayer for the purpose of profit-making by sale, such an acquisition would be contrary to the general purposes of the taxpayer and would be either an aberration or a putting into jeopardy the purposes to be achieved by the segregation of certain shares into the ownership of the taxpayer.
I have had regard to the evidence as to the particular circumstances in which each of the relevant parcels of shares was acquired or dealt with. I have had regard, in particular, to the fact that, as Mr. Priestley, Counsel for the Commissioner, emphasised, certain of the shares were shares not producing income by way of dividends and perhaps, not apt to produce such income for some time in the future. Mr. Priestley has argued that these shares, or shares which were to be regarded as ``speculative'', cast doubt upon the taxpayer's assertion that its purpose in acquiring shares was never a purpose in acquiring shares was never a purpose of profit-making by sale. It may be that the acquisition of such shares can be understood by reference to the ordinary principles of investment to which I shall refer. However this be, I accept the explanations, either general or particular, proffered on behalf of the taxpayer in respect of the acquisition of its shares and, on balance. I do not accept that any of the shares were acquired for the purposes suggested by the Commissioner.
3. Claim as based on sec. 25
As I have said, the Commissioner accepted that the taxpayer was not engaged in the business of share trading at any relevant time, and that this part of the case is to be dealt with upon the basis that the taxpayer's activities were dictated by ``the portfolio management principles'' to which I have referred.
The Commissioner's argument was, however, first, that a taxpayer who acquires and disposes of assets according to such principles, is liable to tax upon the surpluses generated by such business, whether by way of receipt of dividends or surplus on disposal; and, second, that (whether this be so or not)the way in which the portfolio management principles were applied by the taxpayer had such a result.
(a) The Commissioner's first argument was put in simple terms. He submitted that where a taxpayer is carrying on a business and that business has as its purpose the making of a profit, that profit is of the nature of income and therefore taxable. He submitted that it has been established in the United Kingdom cases that the court is to look to see whether what is being done is in the nature of a commercial business and that, if it is, then the business nature of the activities, their system and commercial purpose, result in that which accrues being income. He cited
Northern Assurance Co. v. Russell (2 T.C. 571);
Liverpool & Globe Insurance Co. v. Bennett (6 T.C. 327 at p. 345);
Ducker v. Rees Roturbo Development Syndicate (1928) A.C. 132 at p. 140 and
Commissioner of Taxes v. British Australian Wool Realisation Association Ltd. (1931) A.C. 224 at p. 231,
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These principles were, he argued, supported in Australia byRuhamah Property Co. Ltd. v. F.C. of T. (41 C.L.R. 148 at p. 165);
Colonial Mutual Life Assurance Society Limited v. F.C. of T. (73 C.L.R. 604 at p. 606-8) and other cases.
He submitted further that the kind of activity involved in portfolio management or the activities incident to the management of investment is a ``business'' for this purpose:
Smith v. Anderson (1880) 15 Ch.D. 247 at p. 260-1;
I.R. Commrs. v. Westleigh Estates Co. Ltd. (1924) 1 K.B. 390 at p. 409;
Commr. of I.T. v. Hanover Agencies Ltd. (1967) A.C. 681; and see also
Noddy Subsidiary Rights Co. Ltd. v. I.R. Commrs. (1967) 1 W.L.R. 1; 43 T.C. 458; although he conceded that not every activity of the company constitutes a business for this purpose:
National Bank of Australasia Ltd. v. F.C. of T. (118 C.L.R. 520 at p. 537-8)
In my opinion, this general principle should not be accepted. The term ``portfolio management'' covers a number of different kinds of business activities and I do not think that the activities, systematic and concerted though they may be, have the income tax results which the Commissioner claims. The term, as perhaps it would more usually be understood, denotes merely the systematic investment of assets. I do not think that, notwithstanding Mr. Priestley's careful argument, such investment activities have the tax consequences he suggests because they are systematic or are directed to matters other than the derivation of income.
Those who have large sums of money have normally not held such money in globo but have turned it to account. Where this has been done not by way of trading or in the making of profits by ventures in the nature of trade, but by the purchase of assets to be held, it has generally been accepted that an increase in the value of the assets, whether realised or unrealised, is not of the nature of income. The distinction between investment, in this sense, on the one hand, and the use of capital in trade is well established.
