SHIELDS v DFC of T

Members:
J Block SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 11 January 1999

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J Block (Senior Member)

The objection decision under review in this matter is a decision made by the Respondent on 24 March 1998 refusing to allow an objection by the Applicant made on 17 December 1997 against an assessment dated 19 December 1996; that assessment, which disallowed a loss claimed to be on income account, in an amount of $51756.06 in respect of certain arbitrage share trading activities, related to the tax year ending June 1996 (the ``relevant year'').

2. Initially the Applicant appeared personally but assisted by Mr B Barton of McLean Charge Partners, tax agents; subsequently, and during the course of the hearing, Mr Barton assumed control of the conduct of the Applicant's case. Mr J Davis, an officer of the Respondent, appeared for the Respondent.

3. The Tribunal had before it the T Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. In addition it had before it:

• • Exhibit A1, which is a document consisting of 2 pages, the first of which is headed ``Share Arbitrage Transactions - Working Sheet'' and the second page of which is headed ``Profit/Loss After Tax and Costs'';
• • Exhibit A2 which is a document entitled ``Deal Sheet''; and
• • Exhibit 3 which is an AIMA Practice Note.

The Applicant gave evidence on his own behalf; the Tribunal accepts that his evidence was truthful.

4. The Applicant is currently a senior client services manager in the full-time employ of the AMP Society; as such 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

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ATC 2039

employed by Commonwealth Bank of Australia as a securitisation executive from 1988 to 1992; prior to 1992, 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 First Federation Discount Company (from 1973 to 1981).

5. The Applicant and his family reside at Palm Beach, New South Wales. Clause 2 of the Findings (set out in the Respondent's Statement of Findings on Material Questions of Fact, Evidence and Reasons for the Decision) notes that, in respect of the relevant year, the Applicant derived capital gains amounting to $74,491.00 from the sale of shares in several large Australian banks. The Applicant said that 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.

6. It is convenient to extract clause 7 of the Findings which sets out the manner in which the loss of $51,756.06 was sustained, as follows:

+------------------------------------------------------------+
| SHARES       | Purchase         | Sale          | LOSS      |
|-------------------------------------------------------------|
| Advance Bank | 6.2.96           | 7.2.96        |  8,201.15 |
|              |   121,585.20     |   117,233.00  |           |
|              |      121,081.95  | 7.2.96        |           |
|              |      0 - bonus   |   117,233.00  |           |
|-------------------------------------------------------------|
| CBA          | 27.2.96          | 28.2.96       | 10,392.90 |
|              |    112,124.10    |    202,733.55 |           |
|              |       101,002.35 |               |           |
|-------------------------------------------------------------|
|              | 28.2.96          | 29.2.96       |  8,830.93 |
|              |    112,728.00    |    159,133.82 |           |
|              |        55,236.75 |               |           |
|-------------------------------------------------------------|
|              | 29.2.96          | 29.2.96       | 10,860.00 |
|              |    225,456.00    |    214,596.00 |           |
|-------------------------------------------------------------|
|              | 29.2.96          | 29.2.96       |  1,575.98 |
|              |     41,029.92    |     39,453.94 |           |
|-------------------------------------------------------------|
|              |  1.3.96          |  1.3.96       | 11,895.10 |
|              |    228,676.80    |    108,291.50 |           |
|              |                  |  4.3.96       |           |
|              |                  |    108,490.20 |           |
+-------------------------------------------------------------|
                                           Total  | 51,756.06 |
                                                  +-----------+
      

7. In respect of the aggregate losses sustained, and as set out in clause 6, the Applicant's evidence can be summarised as follows:

(a) Shares in certain quoted companies (and in particular, but not confined to banks) are quoted on screens and, at the same time, both cum and ex dividend. It is in other words possible at any given time to buy and to sell shares in that company either cum dividend or ex dividend.

(b) In the interests of brevity, I use the term C shares and E shares to refer respectively, in relation to each or either of Advance Bank (``Advance'') and Commonwealth Bank of Australia (``CBA''), to its cum dividend shares and its ex dividend shares, the bid prices in respect of which are quoted on screens.

