The Administrative Appeals Tribunal (AAT) has recently held in Ransley v Federal Commissioner of Taxation that the profits derived by an individual taxpayer on the sale and exchange of shares were on revenue account. As a result, the taxpayer was not eligible for the capital gains tax rollover under Subdivision 124-M of the Income Tax Assessment Act 1997.

Capital v Revenue

In Ransley, the AAT had to consider the tax treatment of the profits that Ms Ransley made on the sale and exchange of shares in Doyles Creek Mining Pty Ltd for shares in NuCoal Resources NL and the subsequent sale of shares in NuCoal Resources NL.

In summary, the appropriate tax treatment of the sale of shares should consider the following:

a.     where a taxpayer is carrying on the business of trading shares and the shares are held for the purpose of re-sale as part of that business, or where the relevant shares were acquired with a profit-making purpose in a sufficiently commercial or business-like setting or as part of a wider commercial venture, the shares should be held on revenue account; and 

b.     where a taxpayer has “merely realised” a share long-term investment, the receipt by the taxpayer of the sale proceeds should be regarded as being on capital account.

The AAT held that Ms Ransley acquired all of the relevant shares as part of a business or commercial operation in which she and her husband, Mr Ransley were involved as equal partners.  Accordingly, the business operation run by Ms Ransley involved the acquisition of shares in a start-up coal mining company established for the purpose of obtaining an exploration licences.

Even though the AAT accepted that Ms Ransley’s financial difficulties were a reason which motivated the timing of sale of some of her shares, the Tribunal did not accept that such circumstances undermined Ms Ransley’s intentions of being a long-term investor. In particular, the AAT noted the Commissioner’s submission that Ms Ransley was unable to provide evidence to “explain why she progressively sold her shares far more than she invested in the purchase of shares, despite being allegedly passionately committed to being a long term investor in the training mine”.

The AAT found that Ms Ransley’s shares were acquired with the purpose of profit by sale. Ms Ransley’s shares would increase in value as a result of the exploration licences and this would enable Ms Ransley to realise a profit by sale “as and when and in the manner most opportune”. As a consequence, Ms Ransley’s sale of shares was held to be on revenue account.

Administrative Penalties

Ms Ransley’s failure to properly inform her tax agent, Mr Mahoney, of her intentions and the profit-making commercial operation she was undertaking with Mr Ransley was considered by the AAT as a relevant factor for the imposition of administrative penalties.

The AAT found that the limited information provided by Ms Ransley to Mr Mahoney contributed to Mr Mahoney not being given access to all information necessary to properly account the sale of shares. The fact that Ms Ransley instructed Mr Mahoney to account the sale of shares on capital account did not assist her argument against the Commissioner, instead it played against Ms Ransley’s credibility before the AAT. This contributed to the administrative penalty of 50% of the shortfall resulting from recklessness being maintained.

Accordingly, the AAT found:

273. …Ms Ransley was the person who was required to provide Mr Mahoney with complete and accurate information to enable him to prepare the 2010 return. She failed to do so and, as I have said, the explanation for her failure lies somewhere between deliberate dishonesty and gross carelessness. It necessarily follows that s 284-75(6) of Sch 1 to the TAA does not apply because, on my conclusions, Ms Ransley did not give to Mr Mahoney all relevant taxation information.

This case demonstrates the importance for taxpayers to obtain tax advice before undertaking any restructure of their business affairs.

To discuss or for further information please contact:

Patricia Martins
Associate
Sladen Legal
T +61 3 9611 0138
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: pmartins@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
Sladen Legal
M +61 411 319 327|  T +61 3 9611 0105
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
E: dsmedley@sladen.com.au