FEDERAL COURT OF AUSTRALIA

Greig v Commissioner of Taxation [2020] FCAFC 25

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The orders made by the Court on 20 July 2018 be set aside and in lieu thereof, it be ordered that the appeal against the objection decision dated 9 May 2017 be allowed.

3.    The matter be remitted to the respondent to take such further administrative action as is necessary to give effect to these orders.

4.    The respondent pay the appellant’s costs of the appeal and of the proceeding before the learned primary judge, to be taxed in default of agreement.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

KENNY J:

1    This is an appeal from a judgment of a judge of the Court, dismissing an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) against the decision of the respondent Commissioner of Taxation to disallow an objection to a notice of assessment issued to the appellant, Andrew Carlyle Greig, in respect of the income year ended 30 June 2015.

2    I have had the considerable advantage of reading in draft the judgments of Derrington J and of Steward J. I agree with the orders proposed by Steward J, substantially for the reasons his Honour gives. Since, however, the outcome of the appeal turns on issues of characterisation that are not straightforward, due in part to the way the appellant has framed his case, I would add the following.

3    The primary judge rejected Mr Greig’s submission that a loss of $11,851,762 incurred on the transfer and cancellation of his shareholding in Nexus Energy Limited in December 2014 and the expenditure of $507,198 in legal fees incurred in connection with litigation arising out of Nexus’ voluntary administration in June 2014 were deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Although the learned primary judge accepted that Mr Greig had acquired the Nexus shares for the purpose of obtaining a profit or gain on their subsequent sale, his Honour found that Mr Greig’s acquisition was essentially a private investment in listed shares. The acquisition was not made, so his Honour held, in a “business operation or commercial transaction” “or commercial dealing” so as to bring it within the principle set down by the High Court in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199. His Honour also held that the share purchase did not constitute a business of trading in shares.

4    On appeal, the appellant contended that the primary judge erred in that both the loss and the expenditure were deductible under s 8-1 of the ITAA 1997. On the appellant’s case, this was because the loss and the legal fees were deductible under par (a) of s 8-1(1) since they were incurred in a “business operation or commercial transaction” entered into for the purpose of making a profit within the principle in Myer Emporium. In the alternative, the appellant argued that the loss and the legal fees were a loss or outgoing “necessarily incurred in carrying on a business” for the purposes of par (b) of s 8-1(1).

5    Section 8-1 of the ITAA 1997 relevantly provides:

(1)    You can deduct from your assessable income any loss or outgoing to the extent that:

(a)    it is incurred in gaining or producing your assessable income; or

(b)    it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

…

(2)    However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)    it is a loss or outgoing of capital, or of a capital nature; or

(b)    it is a loss or outgoing of a private or domestic nature; or

(c)    it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d)    a provision of this Act prevents you from deducting it.

…

6    The Commissioner contended that there was no error in the judgment under appeal, and that the primary judge was correct in finding that Mr Greig’s acquisition of Nexus shares were not made in a “business operation or commercial transaction” as explained in Myer Emporium and that the loss and legal fees were not incurred in the carrying on of a business of dealing in Nexus shares. The Commissioner contended that the loss and legal expenses were “a loss or outgoing of capital, or of a capital nature” within the meaning of s 8-1(2)(a).

7    As will be seen, whether the primary judge erred in not finding that the loss of $11,851,762 and the legal fees of $507,198 are deductible under s 8-1(1) turns on the applicability of the principle in Myer Emporium. As senior counsel for Mr Greig said at the hearing of the appeal, if the Court rejected the appellant’s primary argument about the applicability of this principle, then it would not accept the appellant’s alternative argument that Mr Greig was carrying on a business of dealing in Nexus shares.

8    It was common ground that, under Myer Emporium, a loss or outgoing incurred in gaining or producing assessable income is deductible under s 8-1(1)(a) of the ITAA 1997 if that loss or outgoing is incurred in a “business operation or commercial transaction” entered into with the purpose of deriving profit or gain, even though the loss or outgoing was not incurred in the ordinary course of carrying on the taxpayer’s business. In Myer Emporium at 209-210 the High Court said:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

(Citations omitted; emphasis added)

9    In their respective reasons for the judgment, Derrington and Steward JJ detail the facts and circumstances relevant to the application of the principles in Myer Emporium. I shall not repeat all that their Honours have said. The following factual outline suffices for my purposes.

10    From April 1981 until May 2015, Mr Greig was a senior executive in the Bechtel group of companies. In January 2008, he retained Mr Warwick Foot of FSS Advisory to advise him on the purchase and sale of shares. Mr Greig told Mr Foot that, on account of his work experience, he knew quite a bit about mining and thought there were a lot of opportunities with respect to mining shares. Mr Greig’s evidence (which on this point was accepted by the primary judge) was that at that time he told Mr Foot that he wanted “to purchase stocks that [were] undervalued and which [were] likely to go up in the short-term”. Mr Greig added that he was interested “in smaller companies that [were] going to outperform over the next 12 months or so”. His evidence in this regard was corroborated by Mr Foot, who said that Mr Greig told him that he wanted to “find undervalued stocks that [he could] buy at decent volumes and then sell quickly in order to make a profit” and that he was not “looking for shares to hold in the long-term”. Mr Greig remitted $1.2 million to Mr Foot to begin.