In some cases, dealing with assets in this way has been held to be merely a normal incident of a trading business and in such cases, increases in the value of the assets, insofar as such increases have been ``derived'' or ``come home'', have been held of an income nature. Thus, the investment and ``switching'' of assets in this way has been held to be an incident of the life insurance business:
Colonial Mutual Life Assurance Society Limited v. F.C. of T. (73 C.L.R. 604); and of the business of a bank:
Punjab Co-operative Bank Ltd., Amritsar v. Commr. of I.T., Lahore (1940) A.C. 1055. But these are exceptions to the established principle and, in my opinion, they are such exceptions not because of the systematic and business-like manner in which the investments are made and managed, but because of the relationship of the investment activities to the main business of the taxpayer.
Investment, in the sense to which I have referred, does not cease to be such merely because it is done systematically and skilfully. It may do so if, as a matter of fact, the activities of a taxpayer are such that he is carrying on a trade: see
I.R. Commr. v. Sangster (1920) 1 K.B. 587; 12 T.C. 208;
Salisbury House Estate Ltd. v. Fry (1930) 1 K.B. 304; 15 T.C. 266; and see the Noddy Subsidiary Rights case (supra) at p. 15; 475. But, upon the present facts, I do not think that it was so. Except in the sense to which I have referred, the Commissioner did not contend that what the taxpayer was doing was a trade.
However, the Commissioner pressed his argument a step further. He submitted that, investment, if it is to be systematic management in the sense in question, is necessarily not concerned simply with considerations of maintaining or increasing income yield from assets but involves of its nature the variation of the investments held according to the dictates of those principles. This, he argues, distinguishes the kind of investment management here in question from the simple cases to which, he has argued, the general principle applies.
In my opinion, this mistakes the nature of investment in the sense in which it is used in this context. Persons who ``invest'' do not, in deciding what to buy and what to sell, confine themselves solely to considerations of income yield; they have regard to the maintenance of their capital. Even in times of a completely static community or stable currency, the acquisition and sale of investments in this sense, may be made by reference to factors other than maintaining or maximising income yield. Thus, a building acquired as yielding a particular income might, according to proper investment principles, be sold because of an actual or anticipated fall in its capital value, and this notwithstanding that its income yield might be stable or rising. The variation of investments in order to maintain the value of capital is, in my opinion, a normal investment procedure, and this has been recognised by the
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principles which have been, evolved for the taxation of income.But the principles as to the income tax treatment and the proceeds of investment were not evolved in times of a static community or a stable currency. In the course of investment of capital, assets purchased may be resold because their value, in real terms, has been or is likely to be varied by reason of, e.g., a change in the use of land, or a depreciation of the currency. It would be, in my opinion, an unreal approach to the principles which have been established governing the taxation of investment income to treat them as assuming that the normal investor, in respect of whose activities the principles have been formulated would not vary the assets held by him by reason of factors such as those to which I have referred. The principles evolved, insofar as they establish that a surplus realised upon the variation of assets held by an investor is not of an income nature, assume in my opinion, that an investor may vary the assets held by reason of factors such as those to which I have referred. In a particular case, the facts may warrant a finding that a variation in assets was of a short term nature or otherwise such as to be an adventure in the nature of trade: cf.
Wisdom v. Chamberlain (1969) 1 W.I.R. 275; but this does not mean that, in every case, the variation of assets is to be so categorised. Notwithstanding Mr. Priestley's detailed examination of the cases. I do not find anything in them which is inconsistent with this view or which requires that activities be treated otherwise than as investment in this sense because they are motivated by the purpose of maintaining the capital invested.
The attraction of this portion of Mr. Priestley's argument lies, in my opinion, in the difficulty, to which he referred, of distinguishing in a particular case, between the variation of investments to maintain capital and the variation of them by a venture in the nature of trade. In static periods and in times of stable currency, this difficulty may not be so great. But, as Mr. Priestley emphasised in argument, some of the activities here in question took place during, as it was described, ``the mining boom'' and the consequent violent fluctuation in share prices which then took place. Mr. Priestley's argument was, or at least it inferred, that it was difficult to accept that activities during such a period remained investment activities in the relevant sense. It may be accepted that, where share prices are fluctuating in this way, a systematic investor may see opportunities of employing his skill in buying shares with a view to disposing of them at a profit. But I do not think that this should lead to the conclusion that, in such times, variations of shareholdings, albeit made with an eye to the fluctuations which have occurred or may occur, must cease to be investments in this sense.
