TAX FILES
No gain without pain – paying tax on profit-making transactions ANDREW SHAW, SHAW LAWYERS “The best things in life are free, but you can give them to the birds and bees, I want money (that’s what-I-want), I want money (that’s what-I-want), just give me money (what-I-want), that’s what I want.” – Bradford & Gordy, “Money (That’s What I Want)” (1959)
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recent decision of the Administrative Appeals Tribunal in XPQZ, KYZC, DHJP v Commissioner of Taxation is a reminder that gains made on the sale of shares may be taxable as income according to ordinary concepts, rather than as capital gains.1 As a result, the discounted basis of taxation applicable to capital gains is not available.2 Further, such income cannot be offset against current or carry forward capital losses. It is important to bear these rules in mind in any transaction intended to produce a profit, even if the transaction is not in the course of carrying on a business. An obvious example is buying up listed shares while stock markets are depressed in anticipation of making quick profits as they recover post-COVID.
BACKGROUND The trustee of a trust (Trustee) acquired shares in Doyles Creek Mining Pty Ltd (Doyle’s Creek). In 2007 Doyle’s Creek acquired land in the Hunter Valley and sought an exploration licence by direct allocation (i.e. without participating in a tender process). When the exploration licence was allocated to Doyle’s Creek, the value of Doyle’s Creek increased greatly. The Trustee sold some shares in Doyle’s Creek in October, 2009. In February, 2010 the Trustee exchanged its remaining shares for shares in NuCoal
38 THE BULLETIN August 2020
Resources Pty Ltd. The sole shareholder and director of the Trustee (Mr Poole) was also a director of Doyle’s Creek and NuCoal. The gains on disposal of the shares were almost $17 million. The Trustee treated the gains as on capital account. The gains were therefore taxed on a discounted basis (50% discount) in the hands of beneficiaries of the Trust. The Commissioner of Taxation issued assessments which treated the gains as income under ordinary concepts, rather than as discounted capital gains. The Commissioner also assessed penalties equal to 50% of the primary tax on the basis that the Trustee’s treatment of the gains on capital account was “reckless”.
BURDEN OF PROOF A taxpayer has the burden of proving on the balance of probabilities that an assessment is excessive, and in what amount the assessment should have been made.3 If a taxpayer succeeds in “weighing down [the] scales ever so slightly in his favour then he has discharged the burden he carries”.4 It was therefore up to the Trustee to convince the Tribunal that the gains should properly be taxable on capital account.
GENERAL PRINCIPLES A gain made on sale of property will be on revenue account on two alternative
bases, known as the first and third limbs identified by the High Court in the leading authority of Commissioner of Taxation v The Myer Emporium Limited (1987) 163 CLR 199, namely: • The gains were made in the ordinary course of carrying on a business of buying and selling property; or • The property generating the gain was acquired in “a business operation or commercial transaction” for the purpose of profit-making by the means giving rise to the profit (i.e. by sale of the property). The profit or gain must be associated with a “scheme, business operation or commercial transaction”, and must also be accompanied by the relevant purpose of profitmaking at the time of the acquisition. Where a transaction occurs outside the scope of ordinary business activities, it is necessary to find, not only that the transaction is “commercial”, but also that there was, at the relevant time, the intention or purpose of making a relevant profit “in the manner contemplated by the taxpayer”. 5 Professor Parsons described the features which are necessary to give a transaction the character of a business deal or of a trade of dealing on a single occasion as including “an elusive factor that is more than purpose to profit”. Parsons opined that “the transaction must be the sort of thing a business man or man of trade does…”.6 An acquisition of property for longterm investment does not have the quality of a business operation or commercial transaction even if there is a hope or expectation of eventual gain on sale. In Westfield Limited, the Full Federal Court held that a profit from sale of land by a
