Greig v Commissioner of Taxation  FCA 1084 (Greig) reiterates the uncertainty in respect of the revenue and capital dichotomy and draws on well-known case law principles.
The case of Greig was an appeal by the taxpayer against a decision by the Commissioner of Taxation’s (Commissioner) disallowance of deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA1997) of share losses and litigation costs totalling $12.35m.
Despite arguing that he had an intention to make short-term profits from the purchase of shares on the ASX the taxpayer’s appeal was disallowed because the Court held that he was not in a business operation or commercial transaction of purchasing shares and was not carrying on a business of dealing in shares.
The facts of the case were not complicated. The taxpayer had a diverse portfolio of shares and made regular investments. With the help of his financial adviser, the Taxpayer bought $11.85m worth of shares in Nexus Energy Limited (Nexus) over a period of 25 months in 2013 and 2014. The taxpayer’s investment approach – the “Profit Target Strategy” - was to generate profits over a short-term period from investments in the mining, energy, and resource sectors. The taxpayer made gains and losses from his share portfolio and treated those losses as being on capital account (that is, the capital gains tax (CGT) rules applied.
Nexus went into voluntary administration in June 2014 and the taxpayer made a $11.85m share loss on his Nexus shares in December 2014 and incurred a further $0.5m in legal fees due to the legal action he took against Nexus and its voluntary administration.
The taxpayer argued that the share loss and legal fees should be deductible under section 8-1 (revenue account) relying on the principle in the Myer Emporium case because he had a profit-making intention at the time of purchasing the Nexus shares and he conducted a business of buying and selling Nexus shares.
The Myer Emporium principle is that an isolated transaction is ordinary income if the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain and 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.
Thawley J in Greig agreed that the taxpayer had a profit-making intention when buying the Nexus shares. However, the case turned on the whether the taxpayer bought the Nexus shares as part of a “business operation or commercial transaction” or whether the taxpayer was in the business in “dealing” in Nexus shares.
On this point, the taxpayer could not lead sufficient evidence that his actions were different to that of investors who purchase shares with the intention of deriving dividends or hoping the share price would increase or both. The taxpayer’s arguments that he researched extensively into the Nexus shares and the continuous acquisition of the shares did not amount to actions constituting a “business operation or a commercial transaction”.
Accordingly, Thawley J held that the taxpayer was not in the business of dealing in Nexus shares and the $12.35m of share losses and litigation costs were not deductible under section 8-1. We wonder if the taxpayer had made a gain instead, would the taxpayer have argued that the gain was on revenue account (losing access to the CGT discount)?
Notwithstanding the critical question about whether the losses and costs were deductible, the outcome of the case also raises questions about other forms of investment. In recent times, cryptocurrency has attracted much investment. As commented on by us here, the Commissioner may form the view that cryptocurrencies may be assessable on revenue account, for instance, where the cryptocurrency was traded as trading stock.
The question is then, would this case have favoured the taxpayer if instead of shares, the investment was cryptocurrency? Cryptocurrencies differ to shares. Shares typically pay dividends while cryptocurrencies do not. Cryptocurrencies on the other hand can be a means of payment. These differences may be critical factors in future cases.
Similarly, the Commissioner has released draft guidance on property and construction activities and the capital and revenue characterisation including on isolated transactions (previously discussed by us here). Will Greig have an impact on the final form of that guidance?
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