Business operation or commercial transaction
109 Where the owner of an investment, such as a share, chooses to realise it and thereby obtains a greater price for it than the original acquisition price, the enhanced price is not income unless "what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of a business": Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604 at 607, per Starke J. Starke J stated: "The test to be applied is whether the amount in dispute is a gain made in an operation of business in carrying out a scheme of profit making", citing - amongst other cases - Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes) (1904) 5 TC 159.
110 In Californian Copper, the Californian Copper Syndicate acquired copper-bearing land in Fresno, California. It sold the land in two tranches to the Fresno Copper Company Limited for a total of £300,000 payable wholly in fully paid up shares in Fresno Copper, allotted to the Secretary of Californian Copper in trust for Californian Copper. Californian Copper resolved to reduce its capital by rateably transferring to its existing shareholders most of the shares held by the Secretary in Fresno Copper. Californian Copper made no profit assessable to income tax unless the net gain derived by it from the sale of its land, represented in shares in Fresno Copper, was profit within the meaning of the Income Tax Act of 1842.
111 Californian Copper contended there was no income and that the two sales of land were transactions by which the company substituted for its capital in the form of land, capital in the form of shares, and that any benefit which might result was a growth of capital not income.
112 The relevant issue was whether Californian Copper carried on an adventure or concern in the nature of trade within the meaning of the first case of Schedule D of the Income Tax Act of 1842. The Lord Justice Clerk said at 166:
It is a quite well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by realisation, the gain they make is liable to be assessed for Income Tax.
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?
113 The Lord Justice Clerk looked to the purposes for which the company was formed and held that Californian Copper "was in its inception a Company endeavouring to make profit by trade or business, and that the profitable sale of its property was not truly a substitution of one form of investment for another": at 166-7.
114 The High Court in Myer distinguished profits derived in a "business operation or commercial transaction" from "a mere realization or change of investment or from an enhancement of capital". At 213, the High Court stated (citations omitted):
The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere": [Whitfords Beach Pty Ltd (1982) 150 CLR 355]. Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value: see the discussion by Gibbs J in [London Australia Investment Company Limited v Federal Commissioner of Taxation (1977) 138 CLR 106]. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.
115 It is relevant to note three of the matters referred to as to when profit on a realisation or change of investment would be income: first, the High Court spoke of a realisation or change of investments "initially acquired as part of a business"; secondly, those investments were so acquired "with the intention or purpose that they be realised subsequently in order to capture the profit arising from their expected increase in value"; and thirdly, the intention or purpose had to exist at the time of acquisition.
116 The High Court considered the fact that the taxpayer was engaged in business at the time of the isolated transaction to be significant in determining whether the profit made was one made in a "business operation or commercial transaction". At 215-216, the High Court stated (emphasis added, citations omitted):
The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. Likewise, the need to distinguish capital and income for trust purposes and other purposes has focused attention on the difference between the right to receive future income and the receipt of that income, a difference which has given rise to the analogical difference between the fruit and the tree: see Shepherd v. Federal Commissioner of Taxation. Both the "ordinary usage meaning" of income and the "flow" concept of income derived from trust law have been criticized - see Professor Parsons, "Income Taxation: An Institution in Decay?": The 1986 Wilfred Fullagar Memorial Lecture. For present purposes it is sufficient for us to say, without necessarily agreeing with these criticisms, that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.
117 Mr Greig did not contend that he was engaged in any business outside of his acquisition of Nexus shares. His primary position was that the Myer principle applied to a "business operation or commercial transaction" and that the principle did not require that he be otherwise engaged in business.
118 The parties agreed that, although the facts of Myer were concerned with an isolated transaction which: (a) occurred in the course of business; and (b) was extraordinary by reference to the ordinary course of that business, the underlying principle was not confined to isolated transactions where a taxpayer was otherwise carrying on business.
119 In that context, Senior Counsel for Mr Greig drew attention to the obiter dictum of Edmonds J in Blank v Federal Commissioner of Taxation (2014) 95 ATR 1 and of Pagone J on appeal, reported at (2015) 242 FCR 96. Edmonds J concluded that an amount paid to Mr Blank by Glencore International AG (GI) after the termination of Mr Blank's employment was assessable as ordinary income. The amount paid to Mr Blank was calculated by reference to his entitlement under profit participation arrangements made during the course of his employment. The precise mechanism of that participation is not central for present purposes; it is sufficient to note that the participation in GI's future profit was facilitated by the use of Genussscheine (GS). The Commissioner had argued, as an alternative to his contention that the amount received by Mr Blank was ordinary income, that the GS were revenue assets acquired by Mr Blank (or in which he had an interest) and that the gain on the realisation of the GS (or the interest in them) was ordinary income according to the Myer principle. Edmonds J rejected this alternative argument concluding that it could not succeed because Mr Blank was not carrying on a business: at [93].
