Case W8
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
Early in 1985 the applicant commenced his working career and his tertiary education. He begain training for the profession of accountancy by working for a nationally prominent firm of accountants and by embarking upon a course of study as a university undergraduate. One of the partners in the nationally prominent firm had an interest in share market operations and his interest persuaded the applicant - then aged 19 years - that profits were to be easily had by investing in speculative shares. The young man tried his luck and, by 30 June 1986, he had bought and sold for profit some three stocks -
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his evidence was imprecise - and for a short-term outlay of the order of $750, had gained a profit of some $300. Despite his professional training and his responsibilities within the firm in the preparation of tax returns for clients of the firm he chose to lie in completing his 1986 income tax return. In his return he denied that he had sold ``any stocks, shares'' and did not disclose deriving any assessable income as a result of those sales.2. Encouraged by his initial success, during the following year, he extended his operations. According to ``a list of statistical facts'' presented by the applicant at the hearing, for the year of income ended 30 June 1987 ``the number of transaction totalled 42''. The number was derived by multiplying the number of sales by two, conveniently ignoring the circumstance that six of the purchases had been effected in the preceding financial year. Most if not all of the shares in which he dealt belong to the category of ``penny dreadfuls'' although, in at least one case, there was a prospect that the company would pay dividends. I find that the sole purpose on the part of the applicant in buying was to realise by sale an expected increase in realisable market value and to do so in the very short term.
3. On the whole, the applicant was successful. During the year of income ended 30 June 1987, he sold 21 parcels of shares (or options). Seventeen of the sales generated a net profit of $4,489.15. But four others resulted in losses. The amounts outlaid and the losses consequent upon sale were as follows: $1,400 ($185.60); $1,125 ($73.44); $500 ($19); $320 ($47.60). The losses totalled $325, reducing his net profit on successful sales to a net profit overall of $4,163. He returned the latter figure as assessable income and provided supporting details of all transactions.
4. Dates of purchase and sale appear in the following table:
TABLE 1
TABLE 1
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Months held
Date of purchase Date of sale (less than)
1. 11.4.1986 4.9.1986 5
2. 28.4.1986 23.7.1986 3
3. 12.5.1986 11.7.1986 2
4. 14.5.1986 13.8.1986 3
5. 16.6.1986 11.11.1986 5
6. 20.6.1986 23.7.1986 1
7. 11.7.1986 14.8.1986 2
8. 1.8.1986 14.8.1986 1
9. 26.8.1986 1.10.1986 2
10. 29.8.1986 20.1.1987 5
11. 4.9.1986 31.10.1986 2
12. 3.10.1986 15.1.1987 4
13. 5.11.1986 8.1.1987 2
14. 14.11.1986 23.12.1986 2
15. 9.12.1986 20.2.1987 3
16. 8.1.1987 19.3.1987 3
17. 20.1.1987 10.4.1987 3
18. 21.1.1987 13.4.1987 3
19. 13.2.1987 19.3.1987 2
20. 20.2.1987 19.3.1987 1
21. 20.2.1987 3.4.1987 2
5. The financial effect of those 21 transactions of sale was as follows:
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TABLE 2
Purchase price Net profit (loss)
$ $
1. 320 (47.60)
2. 240 20.10
3. 520 18.90
4. 300 11.90
5. 960 110.90
6. 800 528.50
7. 1,100 122.80
8. 1,100 608.80
9. 1,200 155.90
10. 1,125 (73.44)
11. 1,400 300.40
12. 1,400 8.80
13. 1,400 39.20
14. 1,250 225.05
15. 700 28.50
16. 1,400 (185.60)
17. 1,350 497.30
18. 1,600 1,066.80
19. 500 (19.00)
20. * 228.10
21. 1,000 517.20
*Item 20 relates to options for stock in item 19.
6. The overall effect of those transactions can be expressed as follows:
TABLE 3
$ $
Gross profit 5,710.00
LESS costs of sale 1,220.85
--------
4,489.15
LESS loss on cost
price 120.00
PLUS costs of sale 205.64 325.64
------ ---------
$4,163.51
Liability to tax on $4,163 is not disputed. What is at issue is the claim to bring to account the loss of $325.
