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Case X86

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 October 1990.

R.K. Todd (Deputy President)

This is an application for review of an objection decision of the Deputy Commissioner of Taxation disallowing the applicant's objection dated 4 June 1989 to a notice of assessment, dated 24 May 1989, in respect of income derived during the year ended 30 June 1988. The dispute concerns the disallowance as a deduction of an amount of $19,466, representing losses incurred in respect of share transactions claimed as a deduction under sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'').

2. The applicant's occupation is primarily that of a dentist. In the year of income ended 30 June 1987 he bought and sold a number of parcels of shares in six companies. The applicant was assessed in respect of that financial year on a net share trading profit of $8,683.26. During the 1987/88 financial year he engaged in the following share transactions: 

      (a) Kakadu Resources
          Bought 20,000 shares for:         $16,142.70
          Sold 20,000 shares for:            $1,600.00
          Incurred loss of:                 $14,542.70
      (b) Pioneer Resources
          Bought 30,000 shares for:          $5,524.20
          Sold 30,000 shares for:              $600.00
          Incurred loss of:                  $4,924.20

Net loss $14,542.70 + $4,924.20 = $19,466.90.

The applicant claimed this net loss as a deduction in his 1988 tax return on the basis that this was an outgoing incurred in the course of producing assessable income or in the course of carrying on a business as a ``share trader''. The term ``share trader'' is used here to describe a person who deals in shares such that his transactions have the character of a continuing business enterprise: see
A.C. Williams v. F.C. of T. 72 ATC 4157 at p. 4167. The Deputy Commissioner of Taxation disallowed the deduction because he regarded it as a loss of a capital nature and one which should be offset against future capital gains. The applicant objected to this assessment and formally requested by letter dated 30 November 1989 that the decision of the Commissioner on the objection be referred to the Administrative Appeals Tribunal (``AAT'').

3. The applicant gave evidence at the hearing of the matter that he had always had an interest in the share market. On the advice of his parents, he bought some shares in CSR in 1982 because they were a solid share that would return a dividend and appreciate in value. The first time the applicant ventured into the share

ATC 623

market on a speculative basis was in 1985. He purchased shares, on the advice of his accountant, in City and Suburban and subsequently sold these at a profit. In 1987 the applicant had excess cash reserves and said that he had made a conscious decision to engage in share trading. He approached his accountant, as his financial adviser, who gave him information about the state of the share market at that time. The applicant also spoke to others engaged in share trading, and consulted investment journals when deciding what shares to buy and sell on the market. As well, he listened to the radio reports on what was happening in relation to the fluctuations in the Australian dollar, the price of gold and the local and overseas share markets. The applicant would also ring the stock exchange several times a day whenever there were significant upward or downward movements in share prices. In particular, if contemplating selling his shares because of a rising market, the applicant would telephone the Telecom information line for its half-hourly stock market updates.

4. During the course of 1987 and 1988 the applicant bought and sold shares in the following companies:

    (a) Austpac Gold

  • This was a gold-mining company operating in New Zealand. Upon the discovery of 8.10 milligrams of gold per tonne in a core sample there was considerable interest in the company. The share price rose in a day from 40 cents to $1.20 per share. The applicant sold his shares when the price reached $1.10 and made a profit of 70 cents on each share.

    (b) Abaleen Minerals (name changed to Indo Pacific)

  • This was said to be a highly respected company exploring the Pacific rim for gold. Its primary operation was in Indonesia. The applicant purchased shares in the company on the advice of his accountant and made approximately $2,964 profit on their re-sale.

    (c) Viking Industries

  • The applicant purchased 30,000 shares in this Sydney-based company. The company proposed to introduce a high concentrate detergent in tablet form, known as ``Cleantab'', into the Scandinavian market. The promotional campaign was unsuccessful and the share price fell. The applicant sold his shares at a loss of $7,414.

    (d) City Resources

  • This was another gold-mining company. Its large reserve was the ``Wild Dog'' discovery in Papua New Guinea. Again these shares were sold at an overall profit.

    (e) Kakadu Resources

  • This Northern Territory company had an alluvial plant for sifting gold tailings, located close to the Dominion Mine. When the applicant purchased these shares it was his belief that the company had exploration rights in the Kakadu National Park close to the BHP Coronation Hill operation. Consequently, he felt that this ``was going to be the one which was going to make me more money than anything''. As a result however of an impending federal election the Government postponed its decision as to when it would allow mining in that conservation zone. Eventually these shares were sold at a loss.