120 On appeal, the Commissioner maintained that, if the amount was not assessable as ordinary income, it was assessable in accordance with the Myer principle. The majority (Kenny and Robertson JJ) concluded that Edmonds J was correct to conclude that the amount was ordinary income: at [92]. Their Honours noted (at [41]) the Commissioner's argument concerning the Myer principle but concluded it was unnecessary to consider it given their conclusion that the amount was ordinary income: at [93]. Pagone J dissented. What is relevant for present purposes is his agreement with Edmonds J that the Commissioner's alternative argument based on the Myer principle should be rejected on the basis that Mr Blank was not conducting a business.
121 Pagone J said at [140]:
The Commissioner's alternative submissions to support the assessments as ordinary income are to be rejected for the reasons given by his Honour at first instance. The Commissioner contended that his Honour ought to have concluded that the amounts payable to Mr Blank were ordinary income in accordance with the principles in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 or as income from property in reliance on [Federal Commissioner of Taxation v McNeil (2007) 229 CLR 656]. His Honour rejected these grounds for upholding the assessment by saying at [93]:
I do not propose to consider the second and third grounds because, in my view, they have no arguable merit. It is sufficient to dispose of the second ground to say that the applicant was not carrying on any business to which the first, as distinct from the second, strand of reasoning in Myer Emporium might attach (see S P Investments Pty Ltd v Commissioner of Taxation (1993) 41 FCR 282 at 297 per Hill J, with whom Burchett and O'Loughlin JJ agreed). It is sufficient to dispose of the third ground to say that the GH analogy is not only irrelevant, but wrong. The relevant company is GI and the applicant held no interest in that company, if it ever held such an interest, upon execution of the Declaration on 15 March 2007.
The principle to emerge from Myer Emporium may be seen to have two strands. The first is that a receipt from a transaction involving the acquisition of property may be business income from a transaction with a profit making purpose notwithstanding that the transaction is outside of the ordinary business activity of the taxpayer and that the transaction is not an incident of the business. That may be so where a profit making purpose is stamped upon the receipt by the transaction giving rise to the receipt. The receipt in Mr Blank's case, however, was from the disposal of the rights which had accrued through participation in plans from 1994 and not from the carrying out by him of any profit making scheme of the kind within the principles considered in Myer Emporium. The application of the first strand of the reasoning in Myer Emporium is also defeated in this case by the fact that Mr Blank, unlike the taxpayer in Myer Emporium, was not conducting a business.
122 Mr Blank was granted special leave to appeal to the High Court where the appeal was dismissed: (2016) 258 CLR 439. It was held that the amount, being "deferred compensation" payable under the relevant agreement (see [59]), was a reward for services rendered by an employee and assessable as income according to ordinary concepts: at [68], [74]. This rendered it unnecessary to consider the Commissioner's alternative submission in the High Court that the amount was assessable in accordance with the Myer principle: at [54], [75].
123 Senior Counsel for Mr Greig also referred to a number of authorities in which the Myer principle had, it was submitted, been applied where it did not appear that the taxpayer was otherwise carrying on a business, including Edwards (Inspector of Taxes) v Bairstow [1956] AC 14; Commissioner of Taxation v Haass (1999) 91 FCR 132; August v Commissioner of Taxation (2013) 94 ATR 376.
124 Edwards v Bairstow was referred to by the High Court in Myer at 212-213. Mr Bairstow and Mr Harrison embarked on a joint venture to purchase a complete spinning plant, which they intended, even before they purchased it, to sell at a profit. Neither of them had ever engaged in any transactions in machinery. They had no intention of using the plant, holding it or deriving income from it. Lord Radcliffe concluded, on this basis, that this was "inescapably, a commercial deal in second-hand plant".