It is, in my opinion, consistent with investment principles, e.g., that an asset will be sold and the proceeds invested in another asset because, inter alia, it is seen that the asset purchased is likely to be more valuable than that sold. I do not think that the principles which have been established require that the investor, in considering whether to hold or dispose of an investment, should not have regard to the fact that a prospective investment will become of a greater capital value than the one presently held. The difficulty of drawing the line between a sale and purchase for that purpose and one for the purpose of realisation at a profit does not, in my opinion, mean that the investor must ignore the opportunity to improve as well as maintain the value of his capital.
I have dealt with these matters in some detail because of the far reaching implications of the argument submitted by the Commissioner and the reliance which the Commissioner sought to place in this regard upon the judgment in
London Australia Investment Co. Ltd. v. F.C. of T. (Helsham J. 27th August 1974) [74 ATC 4213]. It was submitted for the Commissioner that that decision, and the arguments advanced in this case, established that where a substantial sum is to be invested and, as a normal incident of such investment, there will be a ``switching'' of shares, surplus realised on such ``switching'' will be of the nature of income whether that be done to protect the capital invested or even to increase the dividend yield. In my opinion, Helsham I did not lay down any such general principle. As I read his Honour's judgment, he was concerned with the facts of a particular case and he took the view that what was done in that case went beyond the proper procedures of investment, in the sense to which I have referred to them. In my opinion, once it is clear that ``switching'' of shares or other investments may take place, and may be motivated as I have suggested, a particular case will fall to be decided according to what were the processes and the purposes involved in that case.
In deference to one aspect of Mr. Priestley's argument, I would add a further observation on this point. I am conscious that, as was said
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in the Colonial Mutual Life case (73 C.L.R. at p. 608) intention may not as such be the determining factor in deciding whether what is done has become incident to or part of a trading business. No doubt a person may, unawares, cease to be an investor and become a trader. But it is, in my opinion, relevant, in determining what effect is to be given to or categorisation made of a particular variation of assets, to consider whether the intention which the investor had was maintenance of capital or that of trading. I do not read what was said by Starke J. in the Colonial Mutual Life case as establishing any contrary proposition: cf. the observations of Megarry J. inRoyal Mutual Benefit Building Society v. Walker (45 T.C. 171 at p. 195) upon an analogous problem under the United Kingdom Acts.
(b) I come now to consider whether the ``portfolio management principles'' which were applied in the present case were within the principles as to investment in the sense to which I have referred.
Mr. Charles Curran, the stockbroker engaged by the Delasala interests, gave evidence as to certain discussions which had taken place between him and, first, Mr. Delasala Snr., and, subsequently, Mr. Ernest Delasala. In these conversations and in questions concerning them, he outlined the principles which, it has been accepted, were acted upon by the taxpayer. Strictly, those conversations would be applicable only to matters done after they took place, but insofar as disposals of shares took place, they occurred substantially from May 1967 onwards. The parties have not drawn any distinction as to matters done before or after any particular one of these conversations.
Mr. Curran's evidence in this regard is contained in his evidence before the Board of Review (Ex. A. pp. 62-70) and in the evidence given before me (pp. 7-12). Reference was made also in this regard to letters written by him to Mr. Ernest Delasala (Ex. G). The inference to be drawn from this evidence is, in my opinion, that, apart from disposal of the R.W. Miller Holdings Limited shares, to which I have referred, disposals and acquisitions of shares were made in accordance with the advice given by Mr. Curran and the decisions made by Mr. Ernest Delasala. The principles adopted by Mr. Curran and Mr. Delasala involved, first, that there was ``no yield requirement imposed''; and, second, that there would be undertaken ``the elimination of weaker holdings or holdings that would require factor consideration but could suffer short term ups and downs and things of this nature''.
As to the first matter, as Mr. Curran explained these matters, he was, in advising, as to shares to be acquired, not subject to the requirement that the overall yield of the share portfolio of the taxpayer should be a particular sum each year. This is relevant in considering whether the taxpayer was investing or doing something more, but not conclusive.
As to the second matter, there were, as I infer from the evidence, two considerations involved. In the first place, it was intended that companies which ``might be not strong financially, might not be strong from a trading point of view, might be subject to intense competition in the industry'' should be disposed of. These stocks were thought ``inappropriate'' because Mr. Ernest Delasala was not available to give immediate instructions should they suddenly commence to fall in value. It was contemplated that such shares would be disposed of and the proceeds of sale reinvested in a stronger company. This consideration, in my opinion, involved the ordinary process of maintenance of capital to which I have referred.