    (f) Pioneer Resources

  • The applicant was advised to consider purchasing shares in both this company and West Coast. A broker with Australian Investment Advisers advised him not to invest in West Coast, but rather to buy shares in Pioneer Resources, a gold-mining company in Western Australia with prospective tenements. Subsequently, the share price for Pioneer Resources fell whereas it did the reverse as far as West Coast was concerned.

In making his share transaction decisions the applicant relied not only on the news reports which he read and heard, but also on advice from other individuals in a share-trading discussion group and, generally, had some communication with his accountant at least once a week. For example, by a letter (ex. A) dated 12 April 1987 the accountant wrote to the applicant providing him with updated information about the state of Viking Industries, Austpac Gold and another company. The applicant has a ``home office'' which was, at the relevant time, devoted not only to his dental practice but also to his share trading. He kept the purchase and sale records of his share-trading transactions in this office.

ATC 624

5. The applicant stated that as the market was rising in early 1987 his dominant purpose was ``to make as much money in as short a time as possible''. He was well aware of the risks associated with trading in speculative shares but was ``looking for quick profits''. In the first year of trading this goal was realised, but the stock market crash of October 1987 changed all this. There was an air of uncertainty and few buyers for speculative shares in prospective gold companies. It was at this point that the applicant said that he decided to make his exit from the share market as a share trader.

6. During cross-examination the applicant acknowledged that his last acquisition of shares, namely that in Kakadu Resources, was in May 1987 some five months before the share market crash. It was not his assessment however that during this period these shares could not be sold. Rather, since the share price had fallen the applicant was hoping that there would be an eventual increase in the share price. Alternatively, he was prepared to sell at a loss provided that there was another prospect available to him whereby he could recoup that loss. The applicant's evidence was that at the time he did not consider that there were other opportunities to invest which were of the calibre of his earlier transactions. He agreed with Mr White, representing the respondent, that during the period in question the market values of the shares held by him did, at times, experience peaks such that they could have been sold at an overall profit. According to the applicant, however, on the advice available to him he expected the share price to rise eventually and he was therefore reluctant to sell at a loss. The applicant stated that it was not a case of his only being prepared to sell at a profit, but rather that he did not feel that the timing was right. The stock market crash disrupted this timing procedure and resulted in losses to the applicant which were greater than they might otherwise have been. He reiterated that his dominant purpose in dealing with these shares was at all times ``to maximise profits from share trading''.

7. The respondent called C was an experienced stockbroker who had dealt with the applicant during the relevant period. He gave evidence that he had spoken to the applicant on a number of occasions about the sale or purchase of shares nominated by the latter. In general their conversations did not extend to a discussion of the merits of those transactions. The witness was however readily accessible to the applicant for this purpose and for times when the latter had an order that he wanted to place quickly.

8. During examination-in-chief by Mr White for the respondent, C gave evidence that many of his clients constantly reviewed their holdings by monitoring stock market movements as reported in the daily press on a daily basis. He was also asked, on the basis of his knowledge of the applicant's share-trading activities, whether he considered those dealings to be systematic. In C's view, those share transactions may well have been systematic to the applicant and his impression was that they were intended to make a ``quick profit'' for the person who bought them. The volume of the turnover was not important in reaching this conclusion:

``Mr White: So if someone says, `I have turned over $100,000 shares', that would not automatically indicate to you that they are in the business of dealing in shares?

C: If they talked about just an amount, a number of shares, no, it would not indicate anything to me at all.''

The witness gave a qualified opinion as to the nature of the applicant's share-trading activities. Whether or not a person was involved in a continuous share-trading business on a committed basis depended on a number of variable and accordingly would vary from one individual to another.

9. C indicated during cross-examination that he had a business relationship with the applicant's accountant and that they would discuss the share market two to three times a week. C was also aware of the fact that the applicant was being advised by his accountant and others dealing in the same shares. C himself invested in Kakadu Resources and Viking shares because a number of clients had informed him that these shares represented a good profit-making opportunity. He agreed with the accountant that a dealer in shares needs to assess the ``risk return'' factor on a daily basis, to determine whether or not he should hold on to his shares. C considered the applicant to be well-informed because the latter always gave specific instructions. He indicated that after the October 1987 stock market crash,

ATC 625

share trading generally became an unattractive and unprofitable business because of the high degree of market uncertainty. Indeed, the brokerage firm which formerly employed C itself went out of business in the aftermath of the crash. C felt that many share traders opted out on similar grounds.

