How the ATO wins by losing: Considerations from Greig v Commissioner of Taxation
Contributed by Miles Hurst, Partner, William Malouf, Senior Associate and Aleksandra Pasternacki, Graduate, Baker McKenzie.
Andrew Greig was certain that his investment in Nexus Energy Limited (Nexus) was going to pay off. Despite declining share prices, he made 65 separate acquisitions of Nexus shares, expending over $11.8m, in the hope that the market would eventually recognise Nexus’ value. Unfortunately for Greig, the market never would. In 2014, Nexus was placed into administration and his shares were transferred for nil consideration.
Although Greig’s faith in Nexus may have been misplaced, his persistence in the ensuing dispute with the tax office was eventually rewarded. The Full Federal Court (FFC) found that Greig, an ex-mining executive investing for his retirement, held Nexus shares on revenue account and was entitled to deductions for their cost. Significant individual shareholders could be forgiven for their concern at this point, in particular, where hopes of claiming the capital gains tax discount are cast into doubt.
The FFC referred to the principle, articulated in FC of T v Myer Emporium Ltd 87 ATC 433 (Myer), that gains from isolated business transactions constitute income where the property giving rise to the gain is acquired in a “business operation or commercial transaction” for the “purpose of profit-making” by the means actually giving rise to the gain. The corollary of this principle is that expenses will be deductible where incurred in the same circumstances.
Much of the FFC’s decision was spent unpacking the meaning of the words used in Myer. This was a simpler task as it related to the condition that property be acquired for the “purpose of profit making”. The Court was satisfied that Greig was possessed of that intention when acquiring Nexus shares, largely because there was no evidence to suggest the he intended to derive gains otherwise than by sale at a profit. In particular, there was no evidence to suggest that he anticipated any dividend income. The potential for dividend income (or, rather, the lack thereof) was also viewed as significant in the later decision of XPQZ & Ors v FC of T 2020 ATC ¶10-532;  AATA 1014 in which the AAT, citing Greig v FC of T 2020 ATC ¶20-733;  FCAFC 25, found proceeds from the sale of shares by a closely-held trust to be ordinary income.
When addressing the meaning of the terms “business operation or commercial transaction”, the Court weaved its way back to 1985, the year in which Sydney University Emeritus Professor Ross Wait Parsons published ’Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting’. In it, Parsons discusses the expression “business deal” as used in a series of decisions which preceded Myer and which considered the former s 26(a) (about profit making undertakings). Ultimately, Parsons concluded that a transaction will qualify as a “business deal” if it is “the sort of thing a business person, or person in trade, might do”.
The FFC equated the concept of a “business deal” with the concept of a “business operation or commercial transaction”, as developed and referred to in Myer. Having established that Greig was a sophisticated investor, with significant knowledge and experience of the mining industry, and having regard to the frequency of his share purchases, the FFC found that Greig’s investment in Nexus was the sort of thing a business person might do. As such, the FFC found that the conditions in Myer were satisfied and Greig’s investment was held on revenue account.
On one view, the Court’s conclusion is quite unremarkable; Greig certainly doesn’t match the description of the average private investor. He even spent over half a million dollars in legal fees seeking to prevent that compulsory transfer of his Nexus shares under the Deed of Company Arrangement. However, the Commissioner’s decision not to appeal to the High Court could be motivated by more than just the strength of Greig’s arguments. Exposing a greater number of private investors to revenue taxation has the potential to restrict the availability of the capital gains tax discount, which could mean more tax dollars collected from share trading and other investment activities.
As if still deciding whether to mourn or celebrate the Commissioner’s loss, the ATO’s decision impact statement (DIS) on Greig v FC of T is relatively ambiguous. The DIS notes that the FFC’s decision is not “inconsistent with existing advice and guidance” but that, despite this preliminary view, the ATO will be reviewing Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income and Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible. In the interim, founders, significant individual shareholders and those applying industry skill and experience to undertake share trading on a periodic basis should seek advice regarding the availability of the capital gains tax discount and carefully consider whether investment expenses are deductible.