11    Some years later, in early 2011, when planning for his retirement around 2015, Mr Greig reviewed his approach to his share acquisitions. He deposed that his objective at this time was to maximise the amount of cash that he would have available upon his retirement and that, to this end, he proposed to buy and sell shares in relatively large volumes, which his substantial cash reserves allowed him to do. His strategy was, he said, to “select stocks whose market value was likely to increase in a short space of time” and “then sell at a profit within [a] period of several months, or [an] even shorter period, depending on the circumstances of the individual company”. He deposed that he “wanted to be able to purchase shares, sell them quickly at a profit upon the happening of a liquidity event (such as the announcement of a takeover bid), and then use the proceeds to make other trades”. He further deposed that he “intended to draw upon [his] professional experience, skills and expertise gained in the course of working for [the Bechtel group] to identify suitable stocks in the mining, energy and resources sector”. In the proceedings below, this was referred to as Mr Greig’s Profit Target Strategy.

12    Mr Greig instructed Mr Foot to purchase 1 million shares in Nexus on or about 8 February 2011, after he had read a research note sent to him by Mr Foot. Although Mr Foot first drew Mr Greig’s attention to the Nexus shares, Mr Greig was at that time familiar with the company because of his knowledge of the mining and resources sector. He knew that the company held interests in natural gas fields, including an interest held with Royal Dutch Shell and Osaka Gas in the Crux resource in the Browse Basin near Western Australia. Mr Greig deposed that his decision to purchase the Nexus shares was based on his considered view that:

(a)    there was underlying value in the Crux asset and correspondingly Nexus’ economic interest in that asset;

(b)    in negotiating the option with Shell, Nexus had removed an important impediment to realising a greater portion of the underlying value in the Crux asset, and the market had reacted positively to that development;

(c)    additional developments were likely to take place in the following 12- to 18-month period, such as a potential sell-down by Nexus of its equity stake in the Crux project, which would cause Nexus’ share price to increase; and

(d)    there was a reasonable prospect of making a profit (and potentially a substantial profit) by selling Nexus shares upon the announcement or happening of positive events in the months ahead.

As it happened, however, the Nexus share price fell and Mr Greig decided to sell his Nexus shares at a loss in around mid-May 2011.

13    Less than a year later, however, Mr Greig purchased Nexus shares again. His first new purchase was in March 2012 and he continued to make significant purchases of Nexus shares until May 2014. Mr Foot, whose evidence was unchallenged, gave evidence that in discussing the fresh purchase of Nexus shares with Mr Greig in March 2012, he expressed the opinion that Nexus shares were undervalued and would be “worth a lot more” if Nexus exercised its option to sell part of the Crux resource “within the next couple of months”, which he considered it might do. His evidence was in substance that Mr Greig agreed with him. Mr Greig purchased Nexus shares to sell at a profit, which he thought might arise from a takeover of Nexus.

14    From March 2012 until a trading halt was placed on Nexus shares in July 2012, it appears that Mr Greig had reason to believe, and he expected, that Nexus would shortly make an announcement about a joint venture with Shell and Osaka Gas. On this scenario, Mr Greig expected the Nexus share price to rise. His confidence increased in April and May 2012 following Nexus’s appointment of a new Chief Executive Officer (CEO). His optimism was further fuelled by an article in the financial press stating that the joint venture, which was to be formalised under heads of agreement between Nexus, Shell and Osaka Gas, was “worth about $3.75 billion, valuing Nexus’s 17 per cent stake at a massive $637 million, about double Nexus’s market capitalisation”.

15    Mr Greig’s evidence was that, on 11 May 2012, he met with Mr Foot and another financial adviser, and that he said:

I’ve purchased a sizeable number of Nexus shares because I think the company is significantly undervalued and the share price is likely to go up in the next couple of months. When that happens, I’ll sell, which will hopefully provide me with a decent stockpile of cash when I leave Bechtel.

With this objective, Mr Greig went on to make more purchases of Nexus shares.

16    By the end of June 2012, as the price of Nexus shares continued to decline, Mr Greig gave consideration to selling his shares but determined not to do so on the basis that the anticipated joint venture would soon be finalised. When a trading halt was placed on Nexus shares in July 2012, the indications to Mr Greig were that the announcement of the joint venture agreement was imminent. On 9 July 2012, Mr Foot sent Mr Greig an email attaching an article from Energy News Premium stating that Nexus had announced that it had successfully finalised the terms and documentation regarding the Crux joint venture. At this point, Mr Greig was confident that the Nexus share price would increase in the ensuing months. His confidence increased in September-November 2012 with the appointment of a new Nexus Chairman, who was known to Mr Greig; indications that a Thai company was interested in purchasing an interest in Nexus; and the prospect that Nexus might be sold.

17    By March 2013, following more purchases of Nexus shares, Mr Greig was of the view that “the market was finally starting to appreciate that Nexus stock was undervalued, and that the share price would continue to increase in the following weeks and months”. He made further Nexus shares purchases in April and May 2013 in order, so he said, “to make a profit by selling those shares within a period of several months upon a material increase in the shares’ market value, in line with my Profit Target Strategy”.

18    In June 2013, with the Nexus share price falling, Mr Greig decided to become a substantial shareholder in order to bring about quickly a sale of the company or of its assets so that the company’s share price would rise and he might make a profit on the sale of his shares. He purchased further Nexus shares in August 2013 when the Nexus CEO told Mr Foot that the sale process was continuing and Mr Greig was confident a deal would be reached. When the Nexus share price fell further in December 2013, Mr Greig acquired more Nexus shares. He remained confident that he would be able to sell his Nexus shares at a profit.

19    Mr Greig’s optimism continued even after he read the Nexus announcement in March 2014 that Seven Group Holdings (SGH) had made an offer to purchase all of the shares in Nexus for two cents per share. As the primary judge said (in his reasons for judgment at [81]):

Mr Greig stated that he considered that the SGH bid significantly undervalued Nexus and its assets, that rival bidders would emerge and that, once the trading halt was lifted, those bidders would purchase substantial stakes in Nexus, causing the share price to rise. Mr Greig gave instructions on 4 May 2014 to purchase more Nexus shares on the basis that he considered there was still a “reasonable prospect of making a profit by selling his shares in line with his Profit Target Strategy”.