10. The relevant provisions of the Act are as follows:

``SECTION 6 INTERPRETATION

[Definitions] In this Act, unless the contrary intention appears -

  • ...
  • `trading stock' includes anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange, and also includes live stock;...

SECTION 25 GROSS INCOME FROM CERTAIN SOURCES

25(1) [Assessable income to include gross income] 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, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA.

...

SECTION 28 TRADING STOCK TO BE TAKEN INTO ACCOUNT

28(1) [Opening and closing values taken into account] Where a taxpayer carries on any business, the value, ascertained under this subdivision, of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income.

...

SECTION 51 LOSSES AND OUTGOINGS

51(1) [Deductions for losses and outgoings] All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

51(2) [Expenditure on purchase of trading stock] Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.

...

52(1) [Deduction for loss] Any loss incurred by the taxpayer in the year of income upon the sale of any property or from the carrying on or carrying out of any undertaking or scheme, the profit (if any) from which sale, undertaking or scheme would have been included in his assessable income, shall be an allowable deduction:

Provided that, in respect of property acquired by the taxpayer after the date of the commencement of this proviso, no deduction shall be allowable under this section (except where the Commissioner, being satisfied that the property was acquired by the taxpayer for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme, otherwise directs) unless the taxpayer, not later than the date upon which he lodges his first return under this Act after having acquired the property, notifies the Commissioner that the property has been acquired by him for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or scheme.

...

ATC 626

SECTION 160ZC NET CAPITAL GAINS AND NET CAPITAL LOSSES

...

160ZC(3) [Circumstances in which net capital loss incurred] For the purposes of this Part, a net capital loss shall be taken to have been incurred by a taxpayer in respect of the year of income if -

  • (a) where no capital gain accrued to the taxpayer during the year of income - the taxpayer incurred a capital loss or capital losses during the year of income or incurred a net capital loss in respect of the immediately preceding year of income; or
  • (b) where a capital gain or capital gains accrued to the taxpayer during the year of income -
    • (i) if the taxpayer incurred a capital loss or capital losses during the year 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;
    • (ii) if the taxpayer did not incur a capital loss during the year of income but incurred a net capital loss in respect of the immediately preceding year of income - that net capital loss; or
    • (iii) if the taxpayer incurred a capital loss or capital losses during the year of income and incurred a net capital loss in respect of the immediately preceding year of income - the sum of that capital loss or those capital losses and that net capital loss,

    exceeded the capital gain or the sum of the capital gains that accrued to the taxpayer during the year of income.

160ZC(4) [Amount of net capital loss] The amount of the net capital loss that, by virtue of sub-section (3), is to be taken for the purposes of this Part to have been incurred by a taxpayer in respect of the year of income is an amount equal to -

  • (a) in a case to which paragraph (3)(a) applies -
    • (i) if the taxpayer incurred a capital loss or capital losses during the year 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;
    • (ii) if the taxpayer did not incur a capital loss during the year of income but incurred a net capital loss in respect of the immediately preceding year of income - that net capital loss; or
    • (iii) if the taxpayer incurred a capital loss or capital losses during the year of income and incurred a net capital loss in respect of the immediately preceding year of income - the sum of that capital loss or those capital losses and that net capital loss; or
  • (b) in a case to which paragraph (3)(b) applies - the excess referred to in that paragraph.

...

SECTION 160ZO TREATMENT OF NET CAPITAL GAINS AND NET CAPITAL LOSSES

160ZO(1) [Assessable income to include net capital gain] 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.

160ZO(2) [Net capital loss taken into account] A net capital loss that was incurred by a taxpayer in respect of a year of income shall be taken into account in accordance with section 160ZC but is not otherwise allowable to the taxpayer as a deduction under this Act in respect of any year of income.''

11. For the purposes of the Act, shares can constitute ``trading stock'': see
Investment & Merchant Finance Corp. Ltd. v. F.C. of T. 71 ATC 4140. The issue before the Tribunal is whether or not the applicant was a share trader during the 1987/88 financial year. If he was, then the loss of $19,466 constitutes an allowable deduction pursuant to sec. 51. Alternatively, was the applicant rather a ``speculator'' in the stock market in the sense

ATC 627

in which Stephen J. employed that term in A.C. Williams at p. 4168, namely a person whose speculations were in the nature of individual forays in particular stocks with a view to resale. If so, then during the relevant period the loss is a capital loss to be offset against future capital gains: sec. 160ZC, 160ZO(2).