7.In addition to the foregoing transactions the applicant held some shares at 30 June 1986 as a result of purchases made during that year. These transactions were not identified. The applicant made an estimate that the cost of shares held at that date might have been as high as $5,000. His evidence was that from 1 July 1986 he and his brother were in partnership in relation to share-dealing transactions but no clear evidence was presented as to that either. But the 1987 year of income was not to be as profitable as the previous year. The portfolio of the brothers was probably halved in value during the stock market crash of October 1987.
8. The argument for the Commissioner is that, in the circumstances of this case, the profits derived on the sale of the shares which were acquired for the purpose of profit-making by sale constitute assessable income by reason of sec. 26AAA(2) of the Act: having been sold within 12 months of the date of their acquisition. However, when it comes to a consideration of the claim to a deduction for losses on the sale of shares acquired for precisely the same purpose, the Commissioner contends that profit arising from sales effected within 12 months of acquisition are not affected by capital gains tax because sec. 26AAA prevails (sec. 160L(3)) and that the losses are not allowable pursuant to sec. 26AAA because that section never did make provision for the deductibility of losses on sales of property acquired within 12 months preceding sale; and further because, upon the passage of amendments to introduce capital gains tax with effect from 19 September 1985, sec. 25A (which deals with profits on the sale of property acquired for the dominant purpose of profit-making by sale regardless of the period of time held), and sec. 52 (which determines the conditions under which losses may be allowed in relation to property acquired for that purpose) were both amended so as to provide (in each case by the introduction of subsec. 1(a)):
``This section does not apply in respect of the sale of property acquired on or after 20 September 1985.''
That being so, the Commissioner's argument is that, by reason of amendments introduced on the introduction of capital gains tax, the Commissioner is no longer empowered to allow the deduction which previously he would on any view have allowed pursuant to sec. 52 of the Act (as it then was). In my view the argument takes too narrow a view of the matter.
The law - before 1973
9. When the Parliament enacted the Income Tax Assessment Act 1922 - ``the 1922 Act'' - the predecessor to the Act of 1936, by sec. 4 of the 1922 Act it provided that:
``Unless the contrary intention appears -
- `Assessable income' means the gross income which is not exempt from taxation'.''
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Section 16 of the 1922 Act also referred to the concept of assessable income. It provided that:
``The assessable income of any person shall include (inter alia)
- (a) profits derived from any trade or business and converted into stock-in-trade or added to the capital of or in any way invested in the trade or business...''
When the House of Lords delivered its decision in
Jones v. Leeming (1930) A.C. 415 the Parliament reacted by amending sec. 4 of the 1922 Act to extend the definition of ``income'' in sec. 4 to include:
``(ba) any profit arising from the sale by any person of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme.''
It seems that it was thought at the time that the decision of the House of Lords in Jones v. Leeming was to the effect that a person who entered into an isolated transaction, for no other purpose than to derive a profit on sale, was not liable to tax when the profit was derived. As was indicated many years later by a further decision of the House of Lords in
Edwards v. Bairstow (1956) A.C. 14 that was to take too broad a view of the decision in Jones v. Leeming. A more accurate view of the latter decision was that the House of Lords had merely said that a finding of fact by the Commissioners that the particular sale did not constitute a transaction of trade was a finding open to the Commissioners upon the evidence before them and was not to be reversed on appeal.
10. Upon the enactment of the present Act in 1936 the Parliament again chose not to attempt to define the concept of ``income'' but rather to provide by sec. 25(1) of the Act:
``The assessable income of a taxpayer shall include -
- (a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia; and
- (b) where the taxpayer is a non-resident -
- the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income.''
Then, by other provisions of the Act, it specifically identified certain receipts and gains as assessable income. Prominent among those provisions was sec. 26(a) of the Act, which provided:
``The assessable income of a taxpayer shall include -
- (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme;
- (b)...''