20    Mr Greig stated that he was very disappointed when Nexus announced on 7 May 2014 that a scheme of arrangement under which SGH would acquire all Nexus shares would go to a vote on 12 June 2014, and that the scheme booklet indicated that the directors of Nexus believed the scheme was in the best interests of the shareholders and unanimously recommended that the shareholders vote in favour of it. Mr Greig purchased a large number of shares on 8 and 9 May 2014 with the intention of blocking the SGH bid in order that Nexus might find another buyer and negotiate a sale providing a better return to shareholders.

21    On 12 June 2014, the scheme of arrangement was voted down at a meeting of Nexus shareholders. The directors of Nexus appointed voluntary administrators. Nexus’s creditors approved a Deed of Company Arrangement (DOCA) on 11 August 2014, which provided for the compulsory transfer of all Nexus shares to a third party for nil consideration to shareholders. Nexus’s creditors commenced proceedings in the Supreme Court of New South Wales to effect the share transfer. Mr Greig and 16 other defendants unsuccessfully contested the DOCA and resisted the involuntary disposal of Nexus shares. On 24 December 2014, the Supreme Court approved the proposed DOCA and, as a result, Mr Greig incurred the loss of $11,851,762 in the year ended 30 June 2015 and the legal fees of $507,198, both of which are the subject of this appeal.

22    Mr Greig plainly purchased his shares in Nexus with the purpose of making a profit on their subsequent sale. The primary judge correctly so found. The contested issue is whether he acquired the shares in a business operation or commercial transaction. If he did, then he falls within the principle stated in Myer Emporium and the sums in question are deductible under s 8-1 of the ITAA 1997.

23    In order to characterise the nature of a taxpayer’s activities in circumstances such as these, the parties have naturally taken the Court to numerous cases, highlighting the similarities and differences between them and this case. The relevant cases are discussed in the reasons prepared by Derrington J and by Steward J.

24    As their Honours show, in many cases there has been little or no dispute that the relevant taxpayer was carrying on a business. Rather, the issue has been whether the relevant transaction was entered into in the course of that business. While cases of this kind may affirm and to some extent elucidate the applicable principles, they do not directly address a case like this where the issue is whether a taxpayer was engaged “in a business operation or commercial transaction” for the purpose of making a profit, while also being a very well remunerated corporate employee in full-time employment. It must be said immediately that this latter circumstance is not determinative one way or the other. Rather, it is simply a part of the factual matrix that falls for consideration in the process of characterisation.

25    As Steward J notes, Stephen J’s decision in Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 may be instructive because in that case the taxpayer was also an individual, and the managing director and shareholder in an import-export company from which he derived fees and dividends. Stephen J found (at 656) that he had entered into “quite considerable share market speculations”. The analogy cannot, of course, be taken too far. As Steward J makes clear, the case turned on different legislative provisions. Moneys paid on the shares were deductible in any event under the former s 77A of the Income Tax Assessment Act 1936 (Cth). Whether s 82(1) or s 82(2) (and therefore s 82(3)) applied with respect to such deductions turned on whether the former s 26(a) of the Income Tax Assessment Act 1936 (Cth) also applied to the share transactions. His Honour held that it did. It is at this point that Stephen J’s analysis can perhaps assist in this case, even if only to a small degree.

26    Stephen J held (at 656 and 657) that:

[A] basis of assessment founded upon s 26(a) will, I think, accord well with the facts of the matter. It will treat the taxpayer for what he was, a speculator in mining and oil exploration shares who, having had only very modest and infrequent share transactions before the onset of Australia's minerals boom, during the period of the boom, indulged in quite considerable stock market speculations and did so with remarkable success. Those speculations were, I think, viewed by him as, and indeed had the character of, individual forays in particular stocks which he bought with a view to resale. 

…

The taxpayer’s evidence of how he undertook his stock exchange transactions indicated nothing in the nature of a system or method or the carrying on of a business; he simply relied upon his own knowledge of the prospects of particular companies, gained very largely from his contacts with their managements in the course of the export and import business which he managed and which brought him into contact with a number of mining companies.

As Steward J observes, however, Stephen J did not address the issue whether the appellant’s share trading had the character of a business deal. Having regard to the then relevant provisions and the facts as he found them, there was no need for him to do so.

27    While the principle in Myer Emporium is clear, it may fairly be said that previous decisions provide limited assistance as to its application in a case such as this. This is, however, of no special moment because a question of characterisation of the kind now arising will always turn on the facts of the particular case. In their joint judgment in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639, Gaudron, Gummow, Kirby and Hayne JJ made much the same point when they said (at [68]-[69]):

[I]ncome is often (but not always) a product of exploitation of capital; income is often (but not always) recurrent or periodical; receipts from carrying on a business are mostly (but not always) income. Further, in a case where it is said that the receipt is from carrying on business, often there will be a real and lively question whether what has been done amounts to carrying on business or is, in truth, no more than a singular transaction of purchase and resale of property.

The search for analogous cases is, then, hardly surprising and was undertaken by both of the parties to this appeal. In doing so, each party tended to emphasise one or more features of the transactions that gave rise to the payments received by the firm. Sometimes the emphasis of one or more of these features was taken to the point of excluding any consideration of the other features of the transactions. But as Dixon and Evatt JJ said (in the more limited context of distinguishing between profits derived from carrying on or carrying out a profit-making scheme and proceeds of a mere realisation or change of investment) [in Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740] “it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities”.