The second consideration to which Mr. Curran referred was of a different character. He said that ``the basic sort of stock we were looking for was a growth type stock where there would be a growth of earnings, a time element of growth and at the same time one could identify the stocks that were excellent growth stocks but sometimes they became overpriced...''. The inference which I draw from his evidence in this regard, is that insofar as investments were to be made, they should preferably be made in shares of this kind. The principle that investments should be made in ``growth stocks'' does not, of itself, suggest that the taxpayer was doing otherwise than invest, in the sense to which I have referred. Insofar as additional moneys to be invested in shares would be invested in such ``growth stocks'' no problem for present purposes would arise. However, it was suggested that, insofar as moneys for investment in such stocks were to be derived from the sale of stocks held but not having such growth potential, the procedures were to be seen as indicating that the taxpayer was trading qua the relevant stocks.
As such, it is, in my opinion, not inconsistent with investment, in the sense to which I have
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referred, that the principle should be adopted of maintaining the capital invested, as far as it should be possible, in ``growth stocks''. It is not, in my opinion, necessary in order to maintain the status of an investor, that each dollar, once invested, should remain invested in the same stock even though an equivalent stock might be seen as more likely to increase in capital value in the future. There may no doubt be a line to be drawn between a person who changes from one investment to another in order that he may have realised the surplus over cost of the investment sold and a person who sells one investment for the purpose of reinvesting the proceeds in another and better investment, which will be seen as likely to increase in value. Each case must, in my opinion, be determined upon its own facts and it may be that, in times of rapid inflation of the currency, or rapid change in value of assets, a variation of assets for this purpose will be less likely to be seen as trading. But however this be, the existence of such a principle as one of the guiding principles of the investment programme does not, in my opinion, conclude the matter against the taxpayer. I do not see what in fact the taxpayer did in this case as taking its activities beyond what a prudent investor, in the financial setting in which the taxpayer was, would do for the purpose of properly husbanding its capital.However, there was involved in what Mr. Curran referred to a further matter, what was described as ``an ongoing review of the stocks''. Mr. Curran in his evidence before me, explained this in more detail.
``Q. What I want to ask you is just what was involved so far as you understood your instructions concerning the switching over of holdings from time to time?
A. This involved an on-going review of the stocks to ascertain whether there might be alternative investments which would better suit the long term aims of the portfolio and this is the whole basis of management of the portfolio. It involves in relation to the stocks you are reviewing which are in the portfolio an assessment of the immediate return that that stock is producing and the likely future return and relating that to price and seeing if there are some other stocks that might have a better relationship between immediate return, future expected return and price.
Q. In relation to switching of that kind, were you instructed by Mr. Delasala regularly to review the situation in relation to the shares held by Trent Investments?
A. I don't know whether he instructed me to but I certainly volunteered it because I believe that is the basis of any proper management of the portfolio. He agreed to it at least.''
Mr. Curran, who was a stockbroker of some years' standing and who spoke as to the principles of investment, subsequently said:
``Q. In relation to the phrase which has been used 'The management of a portfolio of shares', am I to take it that this would involve the sale of some shares from time to time because their price has risen?
A. Yes, it would be extraordinary if that did not happen. Aberrations occur in the market.
Q. Perhaps it is obvious but it may be necessary to have this recorded on the transcript in case some argument takes place about it. What is the thinking or theory behind the reason why when you bought a share for investment, whatever that may mean, you then set about selling it because it has risen in value?
A. Because there is an alternative investment to which you can apply the proceeds of sale of that particular investment to better advantage.
Q. What do you mean - get more income or make profit or what?
A. No, it would mean to either get more income immediately or to move into other stock because its prospects of income growth is greater.
Q. Then in this letter of 11th December 1967 you say on a number of occasions I think `Take advantage of current prices by disposing of part of the holding' or words to that effect?
A. Yes, I do.
Q. Are you able to tell me what was the thinking or theory behind that?
A. Yes, the theory was that in relation to those stocks about which those comments were made, the stocks had risen above what I considered to be their proper value and I felt that by selling a stock that was at an inflated price and purchasing a stock that was either good value or under value that the portfolio would benefit in a long-term manner.
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Q. Benefit in what way?
A. Would benefit by having in it stocks with a better earning potential, a better potential for earnings improvement.
Q. Let me take the portfolio of shares which is, and the word has been used, managed as an investment and not merely to make profits in the buying and selling of them, is there any recognised thinking or theory of what are the purposes to be achieved by the management?