However, as was recognised in Ratcliffe & McGrath (The Law of Income Tax 1938 at p. 266) the better view in Australia has always been that profits from isolated transactions carried out for the dominant purpose of profit-making by sale always did constitute income. As Dixon J. had already said in
Premier Automatic Ticket Issuers Limited v. F.C. of T. (1933) 50 C.L.R. 268 at p. 298:
``The criterion, which the Legislature has now adopted and established (by way of sec. 4(ba) of the 1922 Act) was formulated by the Courts in the absence of any statutory direction upon the way in which capital profits may be distinguished from income profits. So far as it lacks precision or is uncertain in its application, the cause is to be found in the powerlessness of the Courts to do more than state a wide general proposition and to apply it as each case arose. The statement of the proposition was not a definition, but rather an explanation of principle. No doubt, as the language of the statute it must receive a more literal application. It is not easy to say whether the expression `profit-making by sale' refers to a sole purpose, or a dominant or main purpose or includes any one of a number of purposes. The alternative `carrying on or carrying out' appears to cover, on the one hand, the habitual pursuit of a course of conduct and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system.''
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The question as to sole or other description of ``purpose'' which Dixon J. had contemplated in Premier Automatic came to be answered in
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108 when the High Court of Australia determined that the test was that of ``dominant purpose''.
11. In my view, that statement of principle has not been undermined by any of the numerous cases in which the courts have later had to consider the interrelationship between sec. 25 of the Act and sec. 26(a) of the Act (as it was) or sec. 25A as it came to be when it was enacted upon the repeal of sec. 26(a) of the Act.
12. Even so, in the decades following 1936, the extensive litigation which revolved around sec. 26(a), and later sec. 25A, was essentially directed to isolated transactions and cases in which, as here, there was only a purchase and sale and not a more complicated ``profit-making undertaking or scheme''. A great deal of that litigation revolved around the issue as to the subjective dominant purpose of the taxpayer at the time of acquisition. Commonly that meant that, if a profit had been derived, it was the taxpayer's contention that profit-making had not been his dominant purpose and, if a loss had been sustained, that it was. Establishing whether such assertions were sound was an uncertain and expensive business.
The law - 1973-1985
13. So it was that, in 1973, the Parliament enacted sec. 26AAA which had the effect, subject to specified exceptions, of making irrelevant any question of ``purpose'' if profit was derived upon the sale of property within 12 months of its acquisition. However, although that automatically made all such short-term profits assessable, the law as to deductibility remained unchanged.
14. But, if the activities of buying and selling carried on by a taxpayer generated assessable profits, those profits were only assessable once. It did not matter whether a statutory foundation for the assessment could be found in sec. 25(1), 25A (or 26(a)), 26AAA, or all or any of them. In quantifying those assessable profits for the purposes of sec. 25(1), regard had to be had to losses incurred in the course of trading, either by aggregating the individual losses and setting them off against the aggregate of individual profits, or by treating all receipts as assessable income and the cost of all shares sold as deductible losses or outgoings and where the property dealt in was, and was treated as, ``trading stock'', bringing trading stock to account in accordance with the provisions of sec. 28 (and following). (In this instance, I observe there is no suggestion that the shares in question have been treated as trading stock and brought to account under the trading stock provisions, or that the failure to do so has any significance.) Similarly, if losses were incurred in circumstances allowed for by sec. 52 of the Act, they had to be taken into account. But if the gains were only assessable by force of sec. 26AAA, there was no entitlement to a deduction for losses suffered in similar circumstances.
15. That being so, in a case such as this, there were several provisions of the Act under which the Commissioner could justify the taxing of profits: sec. 25, 25A and 26AAA. As to the deductibility of losses, I accept that, if profits were assessable only by reason of the operation of sec. 26AAA, then no provision is to be made for losses. Similarly, if the profits were only assessable by reason of sec. 25A of the Act, I accept that losses were allowable only under sec. 52(1) of the Act. But, neither of those provisions denied the applicant the entitlement to deductions which he claims if the losses were incurred in the course of his income-earning activities whereby any profit would have been assessable under sec. 25(1) and any loss allowable under sec. 51(1).