12. At the hearing it was submitted on behalf of the applicant that in deciding this question the Tribunal needed to consider whether or not the applicant was carrying on a business. It was argued that in this case there was continuity in what the applicant did from the beginning of the business until circumstances dictated its cessation or, at the very least, a slow-down. The applicant emphasised what he said was his dominant purpose of making a profit from the sale of shares and, it was argued on his behalf, that he had studied the share market in a businesslike manner. The applicant elaborated on this in a further written submission lodged with the Tribunal after the hearing was adjourned.

13. It was contended that in the year of income ended 30 June 1987 an amount of $8,683 was assessed as income received as a result of share trading and provisional tax was accordingly assessed in respect of these profits. The only other method available to tax that profit was the capital gains tax, and provisional tax is not assessed in respect of capital gains. The applicant submitted that because his 1986/87 tax return was amended in respect of the profit arising from the sale of the shares, the respondent had taken specific action in assessing the 1987 return. Accordingly, the applicant argued that as at 30 June 1987 the respondent had regarded the shares held by the applicant as trading stock and, relying on
F.C. of T. v. Murphy (1961) 12 A.T.D. 366, they remained so until sold. The applicant rejected the argument put forward by the respondent that the 1987 tax return merely represented the applicant's assessment of himself as a share trader and no such assessment by the respondent. Apart from the fact that the respondent had specifically amended the 1987 notice of assessment, the applicant considered it highly questionable that the issue of his being a share trader or not only arose when a deduction for a loss was being sought. He also argued that the introduction of the concept of self-assessment was meant to streamline the assessment process. Therefore a taxpayer should not need to clarify his/her position at the end of each tax year depending on whether or not he/she returned a profit or loss.

14. In considering whether or not the applicant was a speculator or a share trader it was submitted that the fact that this taxpayer did not have the resources to use sophisticated methods in his share trading should not be determinative. Accordingly his failure to employ costly hedging techniques did not alter his intention in respect of his trading activity. An individual could be a trader in shares at the speculative end of the market rather than a safe conservative trader. The normal trading activity of a share trader could include speculative share dealings: see Case W8,
89 ATC 171. Unlike a trustee company which controls large sums of money belonging to other people, in this case the applicant was accountable for his own funds and was prepared to adopt a higher risk profile in his trading activities.

15. In support of the argument that the applicant was carrying on a business of share trading, reliance was placed on
F.C. of T. v. St Hubert's Island Pty. Ltd. 78 ATC 4104. The shares in which this applicant traded were bought with the purpose of earning profits on resale. A high risk/return strategy was adopted to maximise those profits. The applicant submitted that there was continuity of activity because he constantly monitored the share price, was in contact with his adviser and other traders and had regard to price movements and future prospects on a daily basis. It was further submitted that there were repeated acts of buying and selling, and that there was a turnover in that the proceeds of sale were used to purchase further stock which, in turn, was sold.

16. The applicant argued that he was a share trader because there was an evident intention to engage in trade regularly, routinely or systematically. He had this intention while market conditions were favourable. The applicant refuted the suggestion that, in his case, all there was was the buying of discrete parcels of shares in a company later to be sold in one or two lots. He relied on the judgment of Jacobs J. in St Hubert's Island in which it was said that it is not necessary to ``repeat or intend to repeat the venture'' to be termed a trader. The applicant argued that his constant monitoring of the market, the purchase and sale

ATC 628

of shares, the existence of a home office for record-keeping purposes and the fact that there was turnover of those shares established a discernible pattern of trading. He did not believe that merely because he gave a detailed presentation of each transaction in his income tax return meant that he was dealing with each parcel of shares on a separate basis. Rather, he was merely complying with the legally imposed duty of each taxpayer to give full and frank disclosure. The applicant relied on Case X31,
90 ATC 296 and Case W8. The latter emphasised the importance of determining the taxpayer's dominant purpose at the time of acquisition. The applicant submitted that at all times his intention was to conduct a business of share trading and therefore his losses during the 1987/88 financial year should be allowed as a deduction against his assessable income for that year.

17. The respondent defined a share trader as one whose dealings can be seen as part of a more extensive business of buying and selling shares. Reliance should be placed on turnover, percentages, system, hedging and any profit or loss generated from the sale of shares arising from a discernible pattern of trading:
St Hubert's Island, John v. F.C. of T. 89 ATC 4101. On the other hand, a speculator's transactions can be viewed as entire in themselves, that is as individual forays in particular stocks with a view to profit on resale: see A.C. Williams at p. 4168. The respondent submitted that in this case the applicant's activities were those of a speculator in the sense previously described rather than a share trader.