(Citations omitted)

The need for “a wide survey and an exact scrutiny” of the taxpayer’s activities in determining a question of characterisation was reiterated in Federal Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19], citing Montgomery and Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729.

28    I have already set out most of the relevant facts and circumstances. It is also relevant that in the course of the activities to which I have referred, Mr Greig made 64 separate acquisitions of a total of 134,893,686 Nexus shares for a total sum of $11,851,762 between 28 March 2012 and 9 May 2014. Further, from 2007 to 2014 Mr Greig purchased listed shares in companies other than Nexus on 218 separate occasions for what amounted to a very large sum of money. He held most of these shares for only a short time, and usually for less than two years. As Steward J concludes, there appears to be no material difference between Mr Greig’s object in acquiring Nexus shares in early 2011 and thereafter and in acquiring shares in other companies after January 2008: see also [10] and [11] above. It follows that the taxpayer’s attempt to isolate his acquisition of Nexus shares in March 2012 and following from the rest of his share trading activities has a distinct air of unreality.

29    As indicated, I agree with Steward J that if Mr Greig had realised the gain he sought on the sale of his Nexus shares, that gain could not have been properly characterised as a realisation of a capital asset. Nor could it have been characterised as a windfall or having been made in pursuit of a game of chance or a hobby. This would indicate that the loss that Mr Greig in fact suffered was not on capital account. Further, the evidence established that Mr Greig did not have an intention or a purpose of holding his Nexus shares over the long-term as an investment on the basis that he would receive dividends in the meantime. Rather, Mr Greig set out to sell his shares at a profit quickly or at least before he retired.

30    Plainly enough, any profit on the sale of the Nexus shares would have been the fulfilment of Mr Greig’s intention or purpose at the time he acquired the shares to make a profit on their sale. Significantly, a profit made in this way was a key part of Mr Greig’s plan for his retirement as formulated in 2008 and 2011: that is, he aimed to achieve a pool of cash profits by the time he retired. In carrying this plan into effect, including in purchasing shares in Nexus, Mr Greig relied on the knowledge, experience and information he acquired in business. He researched, reviewed and kept a close eye on the value of his shares. He also retained Mr Foot (amongst others) to provide him with professional advice and assistance in effecting his objects. Further, the acquisition of the Nexus shares was not an isolated event. Mr Greig acquired his Nexus shareholding on 64 separate occasions in a little over two years. At the same time, he was engaged in buying and selling other stock on a large scale. Importantly too, Mr Greig took significant commercial steps, directly or through Mr Foot, in an effort to ensure that the Nexus share price rose to a level commensurate with what he believed to be the true share value, and one which would yield him his intended profit. These steps included acquiring a substantial Nexus shareholding in June 2013 to facilitate his profit-making on the sale of his Nexus shares, and the further purchase of Nexus shares in May 2014 to block the SGH bid to allow another buyer to be found who would provide a better return on his shareholding. To include these last-mentioned considerations is not to assess the taxpayer’s activities with the benefit of hindsight, since Mr Greig continued to acquire his Nexus shares while engaged in these share-price raising activities.

31    It goes without saying that a profit-making purpose alone is not sufficient to engage the Myer Emporium principle, although such a purpose has a bearing on the complexion of the taxpayer’s activities. Whether a gain or loss is properly characterised as the outcome of a “business operation or commercial transaction” cannot be determined by further exegesis of the words “business operations” and “commercial transaction”. Their meaning is plain enough. It may be that, as Steward J indicates, one cannot improve upon RW Parsons’ description of “business deal” (in Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Limited, 1985) at 2.498-2.500) as adapted to the expression “business operation or commercial transaction”. If the taxpayer’s activities in acquiring the intended profit-making property (here, the shares) are the kind of things that a business person would do in seeking to make an intended profit, then generally speaking the property will have been acquired in a “business operation or commercial transaction”. It seems to me that, on the facts and circumstances of this case, there can be little doubt that Mr Greig acted as a business person would do in acquiring his Nexus shares to obtain a profit on their sale and that therefore he acquired these shares in a “business operation or commercial transaction”. It follows that the Myer Emporium principle is engaged and that the loss of $11,851,762 and the legal fees of $507,198 are deductible under s 8-1(1) under the ITAA 1997.

32    Accordingly, for these reasons and substantially for the reasons given by Steward J, I would allow the appeal.

Associate:

Dated:    2 March 2020

REASONS FOR JUDGMENT

DERRINGTON J:

33    This appeal is concerned with the deductibility under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) of certain losses sustained by the appellant, Mr Greig, in the 2015 income year. In that year a number of shares held by him in the company Nexus Energy Limited (Nexus) were compulsorily transferred and cancelled. He received no consideration for their transfer. Over the previous two years he had expended approximately $11.85 million in acquiring them and, at the time they were cancelled, he was a “substantial shareholder” in the company. In the same income year Mr Greig also engaged in legal action to prevent the compulsory acquisition occurring. He expended approximately $507,000 in connection with that attempt, including by engaging in litigation. He claims the amounts of his losses and expenses are deductible on revenue account because they were incurred in gaining or producing assessable income. In particular, he claims they were incurred in a “business operation or commercial transaction” entered into for the purposes of making a profit. This, he says, attracts the principle in Federal Commissioner of Taxation v Myer Emporium Limited (1987) 163 CLR 199 (Myer Emporium). Alternatively, he claims that the losses or outgoings had been “necessarily incurred in carrying on a business” of “dealing” in the shares of Nexus for profit.

34    The learned primary judge rejected both claims. Although his Honour accepted the acquisition of the Nexus shares was made with a view to obtaining a profit, he concluded they were not acquired as part of a business operation or commercial transaction. His Honour also rejected the proposition that Mr Greig, who relevantly had not sold any of this Nexus shares, had been “carrying on a business of dealing in Nexus shares for profit”.