(c) The spread between the C share price and the E share price gives rise to opportunities to derive an arbitrage profit, precisely because the spread is often different from the amount of a dividend, which has been declared but which has not as yet been paid. The screen will show in relation to any given share, relevant details, and in particular bid prices and volumes bid. In order to derive arbitrage profits in this manner it is necessary to pay careful attention to the bid prices and to volumes, having regard to the fact that substantial bids and/or sales will inevitably affect market prices, and perhaps move them in a manner which is adverse to the bidder.

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ATC 2040

(d) The Applicant is as set out previously a full-time employee of the AMP Society. He has substantial market and finance experience and expertise gained over a period of years in the various capacities in which he has been employed, and referred to previously in these Reasons. For the purpose of his arbitrage activities he utilised the services of Prudential Bache (``PruBache'') notwithstanding that PruBache charges a commission of 1% of value of each completed trade, rather than a discount broker who charges 0.1% only, because, in respect of the relevant arbitrage operations, precise timing and expeditious service is at all times required, and PruBache is able to furnish the service required.

(e) The Applicant decided from the outset to confine his arbitrage activities to Australian banks, firstly because they conventionally pay substantial franked dividends and secondly because their share prices tend to be stable or at any rate more stable than is the case with certain other companies; stability is important because wide fluctuations over short periods can adversely affect his calculations. As the Applicant pointed out, a dividend of 35 cents will allow for a spread or arbitrage opportunity which will perhaps not arise in relation to a dividend of 5 cents, and where to take advantage of any differential would require the purchase of an unacceptably large number of shares.

(f) The Applicant would usually, before coming into work, listen to the news and generally ascertain whether there had been any relevant developments on world markets overnight. Screen trading runs beyond normal stock exchange trading hours and so that transactions are possible before and after the opening and close of business on the stock exchange.

(g) On his arrival at work (and during the relevant period), the Applicant would contact PruBache as to bids and volumes for both C shares and E shares referable to those Australian banks in which he was interested and being banks in respect of which dividends had been declared but not paid; for all relevant purposes, this matter relates to transactions in shares in Advance and CBA. The Applicant might then on various occasions through the day again contact PruBache in order to ascertain developments and from time to time to place orders. Orders at his bid prices might or might not be fulfilled and so that he might have to increase a bid buy price or decrease a bid sale price in order to complete a purchase or sale; his objective in all cases was the purchase of C shares in a bank and as soon as possible thereafter the sale of a matching number of E shares. In all cases save one, he was able to both buy C shares and sell matching E shares on the same day; the sales made on 28 February 1996 and 29 February 1996 referable to purchases on 27 February 1996 and 28 February 1996 respectively were in fact made on the screen after closing hours on the latter dates, but recorded as sales on the next succeeding dates. In one case only was the Applicant unable to sell matching E shares on the same day; in respect of one half of the CBA C shares purchased on 1 March 1996, a matching number of E shares was sold after an intervening weekend on 4 March 1996.

(h) It is relevant to note that PruBache were not prepared to act in accordance with a discretion as to price or within a range of bid prices; each trade (and whether a purchase or a sale) was authorised by the Applicant.

(i) During the course of a day there would be a number of calls, some of a duration of as much of 10 minutes, simply because the Applicant was obliged on occasion to hold the line while PruBache sought to implement instructions; other calls would of course be of a lesser duration. In some cases instructions required amendment during the course of the call. In the same context many calls did not result in trades at the times of such calls.