18. In determining whether or not this applicant was a share trader the respondent posed the following two-stage test:

  • (a) is there a discernible pattern of trading in shares;
  • (b) if not, is there evident an intention to engage in trade regularly, routinely or systematically.

The respondent submitted that in this case no discernible pattern of trading had been established. Rather, a discrete parcel of shares would be purchased in a company and subsequently sold in one or two lots. The process would then be repeated in respect of another company. Apart from one instance, which arose accidentally in respect of the Viking shares, after the applicant acquired the initial shares in a company there were no subsequent purchases of shares in that company. Nor was the applicant inclined to take advantage of good, short-term profits. Instead he held on to the shares in the hope of making an abnormal profit. Similarly, the applicant preferred to hold on to his shares indefinitely rather than accept small percentage losses.

19. In respect of the second limb of the respondent's test, it was submitted that while the applicant's direct evidence of his purpose is important, it is his purpose in fact which needs to be determined:
Pascoe v. F.C. of T. (1956) 11 A.T.D. 108. The applicant here accounted for his transactions on a net-receipts basis, that is the outgoings on the purchase of his shares were only taken into account at the time of the corresponding sale of those shares. The respondent submitted that had there been a genuine business in share trading, a gross receipts approach, whereby allowable deductions were deducted from gross assessable income, would have been more appropriate: see Investment & Merchant Finance Corp. Ltd. at p. 4147. Since the applicant was able to account for his share dealings individually as entire transactions it was felt that this was an indication of the speculative light in which the applicant, in fact, viewed his activities.

20. The respondent also submitted that in this case there was no real system evident in the applicant's activities. In general, most businesses have some form of forward planning to take account of contingencies and market fluctuations, as well as the setting of profit targets, budgets, periodic financial reviews, record-keeping systems, an appropriate office and so forth. In particular, it was said that it would not be unreasonable to expect a share-trading business to involve study of daily and longer-term trends, analysis of a company's prospectus and annual reports and the seeking of advice from experts. Although some of these features were present to a limited extent in this case, the respondent submitted that it would be difficult to find anything in the nature of system or method.

21. Finally, the respondent submitted that the issue to be decided needed to be considered against the backdrop of Pt IIIA of the Act, the capital gains tax provisions. As a result of the

ATC 629

introduction of these provisions, many taxpayers who suffered share market losses after the 1987 crash now face the prospect of having those losses quarantined. The respondent argued that that result was the intention of Parliament. As such, a workable distinction between a share trader and speculator was required; one which recognised that share dealing is a complex business and that in the period before the 1987 stock market crash, many entered into the share market with a speculative intent.

22. In relation to the question of whether this applicant was a share trader or a speculator it is necessary to determine whether or not he was engaged in the business of share trading. In Case X31 at p. 298 the Tribunal cited with approval the following passage from
Martin v. F.C. of T. (1952) 10 A.T.D. 37 at p. 39:

``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... the determination is eventually based on the large or general impression gained.''

The question is therefore essentially one of fact. In deciding this issue the case law has established the following factors as generally relevant considerations:

  • (a) the nature of the activities and whether they have the purpose of profit-making;
  • (b) the complexity and magnitude of the undertaking;
  • (c) an intention to engage in trade regularly, routinely or systematically;
  • (d) operating in a business-like manner and the degree of sophistication involved;
  • (e) whether any profit/loss is regarded as arising from a discernible pattern of trading;
  • (f) the volume of the taxpayer's operations and the amount of capital employed by him;

and more particularly in respect of share traders:

  • (a) repetition and regularity in the buying and selling of shares;
  • (b) turnover;
  • (c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;
  • (d) maintenance of an office;
  • (e) accounting for the share transactions on a gross receipts basis;
  • (f) whether the taxpayer is engaged in another full-time profession.

In this case it was the evidence of the applicant that at all times his intention was to engage in the business of share trading and to this end he placed considerable reliance on Case W8 and Case X31.

23. In Case W8 the taxpayer was a trainee accountant. During 1987 he purchased and sold a number of shares for the sole purpose of realising short-term gains. All the shares were sold within a year of their acquisition. The taxpayer sold 21 parcels of shares, 17 of which generated a net profit of $4,489. Four of the transactions however resulted in a total loss of $326 for which a deduction was claimed. The Commissioner disallowed the claim and assessed the taxpayer on the whole of the $4,489. The Tribunal held that the taxable income of the taxpayer for the 1986/87 tax year should be reduced by $326. It found that the shares acquired by the taxpayer did constitute trading in a business of share dealing. He had bought and sold shares repeatedly with a view to sale at a profit. Accordingly, the taxpayer was entitled to claim his losses as an allowable deduction.

