FC of T v SHIELDS

Judges:
O'Connor J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [1999] FCA 1077

Judgment date: 9 August 1999

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O'Connor J

This is an appeal from a decision of the Administrative Appeals Tribunal (``the Tribunal'') [reported at 99 ATC 2037] made on 11 January 1999 whereby the Tribunal set aside the decision of the Commissioner of Taxation to disallow an objection by the respondent against an assessment issued on 19 December 1996 under the Income Tax Assessment Act 1936 (Cth) (``the Act'') in relation to the year of income ended 30 June 1996.

2. The Commissioner in his application claims the following questions of law are raised on this appeal:

• (a) Whether the Tribunal erred in law on the facts as found by failing to properly apply s 51(1) of the Act.
• (b) Whether any conclusion was open to the Tribunal other than that the loss suffered by the respondent on the sale of shares was not deductible under s 51(1) of the Act.
• (c) Whether the Tribunal's conclusion that the respondent was entitled to a deduction for the loss on the sale of shares was reasonably open on the facts as found.
• (d) Whether the Tribunal's conclusion that the respondent was engaged in a business of share trading was reasonably open on the facts as found.
• (e) Whether there was any evidence upon which the Tribunal could conclude that the respondent was engaged in a business of share trading.
• (f) Whether the Tribunal erred in law in finding that the share dealing activities of the respondent had a purpose of profit making.
• (g) Whether the Tribunal erred in law in finding that each transaction was a commercial operation carried out to derive a profit.
• (h) Whether the Tribunal erred in law in failing to have regard to the stated purpose of the respondent to profit having regard to dividends payable on the shares.
• (i) Whether the Tribunal failed to have regard to the following relevant matters:
  • (i) that the overall profit to the respondent was only achieved as a result of the effect of the rebate in tax because of the availability of franking credits;
  • (ii) that there was an overall loss on each transaction having regard to stamp duty and brokerage;
  • (iii) that the respondent's purpose was not to profit on the purchase and sale of the shares.
• (j) Whether the Tribunal failed to consider, if the loss on the sale of shares was deductible under s 51(1) of the Act, the extent to which a deduction was allowable having regard to the disparity between the income generated from the transactions and the loss incurred on the sale of shares.
• (k) Whether the Tribunal failed to consider whether the losses were losses of capital, or of a capital, private or domestic nature.

3. The grounds of appeal are:

• (a) That the Tribunal erred in law on the facts as found by failing to properly apply s 51(1) of the Act.
• (b) That the only conclusion open to the Tribunal was that the loss suffered by the respondent on the sale of shares was not deductible under s 51(1) of the Act.
• (c) That the Tribunal's conclusion that the respondent was entitled to a deduction for the loss on the sale of shares was not reasonably open on the facts as found.
• (d) That the Tribunal's conclusion that the respondent was engaged in a business of

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  ATC 4785

  share trading was not reasonably open on the facts as found.
• (e) That the only conclusion open to the Tribunal was that the respondent was not engaged in a business of share trading.
• (f) That there was no evidence upon which the Tribunal could conclude that the respondent was engaged in a business of share trading.
• (g) That there was no evidence upon which the Tribunal could find that the share dealing activities of the respondent had a purpose of profit making.
• (h) That the only conclusion open to the Tribunal was that the share dealing activities of the respondent did not have a purpose of profit making.
• (i) That there was no evidence upon which the Tribunal could find that each transaction was a commercial operation carried out to derive a profit.
• (j) That the only conclusion open to the Tribunal was that each transaction was not a commercial operation carried out to derive a profit.
• (k) That the Tribunal erred in law in failing to have regard to the stated purpose of the respondent to profit having regard to dividends payable on the shares.
• (l) That the Tribunal failed to have regard to the following relevant matters:
  • (i) that the overall profits to the respondent was only achieved as a result of the effect of the rebate in tax because of the availability of franking credits;
  • (ii) that there was an overall loss on each transaction having regard to stamp duty and brokerage;
  • (iii) that the respondent's purpose was not to profit on the purchase and sale of the shares.
• (m) That the Tribunal failed to consider, if the loss on the sale of shares was deductible under s 51(1) of the Act, the extent to which a deduction was allowable having regard to the disparity between the income generated from the transactions and the loss incurred on the sale of shares.
• (n) Whether the Tribunal failed to consider whether the losses were losses of capital, or of a capital, private or domestic nature.