125 The High Court in Myer stated (at 212):
In rejecting the argument that the profit was not income because it arose from an isolated transaction, Lord Radcliffe observed [quoting Edwards (Inspector of Taxes) v Bairstow at 38]:
"… that circumstance does not prevent a transaction which bears the badges of trade from being in truth an adventure in the nature of trade. The true question in such cases is whether the operations constitute an adventure of that kind, not whether they by themselves or they in conjunction with other operations, constitute the operator a person who carries on a trade. Dealing is, I think, essentially a trading adventure, and the respondents' operations were nothing but a deal or deals in plant and machinery."
126 The relevant statute in Edwards v Bairstow charged income tax upon the profit arising from "trade, manufacture, adventure or concern in the nature of trade". The High Court stated at 212-213 (citations omitted):
The judgments in some of the English decisions naturally reflect the language of the United Kingdom statutory provisions, which have no precise counterpart in this country. However, over the years this Court, as well as the Privy Council, has accepted that profits derived in a business operation or commercial transaction carrying out any profit-making scheme are income, whereas the proceeds of a mere realization or change of investment or from an enhancement of capital are not income: Ruhamah Property Co. Ltd. v. Federal Commissioner of Taxation; McClelland v. Federal Commissioner of Taxation; London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation; and see Whitfords Beach.
127 The taxpayer in Haass entered into a life policy in respect of which the death cover component had been reduced to zero in return for a discounted premium of $100,000 per annum. The taxpayer carried on business as a real estate agent but the policy "was obtained for private and domestic purposes, unconnected with his business": at [16]. Heerey J recorded at [5] that, in the course of negotiations for the policy, it was arranged that the taxpayer would pay $8,833.50 of the annual premium of $100,000 from his own funds and the agent would pay the balance. This unusual feature was facilitated by the fact that the agent was entitled to receive "extraordinarily high commissions". The policy had many other features not typical of a standard life policy which it is not necessary to set out for present purposes. Heerey J, referring to AAT Case 12,258 (1997) 37 ATR 1045 which involved an identical policy, concluded that the policy was not properly characterised as a life policy and that the taxpayer should be regarded as entering into a commercial transaction: at [17], [18].
128 The decision in August also turned on what were found to be commercial transactions. The trial judge had concluded that certain properties were purchased with an intention that they be developed, tenanted and sold for a profit. The Full Court (Siopis, Besanko and McKerracher JJ) considered that conclusion was open to the trial judge and stated at [149]: "Development of properties, the securing of tenancies and the subsequent sale of the properties is a scheme or commercial transaction".
129 Mr Greig also relied upon Moana Sands Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1853. In Moana, the Tribunal concluded that land had been acquired by a company with a dual purpose: first of working and/or selling the sand and, secondly, holding the land for future sale at a profit either to an associated company set up for the purpose of subdividing the land or to a third party subdivider, whichever gave the greatest financial return to the company - see reasons of the Full Court at 1858.38-45. The land was ultimately compulsorily resumed by a government authority. The Full Court concluded that the proceeds from resumption of the land was assessable as income according to ordinary concepts under former s 25(1) of the ITAA 1936: at 1859.44-48. Although unnecessary to do so (at 1859.49), it also considered the proceeds were assessable under the second limb of former s 26(a), as income from a profit-making scheme: at 1860.42-47.
130 I proceed on the following basis. Where assets are acquired with a sufficient profit-making purpose, in a "business operation or commercial transaction", then absent other reasons supporting a contrary conclusion, the profit on disposal is ordinary income (and any loss incurred will generally be on revenue account) irrespective of whether the acquisition occurred in the course of an existing business. However, the circumstance that the taxpayer is engaged in business at the time of the relevant transaction or acquisition is relevant. As noted at paragraph [116] above, the High Court in Myer emphasised (at 215):
If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business.
131 Gordon J stated in Visy Industries USA Pty Ltd v Federal commissioner of Taxation (2011) 85 ATR 232 at [80] and [81]:
80. The concept of a "commercial transaction" stands in contradistinction to a private, recreational or other non-business activity: Federal Commissioner of Taxation v Haass (1999) 91 FCR 132 at [16]-[18] and Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729; cf Paramedical Services Pty Ltd v Ambulance Service of New South Wales (2005) 217 ALR 502 at [86]; Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 127-130 and Lubidineuse v Bevanere Pty Ltd (1984) 3 FCR 1 at 11-12.