24. In Case X31 the taxpayer was a partner in a craft business. After carefully studying the share market and regularly looking at the paper she decided to purchase two kilograms of silver as a trading commodity. She believed that the price of silver was likely to rise. It did the reverse. The taxpayer continued with her careful study of the market and bought a further two kilograms of silver in September 1980 and five kilograms in September 1981. Unfortunately the price of silver continued to fall. The taxpayer treated the silver as trading stock and claimed the difference between the purchase price and market value as a deduction. The Commissioner denied the deduction on the basis that the taxpayer was not engaged in a business of trading in silver. The Tribunal held that the taxpayer was carrying on such a business albeit in a small way because there was an element of regularity and repetitiveness. It found that each purchase was a commercial decision, carefully made after regular analysis of the market. Therefore it allowed the

ATC 630

taxpayer's claim for a deduction against her assessable income.

25. The Tribunal accepts the applicant's evidence in this case that his intention was at all times to maximise his profits from the sale of his share acquisitions. This does not however inevitably lead to the conclusion that he was engaged in a business of share dealing and accordingly that he was a share trader. It is necessary to consider not only the applicant's subjective intent, but also the objective surrounding circumstances. The applicant invested $100,000 in the share market. His resources were limited, so he did not employ sophisticated share-trading techniques in the management of his share acquisitions. The Tribunal accepts the applicant's evidence that he sought advice from his accountant and certain others in respect of these shares and that he read the papers and listened to financial reports on a regular basis. He did not however operate to any particular plan apart from his goal of maximising profits. There were no contingency plans in place should conditions in the share market deteriorate, as they did, dramatically, in October 1987. This is evidenced by the fact that although opportunities for sale at a modest profit presented themselves to the applicant he preferred to hold on to his shares in the hope of much larger gains. It is true that the applicant was operating on a small scale so that the maintenance of complex records and a separate office was not required and that this, of itself, does not necessarily deny the existence of a business. Similarly, the fact that the applicant continued with his dental practice does not preclude a finding that his additional activities constitute the carrying on of a business. The evidence of C was that it was possible to view the applicant's activities in this light. It is difficult however in all the circumstances of this case to conclude that those activities exhibited a system of operations which objectively evidenced a business of share trading.

26. Another factor which confirms this conclusion is the volume of the applicant's operations. The number of share transactions involved was quite small. The applicant invested in only six companies and, apart from Viking Industries, he only acquired one parcel of shares in respect of each company. In Case W8 the taxpayer had 21 share-dealing transactions and a much greater turnover than the present applicant. The volume of this applicant's operations is much smaller. Again, this does not preclude a finding that he was conducting a business in share dealing. For example, in Case X31 there were only three purchases of silver. The fact of limited turnover in the shares held, when viewed in the whole circumstances of this case, tends to point to the applicant being involved in a series of individual transactions in the stock market on a speculative basis rather than as a share trader.

27. The facts in this case are very similar to those in A.C. Williams in which the High Court held that the taxpayer was not carrying on a business of trading in shares. In that case, the taxpayer decided early in 1969 to invest in mining and oil exploration shares. Prior to the minerals boom he had had only infrequent and very modest share dealings but during the period of the boom he was involved in quite considerable stock market speculations with remarkable success. The Court found that the taxpayer was a speculator in those shares. In coming to this conclusion Stephen J. said at pp. 4168-4169:

``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.''

28. In the present case the applicant too had had only limited contact with the stock market prior to the share market boom. He then entered the stock market for the purpose of making quick profits by generally buying and selling shares in speculative mining companies. He had some contact with others speculating in the same shares, and with his accountant. Apart from reading the papers and listening to radio reports the applicant did not conduct extensive research into the companies in which he invested, often being happy to be guided simply by share market rumour. Although many share traders may have opted out of the stock market after the October 1987 crash

ATC 631

because of the high degree of market uncertainty, many also did so because the once high profits available from such speculating were no longer available. Having regard to the intent behind Pt IIIA of the Act and all the circumstances of this case the conclusion which necessarily follows is that the applicant was not engaged in a business of share trading but rather that he was a speculator in the share market.

29. Accordingly, the Tribunal finds that the loss of $19,466 is not an allowable deduction pursuant to sec. 51(1) of the Act and affirms the objection decision under review.


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