4. The Commissioner seeks orders that the appeal be allowed and if deemed fit, that the application be remitted to the Tribunal to be determined in accordance with law.

5. The respondent objects to the competency of the appeal on the grounds that the purported Notice of Appeal does not disclose a question of law.

Background

6. The respondent is a senior client services manager in the full-time employ of the AMP Society. In this position he is responsible for asset allocation in respect of certain large superannuation and insurance funds. He has been employed by the AMP Society for approximately 8 years; he was previously employed by the Commonwealth Bank of Australia as a securitisation executive from 1988 to 1992; prior to 1988 he was employed by Australian Bank as a general manager in its capital markets division (from 1981 to 1988); and as a dealing manager for the First Federation Discount Company (from 1973 to 1981).

7. The respondent and his family reside at Palm Beach, New South Wales. In respect of the relevant year, the respondent derived capital gains amounting to $74,491.00 from the sale of shares in several large Australian banks. The respondent claims he sold such shares in order to generate sufficient moneys to pay for alterations to the Palm Beach home in which he and his family reside.

8. As a result the respondent embarked on arbitrage activities in respect of shares he held with Australian banks and having completed all his trading activities and having made all the relevant calculations he came to the conclusion that the profit or gain derived by him was not commensurate with the time and effort and capital involved. Accordingly early in March 1996 he decided to terminate his arbitrage activities, and did not thereafter enter into any further arbitrage transactions.

9. On 16 December 1996 the Commissioner made an assessment which disallowed a loss claimed to be on income account, in an amount of $51,756.06 in respect of certain arbitrage share trading activities, related to the tax year ended June 1996. On 17 December 1997 the respondent lodged an objection against that assessment which was disallowed by a decision of the Commissioner dated 24 March 1998.

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ATC 4786

Legislative framework

10. Section 51(1) of the Act provides:

``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing 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.''

11. Section 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (``AAT Act'') provides:

``44(1) A party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding.

44(2) Where a person has applied to the Tribunal for a review of a decision, or has applied to be made a party to a proceeding before the Tribunal for a review of a decision, and the Tribunal decides that the interests of the person are not affected by the decision, the person may appeal to the Federal Court of Australia from the decision of the Tribunal.

44(2A) An appeal by a person under sub- section (1) and (2) shall be instituted-

• (a) not later than the twenty-eighth day after the day on which a document setting out the terms of the decision of the Tribunal is furnished to the person or within such further time as the Federal Court of Australia (whether before or after the expiration of that day) allows; and
• (b) in such manner as is prescribed by rules of court made under the Federal Court of Australia Act 1976.

...

44(3) The Federal Court of Australia has jurisdiction to hear and determine appeals instituted in that Court in accordance with sub-sections (1) and (2) and that jurisdiction:

• (a) may be so exercised by that Court constituted as a Full Court;
• (b) shall be so exercised if:
  • (i) the Tribunal's decision was given by the Tribunal constituted by a member who was, or by members at least one of whom was, a presidential member; and
  • (ii) after consulting the President, the Chief Judge of that Court considers that it is appropriate for the appeal from the decision to be heard and determined by that Court constituted as a Full Court; and
• (c) shall be so exercised if the Tribunal's decision was given by the Tribunal constituted by a member who was, or by members at least one of whom was, a Judge.

44(4) The Federal Court of Australia shall hear and determine the appeal and may make such order as it thinks appropriate by reason of its decision.

44(5) Without limiting by implication the generality of sub-section (4), the orders that may be made by the Federal Court of Australia on an appeal include an order affirming or setting aside the decision of the Tribunal and an order remitting the case to be heard and decided again, either with or without the hearing of further evidence, by the Tribunal in accordance with the directions of the Court.

44(6) If the Federal Court of Australia makes an order remitting a case to be heard and decided again by the Tribunal, the Tribunal need not be constituted for the hearing by the person or persons who made the decision to which the appeal relates.''

Tribunal decision

12. The fundamental question before the Tribunal was whether the respondent could be said to have been carrying on business or was in other words, a trader, and in which event the shares constituted trading stock or revenue assets. If this was correct the loss from transactions entered into in the course of carrying on a business or in carrying out a business operation or commercial transaction would generally be deductible under s 51(1) of the Act.

