The question of when a taxpayer holds shares or any other investment on capital account or revenue account is fundamental in determining whether gains from the investment are capital in nature or ordinary income.
In a recent case Whiddon and Commissioner of Taxation (Taxation) [2022] AATA 197, the Administrative Appeals Tribunal (AAT) held that a taxpayer who entered into a complex commercial arrangement overseas in order to exchange shares of nominal value for value shares had a not insignificant purpose of obtaining profit.
During 2009 and 2010, and as part of a complex commercial arrangement, the taxpayer, Mr Whiddon exchanged shares and options in CLNR Holdings Pty Ltd (CLNR), a shelf company incorporated for the purpose of the arrangement, for shares and options in Rialto Energy Limited.
Underlying the transaction was an interest in a petroleum asset off the west coast of Africa. The interest comprised shares in C&L Natural Resources Ltd, which was a party to a Product Sharing Contract relating to rights to explore for and produce oil and gas over an area.
Mr Whiddon did not include the value of the benefit obtained from the arrangement in his Australian income tax return for the 2011 income year as he considered it to be capital nature. The Commissioner of Taxation (Commissioner) assessed Mr Whiddon to income tax on the basis that the gain was on revenue account. The Commissioner also assessed on administrative penalty of 50%, reduced to 25% on objection, and declined to exercise the discretion to remit the penalty either wholly or partly.
The question was whether Mr Whiddon had shown that he did not enter the arrangement for the not insignificant purpose of profiting upon disposal. The time for testing whether Mr Whiddon had the not insignificant purpose of profiting on the exchange of the CLNR shares was when those shares were ventured into the arrangement.
The AAT considered that the commercial transaction undertaken delivered, as it was intended to deliver, a substantial profit in the form of the difference between the value of the interests obtained and the nominal value of the shares in CLNR.
The obtaining of the increase in value was a not insubstantial purpose of the exercise. It was not necessary for profit-making to be the main purpose. It was sufficient if it was a not insignificant purpose. As a result, the AAT held that the gain arising from the commercial transaction was ordinary income of Mr Whiddon.
In respect of the penalties imposed, the AAT held that there was no evidentiary foundation on which to conclude that Mr Whiddon or his accountant exercised reasonable care. Similarly, the absence of any substantial evidence about the circumstances surrounding the preparation of the return or otherwise meant there was no basis on which to remit the penalty. It did not follow as a matter of logic that, because the Commissioner initially took a position, that position must be objectively reasonable or otherwise found a basis for remission.
To discuss or for more information:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