Background facts

35    Mr Greig held various senior executive roles within the Bechtel group of companies in the period between April 1981 and May 2015. The companies under his control were engaged in construction, project management and provision of engineering services to clients, including many in the mining and resources industry. Mr Greig believed that in the course of his professional life he had developed an understanding of the oil, gas and mineral market sectors in Australia and the methods, logistics and technologies involved in exploring, extracting and processing oil, natural gas and mineral resources, as well as the commercial valuation of natural resource deposits.

36    Mr Greig’s positions included Executive Director of the Bechtel Group, Managing Director of Bechtel Australia Pty Ltd and President of the Bechtel Group’s Mining and Metals Global Business Unit. In these roles his earnings were substantial, providing him with sufficient cash to enable him to make significant share purchases. He retired from the Bechtel Group in May 2015.

37    In 2006, Mr Greig encountered Mr Foot, who was a member of the firm FSS Advisory, which carried on a business of stockbroking and financial advice. As at that time, Mr Greig had engaged Mr Kretschmer of Unity Partners to be his financial planner and adviser.

38    In the period from 2006 to 2008, Mr Kretschmer provided Mr Greig with advice in relation to superannuation, salary sacrificing, the structure of his personal and family asset holdings and his long term financial planning. It does not appear that Mr Kretschmer provided advice in relation to the purchase of the relevant shares.

39    In January 2008, Mr Greig retained FSS Advisory and, in particular, Mr Foot to advise him on the purchase and sale of shares. At that time he considered he had sufficiently large cash resources to generate significant short term cash profits. To about that time Mr Greig had, himself, invested in the share market, and did so through a “Macquarie Investment Manager” account which had been opened in 2006 with a transfer of $1.6 million.

40    It is apparent that Mr Greig was concerned that, given his schedule as a senior executive of Bechtel, he needed to engage a stockbroker who might monitor the market and identify stocks which he might acquire. In his role at Bechtel, Mr Greig was required to travel extensively and he was away from home for substantial periods at a time and regularly for more than 200 days a year. In some years he was absent from his residence for substantially longer periods.

41    In his first affidavit relied upon at the hearing before the primary judge, Mr Greig identified the substance of his initial instructions to Mr Foot in January 2008. He claims he told Mr Foot:

I want to purchase stocks that are undervalued and which are likely to go up in the short-term. I’m not looking for blue-chip companies. I’m more interested in smaller companies that are going to outperform over the next 12 months or so. The mining sector is booming at the moment and there are a lot of opportunities in that space.

I want you to have a look at what’s out there and tell me which stocks you like. I’ll give you $1,200,000 to begin with and we can see how things go.

42    This coincided with Mr Foot’s account of the conversation being to the effect that he was to identify undervalued stock which Mr Greig might acquire at decent volumes and sell quickly in order to obtain a profit. Mr Foot claimed that Mr Greig told him he was not looking for shares to hold in the long term and that he was knowledgeable about mining and believed there to be opportunities in that sector.

43    From 29 January 2008 until, for the purposes of this matter, June 2015, Mr Foot made numerous recommendations to Mr Greig as to the stocks which he believed were suitable for buying and selling on the Australian Stock Exchange. Periodically during this time, Mr Greig instructed Mr Foot to buy and sell certain ASX listed shares, most of which operated in the mining, energy and resources sector. In the usual course these instructions were in accordance with the recommendations provided by Mr Foot. In evidence before the primary judge and this Court is a schedule (ACG-3) setting out what appears to be the bulk of Mr Greig’s share acquisitions and disposals in the period from 29 January 2008 to 23 April 2014. The schedule does not include the purchases of shares in Nexus and a number of other acquisitions. Nevertheless, the schedule shows that, of the identified listed investments, which numbered 218, shares were purchased and held for periods of time ranging between several days to a number of years. The amounts invested varied widely, although a number included acquisitions worth millions of dollars. The schedule also identified whether Mr Greig made a profit or a loss on the transactions in relation to the shares acquired. In his evidence, Mr Greig acknowledged that all the losses and gains on these transactions were returned on capital account in his income tax returns for the relevant financial years.

Alleged “Profit Target Strategy”

44    An essential part of Mr Greig’s case is that from early 2011 he adopted a deliberate strategy pursuant to which he would acquire shares in large volumes and sell them quickly at a substantial profit. He claimed that, whist the strategy was not intended to be limited to Nexus shares, as it transpired, it was only adopted in relation to those shares and no others. He indicated that he had significant cash available which enabled him to engage in this strategy and that its purpose was to provide him with significant cash resources on his planned retirement from the Bechtel Group in 2015. He said his intent was to use the money generated to deposit in managed funds and superannuation for the purposes of securing his future, as well as having cash on hand to pursue other ventures which might arise. Specifically, Mr Greig described his strategy in his first affidavit as follows:

23.    My strategy for making a profit from buying and selling shares was to select stocks whose market value was likely to increase in a short space of time – whether due to the relevant company being undervalued by the market, the potential for that company’s business to experience rapid growth, the company becoming a target for a corporate takeover, investors taking a favourable view of the performance or potential of a particular industry or sector of the market, or some combination of all of those factors.

24.    I did not set out to purchase shares in a particular industry, but I intended to draw upon my professional experience, skills and expertise gained in the course of working for Bechtel Group Inc. to identify suitable socks in the mining, energy and resources sector, which at that time in early 2011 was generally performing very strongly.