13. The Tribunal made the following findings:

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ATC 4787

• • That the applicant is a person with many years of experience in finance and investments who brought to his arbitrage operations skill and care, and to which he devoted considerable time and attention. Having regard to relevant authorities the Tribunal considered that having regard to time, expertise and capital involved the respondent was actively, not passively, involved in transactions which while speculative were organised and carried out so far as possible to minimise the risks involved. The activities amounted to much more than a hobby; they constituted a series of transactions, albeit that the overall number was comparatively small and the activities terminated after the respondent came to the conclusion that the risk/reward ratio was not sufficiently favourable.
• • The overall impression of the Tribunal was that the respondent was in business, notwithstanding that the business extended for a short time only; the fact that the time period involved was short may have been relevant, but it could not of itself be determinative.
• • Having regard to the nature of the respondent's expertise, experience and skills brought to bear on his operations; to engage in activities of this nature (not without risk) was not open to every taxpayer and for this reason the Tribunal characterised the respondent's activities as arbitrage operations even though they were linked to dividends.
• • Although the activities of the respondent were in some respects speculative, the Tribunal considered that they were so carefully and systematically organised and handled, often involving sales of shares in tranches as the market moved, that such activities can be characterised as being in the course of a business.

14. The Tribunal concluded that there was indeed a business and that the respondent's loss should be allowed under s 51(1) of the Act. Accordingly the objection decision under review was set aside.

Decision

15. Parties to proceedings before the Administrative Appeals Tribunal (AAT) have a right of appeal to this Court by virtue of s 44(1) of the AAT Act (set out above) and as was said by the Full Court in
FC of T v Brixius 87 ATC 4963 at 4967, the ambit of the appeal is confined to questions of law.

16. There is no challenge by either party to these proceedings that if the Tribunal made a wrong finding this does not amount to an error of law. See
Waterford v Commonwealth of Australia (1987) 71 ALR 673 per Brennan J at 689 where he said relevantly:

``A finding by the AAT on a matter of fact cannot be reviewed on appeal unless the finding is vitiated by an error of law. Section 44 of the AAT Act confers on a party to a proceeding before the AAT a right of appeal to the Federal Court of Australia `from any decision of the Tribunal in that proceeding' but only `on a question of law'. The error of law which an appellant must rely on to succeed must arise on the facts as the AAT has found them to be or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make.''

17. The reasons for decision of the AAT show that the decision maker was concerned with one factual issue, namely, whether the respondent to this appeal was ``carrying on a business''.

18. The respondent, correctly points out, that this was the basis on which the appellant conducted its case before the AAT. If the decision maker accepted, as a matter of fact, that the respondent was carrying on a business, then the losses incurred by the respondent and allowable under s 51(1) of the Act.

19. The decision maker found that the respondent was carrying on a business. The appellant argues before the Court that in the process, he,

• (a) made a perverse decision and/or
• (b) failed to take into account relevant considerations.

20. The appellant supported these submissions by referring to the following (among other) matters:

• (i) The decision maker took into account the fact that the respondent's share trading was for profit in coming to his conclusion, whereas this could be the motive of a speculator as well.
• (ii) The decision maker found that the activities were ``substantial'' ``complex'' and ``required skill, expertise and

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  ATC 4788

  experience'' but did not advert to other evidence where he carried on the same activities outside of a ``business'' environment.
• (iii) The decision maker found that the trading was ``regular, routine and systematic while the enterprise lasted'', and such a conclusion was not open to him because of the circumstances in which the activity took place.

21. A number of other submissions of the same kind were made repeating the gist of those referred to. None in my view demonstrated any perversity or failure to consider the evidence before the decision maker. Whether the respondent carried on a business is a question of fact. The test to be applied in forming a conclusion as to that issue is both subjective and objective. Regard is to be had to the nature and extent of the activities undertaken and the purpose of the individual engaging in them (
Martin v FC of T (1952) 10 ATD 37 at 39 per Webb J).

22. The decision maker accepted the evidence of the respondent who gave evidence before him and gave it weight in coming to his decision. The submission that the conclusion reached was perverse or that material evidence was disregarded is not supported by a balanced reading of the decision.

23. It is clear from the transcript (to which I was taken during the hearing) that the decision maker saw his conclusions as ``finely balanced''. After detailed consideration he decided the question of whether he was ``carrying on a business'' in favour of the respondent. On all the material presented to the Court he was entitled to do so. No error of law has been established.

24. The appeal is dismissed with costs.

THE COURT ORDERS THAT:

1. The appeal be dismissed with costs.