8. (a) The first page of Exhibit A1 is set out in full as follows:

``Share Arbitrage Transactions - Working Sheet

Assumptions

• • Purchase 100,000 Advance Bank Shares. Dividend is $0.35
• • Purchase price is $12.00. Total cost is $1.2 mill.
• • Break even sale price $11.65 or $5.825 after bonus share impact.
• • Target is a margin of $0.05-$0.15 ie sale at $5.85-$5.90 or above. Adjust sale target up or down depending on entry price differential from $12.00.
• • Profit would be $5,000-$15,000 before brokerage and stamp duty. Stamp duty is 0.3%

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  ATC 2041

  round trip ($3.600). Brokerage may vary between $100 flat to 1% round trip. Point brokerage is 0.1%.
• • Typical intra day volatility for a stock like Advance Bank is $0.10-$0.25. Plenty of opportunity. Buy/sell spreads are around $0.02 to $0.07.
• Market
• • Current Cum marker: 12.00 bid/12.07 offer. Last sale 12.00
• • Simultaneous EX div market: 11.66 bid/11.70. Last 11.66
• Issues for RS:
• • How much is on each side of each market?
• • Are both markets moving exactly together?
• • How long will it take to get set on both sides?
• • Will RS move the market?''

• (``RS'' refers of course to the Applicant)

(b) It will be noted that subclause (a) seeks to set out by way of example the factors which of necessity were considered by the Applicant in relation to each potential trade. It should be noted also that subclause (a) does not include, or make provision for tax considerations.

9. (a) The second page of Exhibit A1 headed ``Profit/Loss After Tax and Costs'' is set out in full as follows:

Profit/Loss After Tax and Costs

Deal No./  Stock      Cash      After Tax  Cash Loss  After Tax  After Tax
Date                  Dividend  Dividend   on Share   cash Loss  Transaction
                                           Sales      on Sales   Profit/Loss

1-Feb-06   Advance    7000      5600       -8201.15   -4100.575  1499.425
2-Feb-27   CBA        7200      5776       -10392.9    5196.45    579.55
3-Feb-28   CBA        5662      4529.6     -8830.93   -4415.465   114.135
4-Feb-29   CBA        7600      6080       -10860     -5430       650
4-Feb-29   CBA        1368      1094.4     -1575.98   -787.99     306.41
5-Mar-01   CBA        7600      6080       -11895.1   -5947.55    132.45

Cash Totals:          36450                -51756.06

Gross After Tax Profit                                             3281.97
      

(b) Subclause (a) sets out the relevant calculations, except that the after tax dividend calculation is not altogether accurate, firstly because it is calculated having regard to an assumed tax rate of 50% (rather than 48.5%), and secondly because the after tax dividend value is greater because of the exact value to the Applicant of the franked dividend. By way of one example only, and in respect of the 20,000 Advance shares a dividend of 35 cents per share became payable on 14 March 1996. That aggregate dividend of $7,000 was fully franked and when grossed up by a factor of 36/64 increases by $3,938 to $10,938. That dividend then attracts tax at 48.5% (at the Applicant's marginal rate), amounting to $5305; the amount of tax payable after the deduction of the franking credit is $1366; the value of the dividend is thus $5,634 and being $7,000 less $1,366. (The information contained in subclause (a) does take into account brokerage and stamp duty.)

(c) Accordingly the aggregate profit in respect of the calculations set out in subclause (a), taking into account the amendments set out in subclause (b) above is in excess of $3281.97, and approximately $3,600.

(d) In respect of each trade, the Applicant must naturally take into account the tax effects (and being tax on the franked dividend), brokerage (at 1%) and stamp duty (at 0.15%) for each trade.

10. (a) Exhibit A2 and headed ``Deal Sheet'' is set out in full as follows:

        
                                                                                                                                                 Exhibit A2
                                         Deal Sheet
Deal      Stock   No. of  Purchase  Total  Break   Sale    Sale     Dividend  Total       Net
No                Shares    Price    Cost   Even   Price  Proceeds            Proceeds   Profit
                                            Price                                         Loss
                               $       $      $      $        $         $        $          $
1. Feb 6  Advance 10000     12.03   120300  11.68  11.80   118000     3500     121500     1200
          Bank    10000     12.08   120800  11.73  11.80   118000     3500     121500      700
                                    241100                 236000     7000     243000     1900
2. Feb 27 CBA     10000     11.14   111400  10.76  10.74   107400     3800     111200     -200
2. Feb 27 CBA      9000     11.15   100350  10.77  10.74    96660     3420     100080     -270
                                    211750                 204060     7220     211280     -470
3. Feb 28 CBA     14900     11.20   166880  10.82  10.75   160175     5662     165837    -1043
4. Feb 29 CBA     20000     11.20   224000  10.82  10.80   216000     7600     223600     -400
4. Feb 29 CBA      3600     11.23    40428  10.85  10.94    39384     1368      40752      324
5. Mar 1  CBA     10000     11.36   113600  10.98  10.90   109000     3800     112800     -800
                  10000     11.36   113600  10.98  10.92   109200     3800     113000     -600
                                    227200                 218200     7600     225800    -1400
      

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ATC 2043

(b) Exhibit A2 does not take into account tax considerations or considerations of brokerage and duty. It sets out in relation to each C share the break-even price required in relation to each matching E share, and also the price in fact realised. Exhibit A2 indicates that the break- even price was usually, but not always, bettered. There were some occasions (as set out in Exhibit A2) on which a lower price (ie lower than the break-even price) was obtained.

11. There are of course relevant timing considerations. In respect of each purchase and sale the Applicant was required to pay the difference between the aggregate buy and sell prices within 6 days while having to wait for the relevant dividends, and being 35 cents per share in the case of Advance paid on 14 March 1996, and 38 cents per share in the case of CBA paid on 1 April 1996. Thus before receiving the dividends, the Applicant laid out in aggregate $51756.06. There is another not readily evident timing complication; trades of this nature result in losses (and being the excess of the purchase price of the C shares over the sale price of the matching E shares), and if these losses are on income account as is contended by the Applicant, there will inevitably be a time delay before the tax benefits resulting from those losses are in fact derived.

12. In respect of the purchase of shares in Advance on 6 February 1996 there is an apparent, but not a real, complication. There was at the relevant time a one for one bonus issue which in consequence halved the break- even price required. Accordingly Exhibit A2 should be read as if the true break-even prices and sale prices were halved; there is however no effect on the amounts in aggregate realised.

13. The Applicant having made all of the trades set out in Exhibit A2 and having made all the relevant calculations, came to the conclusion that the profit or gain (and he referred in this context to the overall gain in economic terms) derived by him was not commensurate with the time and effort and capital involved. He said that the effort required was such that it was taking too much of his time and attention; he stated also that the cost (ie brokerage and duty) of each transaction was a materially adverse factor. Accordingly, and early in March 1996, he decided to terminate his arbitrage activities, and did not thereafter enter into any further arbitrage transactions.

14. It is convenient to gather in this clause 14, relevant extracts from a number of decided cases (emphasis having been added where relevant by the Tribunal):

(a) In Case X86,
90 ATC 621 Deputy President Todd of this Tribunal, in the light of the case authority referred to in his decision, summarised the applicable tests at page 629 in the following terms:

``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 FC of T (1952) 10 ATD 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;

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  ATC 2044

• (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.''

(b) And in clause 25 of his decision in Case X86 [at page 630] Deputy President Todd said:

``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.''

The Tribunal notes in particular in this context that the taxpayer (a dentist) in Case X86, whose market operations related to speculative mining shares, was not in reality (and having regard to the underlined passage) a trader, because he preferred to hold his shares despite the opportunity for profit and in the hope of more substantial gains.

(c) In
Investment & Merchant Finance Corporation Ltd v FC of T 71 ATC 4140, (a decision criticised by RW Parsons in Income Taxation in Australia, but not on the basis that the taxpayer was not a trader in shares):

(i) Menzies J said at page 4146:

``... In doing so he was, I think, correct. The taxpayer bought the shares intending to take the dividend and to sell the shares at their then marked price. It was undoubtedly true that the attraction of the transaction lay in the concurrence of three features - namely that the purchase price would be deductible from assessable income; that the dividend to be received would be rebatable and that the sale of the shares would result in a loss which would, it was expected, be deductible from other income of the year in which the loss was made. It seems to me however, that this transaction was a transaction of a trading character. The decision of the House of Lords in
Griffith (Inspector of Taxes) v JP Harrison (Watford) Pty Ltd (1962) 1 All ER 909, supports this conclusion. In the later case of
Finsbury Securities Ltd v Bishop 43 Tax Cas 591. Lord Morris at pp 626-7 spoke of Harrison's case in these terms:

`In that case then there was a purchase of the shares in a company called Bendit Ltd (afterwards called Claiborne Ltd). The vendors of the shares had no interest in the shares thereafter. They had no prospect of receiving any benefit from any tax recovery. After the Harrison company owned the shares in Claiborne Ltd there was a declaration of dividend on the shares. After that the shares were sold. It was my view in that case that the transaction was demonstrably a share-

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ATC 2045

dealing transaction. Shares were bought; a dividend on them was received, later the shares were sold. There may be occasions when it is helpful to consider the object of a transaction when deciding as to its nature. In the Harrison case 40 TC 281, my view was that there could be no room for doubt as to the real and genuine nature of the transaction. The fact that the reason why it was entered into was that the provisions of the revenue law gave good ground for thinking that welcome fiscal benefit could follow did not in any way change the character of the transaction. It was not capable of being made better or worse or being altered or made different by the circumstance that the motive that inspired it was plain for all to see .'

In the Harrison case Viscount Simonds, at p 912, had said:

`Here was a company whose object it was to deal in shares. It entered into a commercial transaction which, though it might be given an invidious name, contained no element of impropriety, much less of illegality. I can find nothing that enables me to say that it is not a trading transaction and echo the question asked by the majority in the Court of Appeal: ``If it is not that, what is it?'' No doubt, many observations that have been made alio intuitu will be found to the effect that trade is carried on with a view to a profit. This proposition, however, is not universally true, nor can it be tested merely by ascertaining the difference between the purchase price (or, it may be, the manufacturing cost) of an article and the selling price of that article. For a dealer may seek his profit if a profit is essential, otherwise than by an enhanced price on a re-sale, as by a declaration of dividend, a repayment on a reduction of capital or on a liquidation of the company whose shares he has brought. It appears to me to be wholly immaterial so long as the transaction is not a sham (as was the case in
RL Johnson v JS Jewitt (Inspector of Taxes) (1961) 40 ATC 314) what may be the fiscal result or the ulterior fiscal object of the transaction...'''

(ii) and Walsh J said at page 4150:

``... But when shares are bought by a dealer in shares and it is intended that they are to be resold and that this will probably occur in the not distant future, I do not think they are to be denied the description of trading stock , either because the trader expects or intends that they will be sold at less than their cost price or because he seeks to obtain a commercial advantage from the transaction otherwise than from a profit on the resale, that is, an advantage from an expected dividend and from an expected taxation benefit.''

(d) In Case W8,
89 ATC 161 Senior Member Roach said at page 177:

``Shares can constitute `trading stock' (
Investment and Merchant Finance Corporation Limited v FC of T 71 ATC 4140; (1971) 125 CLR 249). In my view, the shares acquired by the present applicant did constitute `trading stock' (
FC of T v St Hubert's Island Pty Limited (in liq) 78 ATC 4104; (1978) 138 CLR 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

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ATC 2046

claimed by the applicant and not disputed by the Commissioner.''

(e) In
John v FC of T 89 ATC 4101 [at p 4107], the Court said:

``Whether or not a person is a trader seems to us to be a question of fact, albeit that in some cases the determination of that fact may depend on questions of impression and degree . If trading has not commenced or if there is no discernible trading pattern, the question of intention or purpose may be relevant in the sense that if there is an absence of intention or purpose to engage in trade regularly, routinely or systematically then the person may well not be a trader . A fortiori if some contrary or inconsistent intention or purpose is present. But if trading has commenced and the activities reveal a discernible trading pattern, then it seems to us that the motive for undertaking the activities or for undertaking a particular transaction cannot serve to characterise the person engaged in those activities as a non- trader, or as a non-trader in relation to a particular transaction.