16. So it was that immediately prior to 20 September 1985 the Commissioner might support an assessment of profit on sale by reliance on sec. 25, 25A, or 26AAA. Some profits might not have been assessable under either sec. 25 or 25A, but only by reason of sec. 26AAA. Be that as it may, the Commissioner could support his assessment by reliance upon any relevant provision of the Act (
F.C. of T. v. Wade (1951) 84 C.L.R. 105) even if, at the time of assessment, he had nominated one section only in support of the assessment (
F.C. of T. v. Reynolds 81 ATC 4131). On the other hand, to the same date, losses incurred in circumstances whereby, had the losses been profits, they would have been assessable under sec. 25 or 25A, were allowable under sec. 51 or 52 of the Act, although hedged about by some restrictions in the case of the latter section. But a loss incurred
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in circumstances in which, had a profit been derived, only sec. 26AAA would have made the profit assessable, was not deductible at all. However, if a loss rather than a profit was incurred in circumstances whereby the profit would have been assessable under sec. 25 or 25A, the loss was allowable pursuant to the provisions of sec. 51 or 52, notwithstanding the circumstances that the loss might have been incurred upon the sale of property acquired less than 12 months earlier.The law - from 20 September 1985
17. Then, with potential to effect all dispositions on or after 20 September 1985 of property acquired on or after 19 September 1985, ``capital gains tax'' (as it is commonly, but not necessarily accurately, referred to) was introduced. From that point, by force of amendments touching provisions of the Act other than Pt 3A - Capital Gains and Capital Losses:
- (a) sec. 25A (and with it sec. 52) ceased to operate (cf. ante); and
- (b) it was provided:
``160L(4) This Part [relating to capital gains tax] does not apply in respect of a disposal of an asset... if -
- (a) immediately before its disposal the asset constituted trading stock of the trustee for the purposes of this Act;
- (b) as a result of the disposal an amount has been or will be included in the assessable income of the beneficiary... of any year of income by virtue of section 26AAA; or
- (c)...''
18. In my view, the second of those provisions is to be construed as if it referred only to amounts which would constitute assessable income only by reason of sec. 26AAA. Such a construction is necessary in order to give effect to the principle that the Commissioner was entitled to rely upon all relevant provisions of the Act in support of his contention that any particular amount was assessable and to avoid attributing to sec. 26AAA an interpretation which would override the operation of sec. 25(1).
Capital gains tax and sec. 26AAA
19. By reason of that conclusion I am satisfied that it is not correct for the Commissioner to contend that, because the assessment of the profits arising from the share dealing of the applicant could have been assessed pursuant to sec. 26AAA, losses incurred in similar circumstances are not deductible. Rather, the correct view of the matter is that, where profits were assessable only by reason of sec. 26AAA, losses arising upon the sale of shares acquired and disposed under similar circumstances shall not be deductible. Since it is undisputed that, but for the capital gains tax amendments, the losses incurred by the applicant would have been allowable under sec. 51 or 52 of the Act, the question which remains for consideration is to what extent (if any) the capital gains tax amendments have removed a pre-existing entitlement to a deduction.
Capital gains tax and sec. 25A
20. In my view if, but for the introduction of capital gains tax provisions, the profits would have been assessable by reason of sec. 25A (but not sec. 25), those profits no longer constitute income by reason of sec. 25A (cf. sec. 25A(1A)). Such profits now become assessable as part of a ``net capital gain'' as provided for in sec. 160ZO(1), which provides:
``Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain.''
Determination of the quantum of that ``net capital gain'' requires that consideration be given to sec. 160ZC which, so far as is material, provides:
``(1) For the purposes of this Part, a net capital gain shall be taken to have accrued to a taxpayer in respect of the year of income if a capital gain or capital gains accrued to the taxpayer during the year of income and -
- (a)...; or
- (b) where the taxpayer incurred capital loss or capital losses during the year of income..., the capital gain or the sum of the capital gains exceeded -
- (i) if the taxpayer incurred a capital loss or capital losses during the year
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of income but did not incur a net capital loss in respect of the immediately preceding year of income - that capital loss or the sum of those capital losses;- ...