81. So, for example, where a transaction occurs in the ordinary course of, or is an incident of, carrying on a business, it will generally be stamped with the character of a commercial transaction: Myer Emporium at 209. Consistent with those principles, a one-off transaction entered into by a taxpayer may still be a commercial transaction or an adventure in the nature of trade. …
132 The fact that a taxpayer is not carrying on business when an asset is acquired is likewise a relevant circumstance in determining whether the acquisition of the asset is stamped as being on revenue account. The acquisition of an asset by a person carrying on business might be seen differently to the acquisition of the same asset by a person not carrying on business. It depends on the circumstances.
133 An asset will generally not be a revenue asset if a taxpayer acquires the asset pursuant to a private, recreational or non-business activity: Visy Industries at [80]; Haass at [16]-[18]. The purchase of an investment by a private investor, without more, does not have the quality of a "business operation or commercial transaction" and may be better described as an activity of a private, recreational or other non-business nature: Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 378-9; London Australia Investment Company Limited v Federal Commissioner of Taxation (1977) 138 CLR 106 at 129.
134 Mason J in Whitfords Beach at 378-9 stated:
Unfortunately there is an element of ambiguity in the expressions "business deal" and "operation of business" as there is in the adjectives "business", "commercial" and "trading" which have about them a chameleon-like hue, readily adapting themselves to their surroundings, different though they may be. In some contexts "business deal" and "operation of business" may signify a transaction entered into by a person in the course of carrying on a business; in other contexts they denote a transaction which is business or commercial in character.
135 In McCurry v Federal Commissioner of Taxation (1998) 39 ATR 121 at 124, Davies J referred to Myer and Whitfords Beach and stated:
In a case such as the present where the taxpayers were not carrying on a business, the profit to be assessable must have been derived from a transaction that can be described as a commercial dealing.
136 It is important to emphasise that the relevant acquisition must be made "in an operation of business or commercial transaction". Here, there was a number of acquisitions. However, Mr Greig's case was that the acquisitions were all made in a single "business operation or commercial transaction" which existed from 2011 and which was described as being the acquisition of the Nexus shares in accordance with the "Profit Target Strategy" which had been developed in 2011, and the course of conduct which followed. It was said that the Nexus shares were acquired in circumstances of an expected or desired short-term profitable sale on the occurrence of a 'liquidity event', such as a takeover bid or asset sale.
137 In my view, the Nexus shares were not acquired as part of a "business operation or commercial transaction" such that, on acquisition, they were stamped as being acquired on revenue account. I accept that the Nexus shares were acquired as a whole with the desire that the shares would go up in value and would be sold for a profit. Purchasers of listed shares often make the decision to acquire shares with a view to profiting from dividends or an increase in the share price or both. That hope or expectation does not necessarily make the purchase of the shares a "business operation or commercial transaction". The purchase in such circumstances is an example of an ordinary investment engaged in by innumerable private investors each day and, without more, does not lend itself easily to the description of a "business operation or commercial transaction" (Myer) or a "commercial dealing" (McCurry).
138 This can be seen by an examination of the phase 1 acquisition of Nexus shares in 2011. Mr Greig acquired and disposed of one million Nexus shares in the income year ended 30 June 2011. His evidence was that this was pursuant to the same "business operation or commercial transaction" - defined by the "Profit Target Strategy" - as the subsequent (phase 2) acquisitions of Nexus shares from March 2012 to May 2014.
139 The 2011 acquisition is not appropriately described as a "business operation or commercial transaction" or a "commercial dealing". It was an acquisition of shares which it was hoped would appreciate in value. They might be disposed of if they went up sufficiently in value or if later events suggested that they should no longer be held. This did not have the flavour of a "business operation or commercial transaction" or a "commercial dealing". There was nothing in the nature of business or commerce that Mr Greig proposed to carry on when he acquired those shares. Like many investors he took an interest in the share price and reports from analysts as to whether the shares were undervalued or whether they recommended to buy, hold or sell. He took a similar interest in other shares he acquired. After holding the shares for a brief time, and given he could not see the share price going up, he disposed of the shares as many private investors would. He accounted for his losses appropriately, as a capital loss. There were numerous examples of short term holdings in his evidence, each treated - appropriately in my view - as a capital loss.