In the present case Malindi did trade in shares and its activities disclose a pattern of trading activity rather than a series of discrete transactions. Moreover, it was formed to trade in shares. The fact that its formation and activities can also be ascribed to a desire to obtain a taxation advantage cannot alter the fact that Malindi was at relevant times a share trader. Being a share trader, the Compinge bonus share will, by reason of the definition of `trading stock' in sec 6(1) of the Act, constitute trading stock if they were acquired for the purpose of sale.

The definition of `trading stock', in speaking of the `purposes of manufacture, sale or exchange', clearly predicates that one such purpose shall attend the acquisition of the item in question. The definition does not require that the relevant purpose be the sole or even the dominant purpose. In the present case the acquisition of the bonus shares was attended with the purpose, evident from the prearrangements made, that the shares should later be sold. That purpose having been present, the bonus shares were trading stock as defined in the Act, notwithstanding that the transactions may have been attended by another purpose. As such, by force of sec 51(2) of the Act, the loss or outgoing incurred in relation to the shares cannot be characterised as an outgoing of capital or of a capital nature and hence non-deductible on that account.''

(f) In Case 1/94,
94 ATC 101 Senior Member Pascoe said at pages 104-105:

``The evidence provided by R was not of great assistance other than to confirm that there had been some share transactions over the years and that the applicant's involvement was solely at the instigation of R. The evidence of both the applicant and R confirmed that no outside advice was sought. Whilst accepting the applicant's evidence that the shares in B Mining Ltd were purchased for resale and the dominant motive was profit-making by sale, there was no evidence of any regular, routine or systematic trading in shares. The purchase of any of the shares, including those in B Mining Ltd, appeared to have been made on a very spasmodic basis, in most instances as a somewhat passive participant with his associate in joint venture land development projects, and with no indication of any businesslike approach. The words used by Stephen J in his decision in
A.C. Williams v FC of T 72 ATC 4157; (1972) 128 CLR 645 are appropriate to this case where he said (at ATC page 4168; CLR page 656):

`Those speculations were, I think, viewed by him as, and indeed had the character of, individual forays in particular stocks which he bought with a view to resale. To regard such shares as trading stock to which might appropriately have applied the provisions of secs. 28 to 31 is to give both them and the whole of the taxpayer's speculative activities a colour which they never bore.'''

(g) The Tribunal notes that having regard to the decision in Martin's case, its determination must be based on the large or general impression gained.

15. My attention was drawn to a number of public rulings and in particular:

(a) Taxation Ruling TR 92/4 at p 15,142 which provides inter alia that (emphasis again added):

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ATC 2047

``A loss from an isolated transaction is generally deductible under subsection 51(1) if:

• (a) in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income; and
• (b) the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction .''

It cannot be doubted that the necessary intent was present in this matter, and that moreover there was indeed a commercial transaction.

(b) Taxation Ruling TR 92/3 at pp 15,121, 15,126-15,127, 15,129-15,130 from which I have extracted and set out clauses 15, 16, 35 and 49 as follows (and again emphasis has been added):

``Summary

15. If a taxpayer carrying on a business makes a profit from a transaction or operation, that profit is income if the transaction or operation:

• (a) is in the ordinary course of the taxpayer's business (see paragraph 32 for an explanation of the circumstances in which a transaction is in the ordinary course of business) provided that any gross receipt from the transaction or operation is not income; or
• (b) is in the course of the taxpayer's business, although not within the ordinary course of that business, and the taxpayer entered the transaction or operation with the intention or purpose of making a profit; or
• (c) is not in the course of the taxpayer's business, but
  • (i) the intention or purpose of the taxpayer in entering into the transaction or operation was to make a profit or gain; and
  • (ii) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

16. If a taxpayer not carrying on a business makes a profit, that profit is income if :

• (a) the intention or purpose of the taxpayer in entering into the profit- making transaction or operation was to make a profit or gain; and
• (b) the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction .

...

35. A profit from an isolated transaction is therefore generally assessable income when both of the following elements are present:

• (a) The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.
• (b) The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

...

49. In very general terms, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations. Some factors which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

• (a) the nature of the entity undertaking the operation or transaction (
  Ruhamah Property Co. Ltd v F C of T (1928) 41 CLR 148 at 154;
  Hobart Bridge Co. Ltd v FC of T (1951) 82 CLR 372 at 383;
  FC of T v Radnor Pty Ltd 91 ATC 4689; 22 ATR 344). For example, if the taxpayer is a corporation with substantial assets rather than an individual, that may be an indication that the operation or transaction was commercial in nature. However, if the taxpayer acts in the capacity of trustee of a family trust, the inference that the transaction was commercial or business in nature may not be drawn so readily;
• (b) the nature and scale of other activities undertaken by the taxpayer (
  Western Gold Mines N.L. v C. of T (WA) (1938) 59 CLR 729 at 740);
• (c) the amount of money involved in the operation or transaction and the

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  ATC 2048

  magnitude of the profit sought or obtained;
• (d) the nature, scale and complexity of the operation or transaction;
• (e) the manner in which the operation or transaction was entered into or carried out. This factor would include whether professional agents and advisers were used and whether the operation or transaction took place in a public market;
• (f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction. For example, the relationship between the parties may suggest that the operation or transaction was essentially a family dealing and not business or commercial in nature;
• (g) if the transaction involved the acquisition and disposal of property, the nature of that property (Edwards v Bairstow; Hobart Bridge 82 CLR at 383). For example, if the property has no use other than as the subject of trade, the conclusion that the property was acquired for the purpose of trade and, therefore, that the transaction was commercial in nature, would be readily drawn; and
• (h) the timing of the transaction or the various steps in the transaction (Ruhamah Property 41 CLR at 154). For example, if the relevant transaction consists of the acquisition and disposal of property, the holding of the property for many years may indicate that the transaction was not business or commercial in nature.''

16. (a) There was debate before me as to whether the relevant shares constituted trading stock or revenue assets. A revenue asset is one whose realisation is inherent in, or incidental to, the carrying on of a business. See Income Taxation in Australia by RW Parsons, paragraph 2.478.

(b) It would thus seem, having regard to paragraph 2.478 of Income Taxation in Australia that a revenue asset is one which is utilised in a business, and in other words that a revenue asset must of necessity exist in the context of a business. If this is correct, the fundamental question for me is as to whether the Applicant can be said to have been carrying on a business or was in other words, a trader, and in which event it does not matter whether the shares, for the purposes of this case, constituted trading stock or revenue assets.

17. (a) Before proceeding further I must note that the Rulings to which I have referred make it clear that a profit is income even if it was not made in the course of the taxpayer's business but was made in accordance with a commercial operation. (See for example clause 15(b)(ii)) and clause 16 of TR 92/3 which states that even if the taxpayer was not carrying on a business, the profit is income if it was made in a commercial transaction. Clause 35 of that ruling then goes on to spell out the circumstances in which a profit from an isolated transaction will constitute income.)

(b) The Rulings to which I have referred might well have been conclusive in the Applicant's favour were they binding public rulings within section 14ZAAA of the Taxation Administration Act. However, it does not appear to me that they can be said to relate to a class of persons or a class of arrangements or a combination of both, and thus do not have any such binding character.

18. The Tribunal must therefore consider the tests set out in Case X86 as read with the decision in Martin's case. I note in this context that in my view the position of the Applicant can and should be distinguished from the dentist who acquired (and held) shares in speculative mining companies in Case X86, and also the position of the passive investor in Case 1/94. On the contrary, 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. Dealing specifically with the tests enumerated by Deputy President Todd in Case X86:

(a) The nature of the activities has been described previously in these Reasons and their purpose of profit-making cannot be doubted.