A. It would depend upon the particular requirements of the client. For an individual, oftentimes one would be managing a portfolio such that when they turned 60 or whatever there would be a nest egg from which they could derive income in their retirement and in that sort of a situation one would be working towards once again investing in stocks that had a potential for earnings improvement because that earning improvement, if it occurs, is going to bring other benefits, namely, dividend improvement. If a company is not achieving or does not have the prospects of achieving earnings improvement then it just by definition cannot have the prospect of dividend improvement.
Q. Any other kinds of objectives which you seek to obtain?
A. There are other objectives I suppose for a life assurance company where once again there are longer term goals. There is a requirement to produce income improvements so as at the time when the liabilities of the fund are maturing there will be sufficient income at the time to enable benefits to be paid. You get other ones which are probably less determinant, a private company such as this, for example, that forms part of the assets of a family group. In this particular situation there was no particular immediate income restraint imposed upon me in the framework in which I should be giving advice but rather one for long term gains. My basic approach in that situation is to look for long term earnings gains because the basis of any investment must be income at some stage. It might be income now or income later and if it is income later you are looking for, you should be looking for companies which have a prospect of earnings improvement because it is only if they can achieve earnings improvement that they can later pass on the benefit by way of dividend increases.''
As was pointed out in argument, Mr. Curran's evidence envisages the sale of shares in a weak company and the sale of shares in a company, even if not weak in this sense, in order to invest in a stronger company. Except upon the broad principle advanced by the Commissioner, and which I have rejected, there can be no objection to an investment programme operated in this way. But there is in addition envisaged, it would appear, the disposal of a share because it has become ``over priced'' and, it was argued, this involves simply ``the taking of a profit'' and reinvestment. But I do not think that this is what was meant by Mr. Curran. In his evidence before the Board of Review (p. 64) he said:
``Q.... What did you mean when you referred to an excellent growth stock being over priced?
A. If one views it in isolation from its share price the company is a strong company, it is trading strongly, it is expanding physically, it is expanding in terms of earnings but there is the question of how much one should pay for that and the amount that one should pay is partly related to a comparison with alternative investments so that one might say in stock A one has to pay thirty times current earnings. In stock B which may be has as good a record but is not quite as popular, one has to pay ten or fifteen times earnings so on the face of it that would appear to be a more dangerous investment. By way of illustration BHP is a classical example. There was the one for $25 and everybody thought it was going to go to $40 but it came back to $10. I think the stock, from the point of view of the portfolio manager, should have been identified at some time - I am not saying right at the top of the market - it might have been about $18 - one could have said this stock was getting a bit expensive.''
Properly understood, what Mr. Curran meant was the ``over priced'' stock was, in its price, an ``aberration'', out of alignment with other stocks which were more or less comparable and that this was a ``dangerous investment'', no doubt because a fall in its price to the level of other comparable stocks might be apprehended. There is in this, in my opinion, nothing which, as such, requires the conclusion that what the taxpayer was doing
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went beyond investment. To maintain the status of an investor, I do not think that a taxpayer is required to continue to hold a stock which he believes will fall in price vis-a-vis comparable investment stocks. There will be, in this area also, sometimes a difficult determination of fact, to distinguish between the process of husbanding of the invested capital on the one hand and investing the capital so as to derive the surplus resulting from such stocks, on the other hand. In such a case, the tribunal, considering what the taxpayer has done and taking into account its purpose, will determine whether what has been done is investment. It may be that, in the case of a particular transaction, it will be seen that special considerations apply. But I do not accept that, the taxpayer having invested according to the principles to which I have referred, it must be found to have gone beyond investment or that, on the facts of this case, it should be found so to have done.In these circumstances, it is not necessary for me to consider the submissions which have been made as to the manner in which bonus shares should be treated. The Commissioner did not contend that, if my conclusions in relation to sec. 25 and 26(a) were adverse to him, the particular bonus issues received by the taxpayer should be brought to account for tax purposes.
It is not in contest but that the taxpayer is liable to income tax in respect of dividends received by it. The proceedings have been conducted before me on the basis that no issue need be determined by me as to quantum and that, according to the findings which I make upon the main submissions, appropriate orders may be formulated.
I therefore direct Counsel for the taxpayer to bring in Short Minutes of Order to give effect to the findings which I have made.
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