(2) The amount of the net capital gain that, by virtue of sub-section (1), is to be taken for the purposes of this Part to have accrued to a taxpayer in respect of the year of income is an amount equal to -
- (a)...;
- (b) in a case to which paragraph (1)(b) applies - the excess referred to in that paragraph.''
21. I am satisfied that, subject to the application of sec. 25(1) and related provisions, the losses incurred by this taxpayer on his share dealings constituted such capital losses just as surely as his gains constituted capital gains.
Capital gains tax and sec. 25(1)
22. The other provision to be considered relates to circumstances in which losses have been incurred where, had the losses rather been profits, the profit would have been assessable pursuant to sec. 25(1) of the Act. Part 3A - Capital Gains and Capital Losses - does not expressly provide, as it did in relation to sec. 26AAA, or as sec. 25A now provides in relation to capital gains tax, that the scope of sec. 25 and of capital gains tax are mutually exclusive. Instead, sec. 160L(3) provides:
``This Part does not apply in respect of a disposal of an asset,..., if -
- (a) immediately before its disposal the asset constituted trading stock of the taxpayer for the purposes of this Act.''
Section 6 of the Act provides that:
``... unless the contrary intention appears -
- `trading stock' includes anything... purchased for purposes of... sale...''
23. Shares can constitute ``trading stock'' (
Investment and Merchant Finance Corporation Limited v. F.C. of T. 71 ATC 4140; (1971) 125 C.L.R. 249). In my view, the shares acquired by the present applicant did constitute ``trading stock'' (
F.C. of T. v. St Hubert's Island Pty. Limited (in liq.) 78 ATC 4104; (1978) 138 C.L.R. 210). It was stock with which he traded. He bought and sold repeatedly. He bought with a view to sale: sale at a profit. Furthermore, to overcome any possible doubt, I find that the shares constituted ``trading stock'' in the sense required by both sec. 28 and 160L(3). This was not such an isolated transaction as was considered in the House of Lords in Jones v. Leeming (ante) and as prompted the Parliament to introduce amendments to the 1922 Act which later came to be familiar as sec. 26(a) and, later still, as sec. 25A of the 1936 Act. By reason of being ``trading stock'', the applicant had an obligation to bring his stock to account in accordance with sec. 28 (and following): an obligation he failed to perform. But his failure to bring to account the value of ``all trading stock on hand at the end of (the) year'' does not mean that his holdings did not constitute ``trading stock''. It might be that, had he done so, the distribution of his profit between the year of income ended 30 June 1987 and the preceding year would have been different. However, as the case was presented before me, no issue was raised as to that. Accordingly, I am satisfied that, for the purposes of determining the correct assessment of the applicant for the year of income ended 30 June 1987, it is appropriate to have regard to the quantum of losses as claimed by the applicant and not disputed by the Commissioner.
24. In all the circumstances, my conclusions are:
- (a) that the profits on share trading derived by the applicant were not assessable only by reason of sec. 26AAA;
- (b) that losses incurred upon sales made within 12 months of acquisition are not to be automatically disallowed as deductions;
- (c) that, all the shares having been acquired for the dominant purpose of profit-making by sale, but for the amendment of sec. 25A and 52 (by the addition of subsec. (1A) to each of those sections) the profits would have been assessable pursuant to the former provision and the losses deductible according to the latter;
- (d) that, by reason of the capital gains tax provisions, both gains and losses on the disposal of such shares are to be taken into account in determining the assessable ``net
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capital gain'' (sec. 160ZO(1)) of those provisions apply; and - (e) that, in the circumstances of the case, the profits derived by the applicant were assessable by reason of sec. 25(1) and the losses allowable pursuant to sec. 51(1) of the Act.
25. The order of the Tribunal will be that the decision of the Commissioner under review shall be varied and that the taxable income of the applicant for the year of income ended 30 June 1987 shall be reduced by $325.
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