140 There is a question as to how useful it is to compare this case with the facts of others, such as Edwards v Bairstow, upon which Mr Greig placed much reliance. That case turned on whether the relevant activity fell within the statutory test of "adventure in the nature of trade". As noted at paragraph [126] above, the different statutory language was acknowledged by the High Court in Myer. The real point the High Court was making by referring to the decision was that an isolated transaction could still be one which was a "business operation or commercial transaction". Edwards v Bairstow concerned two people coming together in a joint venture in the nature of partnership, with a specific plan to acquire and quickly sell off plant. They had negotiations with various potential purchasers before the plant was acquired, and had agreed to sell part of it for £15,000 before the completion by them of its acquisition for £12,000. They engaged in significant activity after the acquisition to sell the remainder of the plant. They incurred travel and entertainment expenditure in seeking to sell the plant. They had to pay rent because of delays in moving the plant. Those facts readily showed an "adventure in the nature of trade". Mr Greig's acquisition and disposal of one million Nexus shares in 2011 do not readily show a "business operation or commercial transaction" or a "commercial dealing".
141 Mr Greig's acquisition and disposal of Nexus shares in 2011 is also easily distinguished from the facts in Californian Copper set out at paragraph [110] above.
142 Mr Greig contended that the later acquisitions of Nexus shares (phase 2) were made pursuant to the same "business operation or commercial transaction" as the 2011 acquisition (phase 1). Mr Greig submitted that the 64 individual Nexus share transactions entered into between March 2012 and May 2014 "comprised a consistent course of conduct pursued over a period of more than two years" in furtherance of a profit-making scheme, namely his "Profit Target Strategy". Mr Greig identified the "business operation or commercial transaction" as the acquisition of the Nexus shares in accordance with the "Profit Target Strategy" which had been developed in 2011, and the course of conduct which followed over the two-and-a-half year period from March 2012.
143 Mr Greig expressly did not put a case that sought to distinguish later acquisitions from earlier acquisitions or put an alternative case that particular acquisitions of Nexus shares were acquired in a commercial transaction which was different to that represented by the "Profit Target Strategy". There was no identification of any alternative "commercial dealing" related to specific acquisitions, nor what that "commercial dealing" was or which shares should be seen as acquired under it. Nor was I asked to find that Nexus shares which may have been acquired on capital account should be seen as having been held on revenue account at some point in time (cf Whitfords Beach).
144 In my view, the phase 2 acquisitions of Nexus shares were not made in a "business operation or commercial transaction" or a "commercial dealing". As Mr Greig submitted, each parcel of shares was acquired in the hope that parcel would increase in value. It is difficult to predict whether he would have sold them if the increase in value had eventuated given his retention of every other substantial shareholding he had - see paragraph [100] above. The acquisition in those circumstances was not a "commercial dealing" within the Myer principle.
145 Mr Greig contended, and I accept, that he was not in the business of share trading generally. He had a portfolio of shares under management by others, who treated them as held on capital account. That applied to all of his shares, including his Nexus shares. The portfolio was, by the standards of many, large. The Nexus shares were just one part of that portfolio of shares, albeit a significant part. The size of the portfolio, and of the Nexus component of it, whilst relevant, does not convert the nature of the Nexus share acquisitions into a business operation. Investors make large and small capital investments.
146 In support of his submission that the acquisitions constituted a "business operation or commercial transaction", Mr Greig relied upon the increasing activity of monitoring and research, which occurred over the period March 2012 to May 2104. He also relied on his communications with Nexus in the later period of phase 2 and the steps which he took in an attempt to protect the value of the substantial acquisitions of Nexus shares which he had made. Whilst it may be accepted that not every step which culminates in the making of a profit needs to be planned or foreseen (Westfield Limited v Federal Commissioner of Taxation (1991) 28 FCR 333 at 344-5, per Hill J), the evidence did not establish that these later events were perceived as likely when he made his very substantial early purchases in phase 2, or that it was part of a business operation, whether planned or otherwise.
147 Whilst later events might be probative of the existence of an earlier intention, they cannot supply an intention which did not exist; nor can later events create a business operation which did not exist at the time of earlier acquisitions. As mentioned, it was not put by Mr Greig that the later purchases should be seen as having been acquired "in" a "commercial dealing" different to the "Profit Target Strategy" or the earlier purchases. These later events demonstrate that Mr Greig saw that the substantial investment position he had taken in Nexus was at risk and were entirely consistent with the steps one would expect to see of an investor seeking to protect his substantial capital investment, rather than one implementing a "commercial dealing" or business operation.