25.    In selecting shares to purchase, my aim was to find stock that I could acquire and then sell at a profit within [a] period of several months, or [an] even shorter period, depending on the circumstances of the individual company. I wanted to be able to purchase shares, sell them quickly at a profit upon the happening of a liquidity event (such as the announcement of a takeover bid), and then use the proceeds to make other trades. The high degree of liquidity in the stock market appealed to me, because it meant that I could react quickly to changing circumstances and sell out of positions if it appeared to me that more money could be made by purchasing different stock.

45    In Mr Greig’s affidavits this strategy was given the nomenclature of the “Profit Target Strategy”. It is this strategy which forms the foundation of his claim that his purchases of Nexus shares had a commercial character.

46    Despite the submissions to the contrary, it is apparent from both Mr Greig’s Appeal Statement and his affidavits that, at least at one stage, he claimed that his share trading strategy was put into effect from about January 2011. This can be seen in the submissions filed by Mr Greig before the primary judge. In his affidavit Mr Greig said:

Whilst my intention at the outset in early 2011 was to execute my Profit Target Strategy by acquiring shares in different companies, as events ultimately transpired, the only stock that I purchased in line with that strategy was Nexus. Nexus accordingly became the sole vehicle through which I worked to achieve my objective of making a short-term profit by buying shares and then promptly selling them upon a material increase in their market value.

Nexus phase one: purchase and sale of Nexus shares in 2011

47    In the course of submissions before this Court, the submissions on behalf of Mr Greig divided the dealings in Nexus shares into two phases. The first, referred to as “Nexus Phase One”, concerned the initial acquisition and sale of Nexus shares in 2011. In his affidavit, Mr Greig said the company, Nexus, was identified to him by Mr Foot on 31 January 2011, at which time he was informed that the company had acquired an option from Shell which might give it an opportunity to exploit its “Crux asset”, which was a gas field in the Browse Basin. Mr Greig was aware that Nexus held its interest in the Crux asset jointly with Royal Dutch Shell and Osaka Gas. After reading some research received from Mr Foot concerning Nexus and its prospects, Mr Greig claimed he saw there was value in the stock and there was a reasonable prospect of making a profit by selling it in the following months. He determined to acquire one million shares at a price of $0.47 per share for a total sum of $465,511.50. In his affidavit he says of this:

At the time that I acquired the Nexus shares on 8 February 2011, my intention was to make a profit by selling those shares within a period of several months, upon a material increase in the shares’ market value.

48    Although, thereafter, Mr Greig monitored the value of Nexus shares, they declined in value, and after receiving advice from Mr Foot he determined to sell them because the potential for growth in the short term had dissipated. They were sold between 16 and 18 May 2011 at a price between $0.34 and $0.35 per share at a net loss of approximately $120,000. Given what Mr Greig said was his Profit Target Strategy, it is difficult to see how this acquisition did not fit within it.

49    As the learned primary judge’s reasons observe, for the income year ended 30 June 2011, FSS Advisory sent to Mr Greig a document which included a tax summary for that year. The document related to Mr Greig’s share portfolio and the tax summary was divided into an income summary and a CGT summary. The income summary recorded income which included revenue derived from dividends. However, the CGT summary recorded share sales in three ASX-listed corporations being Lynas Corporation Limited, Pryme Energy Limited and Nexus. The document showed that a capital gain was recorded in respect of the sale of shares in Lynas in an amount of $1,074,144.22. It also recorded a capital loss of $113,571.91 in respect of the sale of Nexus shares. It recorded a further capital loss of $172,219.75 in respect of the sale of shares in Pryme.

50    When the inconsistency between Mr Greig’s claimed Profit Target Strategy and the tax summary prepared by FSS Advisory was identified by the Commissioner in his pre-hearing submissions, Mr Greig swore and relied upon a subsequent affidavit purporting to explain it. He claimed that he did not read the document at the time because he was extremely busy with his work at Bechtel and, further, that his accountants, PricewaterhouseCoopers (PwC), had prepared his tax return. He claimed that the indication in the tax summary prepared by FSS Advisory that his transaction in relation to Nexus shares was on capital account was not based on any discussion with him. At the hearing Mr Greig accepted that he may have looked at the tax summary from FSS Advisory when he received it, but claims he would have looked at it in a cursory way and had forwarded it to his accountant. In other words, Mr Greig sought to disassociate himself from his past accounting treatment of the losses on the Nexus shares as capital losses.

51    The treatment of Mr Greig’s transaction in Nexus shares as being on capital account was replicated in his tax return for the financial year ending 30 June 2011. In relation to this, he claims he had no discussions with his accountants as to the treatment of the losses and that he had left it to them to prepare and lodge the tax return on his behalf. He gave evidence that at the time of the lodgement of that return it did not occur to him, and nor did it occur to him in the following tax year, that the losses on the sale of the Nexus shares ought to be treated differently for tax purposes from other share transactions. A somewhat curious piece of evidence appears at paragraph 12 of his second affidavit to the following effect:

It was only after I incurred the loss on the compulsory transfer and cancellation of my Nexus shares in December 2014 that I turned my mind to the question of whether that loss should be treated as a CGT transaction for tax purposes. I consulted PwC. By that stage I was out of time to seek to amend my tax return for the 2011 financial year, or to apply for a private ruling in respect of the tax treatment of the losses that I incurred on the sale of Nexus shares in that year.

52    The substance of Mr Greig’s subsequent evidence in this respect was that he disavowed the statements made on his behalf by FSS Advisory and his accountants that the loss on the sale of Nexus shares in 2011 was or should have been on capital account. To some extent, that is not consistent with the submission made to this Court, as it was made to the primary judge, that the business of dealing in Nexus shares only commenced in 2012.