(b) The magnitude was reasonably substantial in relation to the Applicant; it was complex in that it required skill expertise and experience; it seems clear that in order to derive a profit from arbitrage activities of this nature, and taking into account the dealing costs involved, precise timing is important.

(c) Trading was regular, routine and systematic, at least whilst the enterprise lasted;

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ATC 2049

it lasted for a little under a month and then ceased for a good and valid reason, namely that insufficient profit was derived.

(d) The operation was businesslike and required sophistication.

(e) There was indeed a pattern of trading even though there was a limited number of trades.

(f) In relation to the Applicant the amount of capital involved was substantial especially when the risk factors are taken into account.

19. Then dealing with the tests specifically laid down for share traders:

(a) There was a degree of repetition.

(b) The turnover was substantial in relation to the Applicant.

(c) The Applicant retained broker's notes which were sufficient accounting records.

(d) The Applicant used the offices of his employer and needed no other.

(e) The Applicant has accounted in a manner considered adequate.

(f) The only aspect which appears to be against the Applicant is the fact that he was at the relevant time in the full-time employ of the AMP Society. It was not clear to me just how he managed to combine fulfilment of his obligations to his employer while regularly involved in numerous telephone conversations (sometimes lengthy) with his broker. However, I have accepted that his evidence was truthful and this being so it seems clear that he spent very considerable periods of time in and in relation to his arbitrage activities.

Having regard to the decision in Martin's case and the other relevant decided cases, I consider that having regard to the time, expertise and capital involved, the Applicant was actively, and not passively, involved in transactions which while speculative were organised and carried out so far as possible to minimise the risks involved. Certainly his activities amounted to much more than a mere hobby; they did moreover constitute a series of transactions, albeit that the overall number was comparatively small, and the activities terminated after the Applicant came to the conclusion that the risk/reward ratio was not sufficiently favourable. Having found that there were a series of transactions, it is unnecessary for me to consider each transaction in isolation; I note though, to the extent that it is relevant, that each transaction was indeed a commercial operation carried out to derive a profit.

My overall impression then is that the Applicant was in business, notwithstanding that the business extended for a short time only; the fact that the time period involved was short may be relevant, but cannot of itself be determinative.

Mention was made (albeit in passing) by Mr Davis of the possibility that the Applicant's activities amounted to dividend stripping (I note that Part IVA of the Income Tax Assessment Act was not in issue between the parties). It is the view of the Tribunal that the activities of the Applicant are most aptly characterised as arbitrage operations even though they were linked to dividends. It is relevant in the view of the Tribunal to have regard to the nature of the Applicant's expertise, experience and skills brought to bear on his operations; to engage in activities of this nature (not without risk) is not open to every taxpayer. Experience is required in order to ``read'' the market, and to gauge moves in the context of the volumes of shares involved. There can be no doubt that the activities in question were speculative; the Applicant said that he always bought C shares before he sold E shares because he feared that an adverse move in the price of C shares would then result in loss; that statement was perhaps not altogether logical since there was no less danger of loss in the reverse situation.

Although the activities of the Applicant were in some respects speculative, the Tribunal considers that they were so carefully and systematically organised and handled, often involving sales of E shares in tranches as the market moved, that such activities can be characterised as being in the course of a business. This will not be so for many speculators or gamblers, who depend purely on good fortune; but in this case the effort and expertise brought to bear by the Applicant takes him, in the view of the Tribunal, to the favourable (to him) side of any relevant dividing line. Of course dealings in shares which depend on the availability of franked dividends are no longer legally possible because of subsequent statutory amendments, but opportunities of this nature were available during the relevant year, and the Applicant as he was legally entitled to do, sought to take advantage of them. The fact that he was successful in economic terms, (albeit not to any

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ATC 2050

great extent), is perhaps indicative of his skills in this regard. Because of my finding that there was indeed a business, his loss (as set out in clause 6) should be allowed under section 51(1) of the Income Tax Assessment Act.

20. Accordingly, the objection decision under review is set aside and the assessment is remitted to the Respondent for reassessment accordingly.