Case X31
Members:P Gerber DP
Tribunal:
Administrative Appeals Tribunal
Dr P. Gerber (Deputy President)
This is a borderline case. The issue is whether the applicant is in the business of trading in silver. It raises, once again, the elusive question: what constitutes a business?
2. The facts can be briefly told. The applicant was at all relevant times a partner in a successful craft business in a Victorian country town. In the 1981 tax year, she turned her attention to silver as a potential trading commodity. She told me that she looked at the paper regularly, observing the movement in silver. I find that the applicant's new-found interest in silver was quite distinct and separate from the activities of the craft shop, even though her other partner (her daughter) also began to invest in silver. After a careful study of the market, the applicant concluded that silver was likely to rise in price and she saw the possibility of making a profit by acquiring bars of silver and subsequently selling it on a rising market. She thereupon acquired, in that year, two kilograms of the metal at $1,591 per kilogram. Unfortunately, silver, instead of rising, fell. This led the taxpayer, after further careful and regular study of the movement of silver on the market, to buy more and more of the metal as the market kept falling. By 1982, she held nine kilograms of silver, all deposited in a bank vault (though on today's prices, she might as well use them as door stops). I find that each purchase was a commercial decision, carefully made after regular analysis of the market.
3. The following is an agreed summary of the chronology of events in this case:
- (1) That on 21 January 1980 the taxpayer acquired 2 kg of silver for $3,183.
- (2) That on 30 June 1980 the taxpayer held 2 kg of silver brought to account as closing stock of $3,183.
- (3) That on 1 July 1980 the taxpayer brought to account as opening stock 2 kg of silver at a cost of $3,183.
- (4) That on 25 September 1980, the taxpayer purchased 2 kg of silver for $1,515.
- (5) That the taxpayer brought to account on 30 June 1981 4 kg of silver valued at $280 per kg being the market selling value at that date.
- (6) That the facts as outlined in 1 to 5 produce the following trading result for the 1981 income year in respect of the acquisition of silver:
$ Opening stock 3,183 Add purchases 1,515 ------ 4,698 Deduct Closing Stock 1,120 ------ Loss (3,578) ------ - (7) That during the 1982 income year the taxpayer purchased in September 1981 5 kg of fine silver for $1,711.
- (8) That the market selling value of 9 kg of fine silver at 30 June 1982 was $227 per kg.
- (9) That on 1 July 1981 the taxpayer brought to account 4 kg of silver as opening stock $1,120.
- (10) That the facts as outlined in 7 to 9 produce the following result regarding the silver trade:
$ Opening stock 1,120 Add purchases 1,711 ------- 2,831 Deduct closing stock 2,043 ------- Loss (788) ------- - (11) That the 9 kg of silver bought was on hand during the 1980 to 1982 income years and is still on hand.
4. Pausing here, I am satisfied on the evidence that had any of the silver been sold at a profit, the Commissioner would have had no hesitation in taxing the gain, nor would the taxpayer have had a good defence against such an assessment. By parity of reasoning, any loss on sale would have been deductible (subject to a satisfactory explanation for her failure to lodge a sec. 52 notice).
5. The issue between the parties arises from the manner in which the taxpayer dealt with the paper loss suffered as a result of the decline in the price of silver. Having held on to her hoard, the taxpayer treated it as trading stock and claimed the difference between the purchase price and the market value as at 30 June in each of the two years as a deduction from her assessable income. This is legitimate provided her activities qualify as a ``business''.
ATC 298
6. ``Business'' is not defined and indefinable. It will not cause litmus paper to change colour.
``The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.''
Martin v. F.C. of T. (1952) 10 A.T.D. 37 at p. 39; (1953) 90 C.L.R. 470 at p. 474.
7. The constituent elements which go to make up a business are exhaustively analysed in
Ferguson v. F.C. of T. 79 ATC 4261. In a joint judgment, Bowen C.J. and Franki J. observed (at pp. 4264-4265):
``There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial. See generally,
Trautwein v. F.C. of T. (No. 2) (1936) 56 C.L.R. 196;
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186;
Fairway Estates Pty. Ltd. v. F.C. of T. 70 ATC 4061; (1970) 123 C.L.R. 153;
Thomas v. F.C. of T. 72 ATC 4094 especially at pp. 4098-4100; (1972) 46 A.L.J.R. 397 at pp. 399-401, in all of which cases it was held the taxpayer was carrying on business; and Martin v. F.C. of T. (1953) 90 C.L.R. 470 in which it was held the taxpayer was not carrying on business.''
Fisher J. likewise held that (at p. 4270):
``if the transactions which go to make up the activity or operations of the taxpayer have an element of regularity or repetitiveness this factor assists in concluding that the taxpayer is carrying on a business rather than indulging in a recreational or hobby activity.''
His Honour referred with approval to the tests suggested by the courts from time to time, including whether the activities had ``a commercial purpose of character'' (Thomas) and whether they had a ``pursuit of profit or gain rather than pleasure or recreation'' (
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1959) 101 C.L.R. 30 at p. 49).
8. It is, of course, axiomatic that ``a man may carry on business although he does so in a small way'': Thomas v. F.C. of T. 72 ATC 4094.
9. Since ``the determination is eventually based on the large or general impression gained'' (Martin) and applying such tests as have emerged from the decided cases, I am satisfied that this lady carried on business, albeit in a small way (Thomas). I am fortified in my conclusion by the fact that ``if the transactions which go to make up the activity or operations of the taxpayer have an element of regularity or repetitiveness, this factor assists in concluding that the taxpayer is carrying on business rather than indulging in a recreational or hobby activity'' (Ferguson).
10. In ordinary circumstances, that finding is sufficient to dispose of this case. However, the fact that each of the parties adopted so intransigent an attitude to what is, after all, a small claim in which the Commissioner - win or lose - will receive much the same revenue (any loss on sale is (semble) deductible) requires some explanation. Thus Mr Ericson, who appeared for the taxpayer took the view that if it were held that his client had a sec. 26(a) purpose, the claim could not succeed. In the result, he put all his eggs in one basket in
ATC 299
reliance on a strong statement of the High Court inF.C. of T. v. The Myer Emporium Ltd. 87 ATC 4363 at pp. 4366-4367:
``Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a `one-off' transaction preclude it from being properly characterized as income
F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp. 366-367, 376). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.''
11. The Commissioner took the view (rightly so, in my opinion) that the above statement must be seen against the background of the Myer case and had no application to the instant facts. In other words, it is one thing for a large retail conglomerate to assign its right to receive interest under a loan to a finance company for valuable consideration - a transaction judged extraordinary by reference to the ordinary course of the taxpayer's business, and quite another for a lady operating a craft shop to venture into the silver market.
12. Having concluded that the dealing in silver constituted a business, the objection decision will be set aside and the claims allowed in full.
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