53    It is appropriate to observe that Mr Greig’s statement in paragraph 12 (extracted above) seems to suggest that, prior to 2012, he did not intend to carry on any separate business of dealing in Nexus shares in a manner distinct from his dealings in other shares. That said, if he was carrying on a business, his subjective intention as to whether he was or not is not relevant. As the discussion of the authorities below reveals, it is the objective intention with which the transactions were entered into which is important.

Nexus phase two: purchase of Nexus shares from 2012 to 2014 and disposal

54    The alleged second phase of dealings in Nexus shares occurred in the period between 28 March 2012 and 9 May 2014, during which Mr Greig made 64 separate acquisitions of Nexus shares. The total number of shares acquired was 134,893,686 and the amount expended was $11,851,762. No Nexus shares were sold by Mr Greig during this period. However, as the schedule ACG-3 demonstrates, shares in other companies were also bought or sold through this period.

55    In support of his claim that he was engaged in the business of dealing in Nexus shares, Mr Greig claimed that in the period from March 2012 he engaged in several activities which were consistent with that characterisation. They included monitoring the share price on a daily basis; considering ASX announcements concerning Nexus shares; reviewing the financial press daily for articles concerning Nexus; reading research reports about Nexus published by investment banks and stockbrokers; communicating with Mr Foot to discuss developments regarding the Nexus share price; and obtaining recommendations about potential purchases.

56    In general, Mr Greig claims he pursued his Profit Target Strategy from January 2012 and that when he received substantial cash payments he devoted significant portions to acquiring Nexus shares. He says he followed the business activities of Nexus and acquired additional parcels of shares from time to time and that he intended to make a profit by selling them within a period of seven months or so. Several events in the business operation of Nexus caused Mr Greig to believe that the share price would increase such that he made further acquisitions of substantial parcels of shares. Even when the share price fell and continued to fall, Mr Greig made further purchases. He did so, so he claimed, on the basis of his perception that the shares were undervalued and he would be able to sell his shares for a profit in the future.

57    During this period, Mr Greig, as a significant shareholder, kept himself informed of matters pertaining to the value of Nexus shares and the prospects of the value increasing. He received research from Mr Foot including ASX announcements, articles from newspapers and reports from brokerage firms and banks. Generally these suggested that the shares had the potential to increase in value when the company became a viable takeover target. Mr Foot occasionally met with the Chief Executive Officer of Nexus and others in the company in relation to its activities and reported any new information to Mr Greig. It is not apparent that Mr Foot communicated with Nexus personnel only because Mr Greig held shares in the company. That said, Mr Greig did ask Mr Foot to attend a presentation to shareholders on his behalf and obtain information for him from it. He also asked Mr Foot to attend the company’s annual general meeting in (late) 2012 and to be part of a shareholder’s conference call on his behalf. There is little doubt that Mr Greig carefully considered his acquisition of Nexus shares and that he did so with an eye to ascertaining whether they would increase in value in the near future. When he formed that opinion, he acquired additional shares even though the share price fell consistently throughout this period.

58    For the purposes of asserting that his dealings in Nexus shares had the requisite commercial character, Mr Greig relied on the fact that the CEO of Nexus, Mr Della Martina, contacted him directly about a potential takeover bid and urged him not to accept any offer because the company was worth much more than was reflected in the bid. He also relied on several meetings he had with Mr Foot in which he discussed whether he should sell his Nexus shares or hold onto them.

59    Despite the share price continually dropping, Mr Greig continued to acquire further shares. In 2013 he was already a significant shareholder but wished to reach the status of a “substantial shareholder”, as he believed that the company’s management would be obliged to keep him informed about the issues facing the company and the decisions being made about important strategic matters. Just how a listed public company might lawfully have passed on that type of price-sensitive information to a major shareholder to the exclusion of others was not explained. Nevertheless, as a result he increased his shareholding in June 2013 by 11,681,571 shares and became a “substantial shareholder”.

60    Mr Foot continued to acquire Nexus shares throughout 2013 and claimed that he did so when he received market information which he regarded as indicating that they were then undervalued and would increase in the following months. This continued into 2014 despite the share price dropping to a very low figure compared to the initial acquisition prices and the trading of shares being halted as a result of the company ceasing production.

61    In his affidavits and throughout his oral evidence Mr Greig emphasized that on each occasion when he made the decision to acquire Nexus shares, he did so with the intention of making a profit by selling them within a period of several months upon a material increase in their value. He also said that, if during the period he held the shares he had reached the view that there was no longer a reasonable prospect of making a profit on their sale, he would have sold them.

62    In March 2014, Seven Group Holdings Ltd (SGH) made an offer to purchase all the shares in Nexus for $0.02 a share which was apparently to be effected through a scheme of arrangement. Mr Greig considered the offer to undervalue the company and he purchased additional shares so that he might exert pressure to prevent Nexus accepting the takeover and, so he said, to profit from the sale of the shares when a higher offer was obtained.

63    The scheme put forward by SGH failed — in part, because Mr Greig used his voting power to help defeat it.

64    By March 2014, Nexus had encountered severe financial difficulties and was unable to restructure its debt. Mr Greig’s attempts to preserve the value of his investment in Nexus shares had failed. The failure of the SGH scheme had the consequence that the directors resolved to place Nexus into voluntary administration in June 2014.

Compulsory acquisition of Nexus shares in 2014

65    Subsequently, on 11 August 2014, Nexus’ creditors approved a deed of company arrangement (DOCA) which provided for the acquisition of all Nexus shares by a third party for nil consideration to shareholders. The creditors commenced proceedings in the Supreme Court of New South Wales to effect the transfer of those shares. That litigation was apparently hard fought, with Mr Greig being one of the main protagonists seeking to prevent the share transfer occurring. Nevertheless, on 24 December 2014, the Supreme Court of New South Wales approved the DOCA. This had the consequence that, in the year ended 30 June 2015, Mr Greig incurred a loss of $11,851,762 in relation to the shares purchased. He also incurred legal fees of approximately $500,000 in connection with the Supreme Court proceedings.

Advice from PwC

66    Subsequent to his loss being sustained in relation to the Nexus shares, Mr Greig consulted PwC in relation to the treatment of his losses for tax purposes. He sought a private ruling as to the deductibility of the losses but the Commissioner issued a ruling on 24 May 2016 that the share losses were not deductible under s 8-1 of ITAA97. Mr Greig subsequently lodged a tax return for the year ended 30 June 2015 consistent with that ruling, and the Commissioner issued an assessment accordingly. Thereafter, Mr Greig lodged an objection to the notice of assessment, claiming that it was excessive on the basis that he was entitled to claim deductions for the share losses and legal fees. That objection was disallowed in full and, on 7 July 2017, Mr Greig filed an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) to the Federal Court.

Decision of the primary judge

Issues relating to Mr Greig’s credibility

67    In his reasons, the primary judge noted a number of instances where Mr Greig’s evidence proved unreliable. First, it was observed that in Mr Greig’s second affidavit he sought to distinguish the Nexus shares from other shares in his portfolio and, in particular, on the basis that he became a substantial shareholder in Nexus. Under cross-examination he said that he could not recall being a substantial shareholder in any other ASX listed company. However, it was subsequently established that around the time he became a substantial shareholder in Nexus he had also become a substantial shareholder in two other ASX listed companies in the resource sector. The primary judge pointed out that one of those companies, Elementos Limited, did not appear in annexure “ACG-3”, which Mr Greig had said was intended to set out all his share acquisitions and disposals in the relevant period. Mr Greig also confirmed that he had become a substantial shareholder in certain overseas companies. The learned primary judge found:

98    Mr Greig stated in his first affidavit that the Nexus shares were the only shares to fall within his claimed “business operation or commercial transaction” and, in his second affidavit, he sought to convey that the circumstances of his dealings in the Nexus shares were distinguishable from all of his other share purchases. However, that statement and those circumstances were not based on a clear recollection of all of the events, and omitted significant events relevant to the position he sought to convey.

68    The learned primary judge also found that Mr Greig’s claim that he treated the acquisition of Nexus shares differently to the other stocks he acquired was unreliable.

69    Similarly, his Honour found Mr Greig’s repeated assertions that he had acquired the Nexus shares in the course of a business operation with respect to those shares was exaggerated. His Honour said that this exaggeration had occurred as a consequence of Mr Greig focussing on the specific events concerning the Nexus shares after they occurred and after he had sought advice in the context of a disappointing loss. That can be taken as indicating that Mr Greig’s evidence was, at its best, the result of some subconscious rational reconstruction on his part.

Consideration of the issues

70    After consideration of numerous authorities, the primary judge identified that the first question was whether the relevant acquisitions were made “in an operation of business or commercial transaction”, with particular focus on the word “in”: [136]. His Honour observed that there were a number of acquisitions and that the argument advanced by Mr Greig was that all were made in a single business or commercial operation which existed from 2011, which was the acquisition of the Nexus shares in accordance with the Profit Target Strategy. It had been argued that the shares were acquired in circumstances of an expected short-term profitable sale on the occurrence of a “liquidity event”. However, whilst the primary judge accepted that the shares were acquired in the hope or expectation that they would increase in value, it did not follow that they were purchased in an operation of business or commercial transaction or as a commercial dealing. His Honour found the circumstances of the share acquisitions were in the nature of an ordinary investment in shares by a private investor. His Honour’s reasons were as follows:

(a)    The 2011 purchase and sale of 1 million Nexus shares did not have the flavour of a business operation or commercial transaction or commercial dealing. It was the purchase of shares which hopefully would increase in value and which would be sold if they did or if they were considered to be no longer worth retaining.

(b)    There was nothing out of the ordinary in the manner in which the Nexus shares were dealt with. Like many investors, Mr Greig followed their price and reports from analysts as to whether they were undervalued or whether they were recommended to buy. Mr Greig undertook similar activities in relation to other shares in his share portfolio.

(c)    Mr Greig sold the shares acquired in 2011 when he could no longer foresee the share price increasing in the future and he accounted for the losses as a capital loss. There were numerous other instances of short term share holdings where losses eventuated and each was treated as a capital loss.

(d)    The circumstances of this case were not similar to those in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 (Edwards v Bairstow), which stands for the proposition that an isolated transaction could be characterised as a “business operation or commercial transaction”. The single share sale in 2011 did not come within that description.

(e)    Nor did the 64 individual Nexus share transactions entered into by Mr Greig between March 2012 and May 2014 comprise a consistent course of conduct. His purchases in phase two were made in the hope that each parcel of shares would increase in value. It was difficult to predict that he would have sold them had the price increased rather than retained them, as he did with shares in other companies in which he became a substantial shareholder.

(f)    Mr Greig was not engaged in a share trading business generally. His portfolio was under management by others who treated all of his shares, including his Nexus shares, on capital account. The Nexus shares were merely part of the larger portfolio of shares. The size of the holdings did not convert the acquisitions into a business operation.

(g)    The increased monitoring activity and research in relation to Nexus shares between March 2012 and May 2014, the communications with Nexus and the steps taken to protect the investment in that company did not constitute a business operation or commercial transaction. Those steps were neither likely nor anticipated when the shares were acquired and were not part of a business operation. Further, Mr Greig did not advance a case that the latter share acquisitions should have been regarded as a “commercial dealing” different from the “Profit Target Strategy” or the earlier purchases. The steps taken by Mr Greig were those one would expect from a person who was seeking to protect a substantial capital investment.

(h)    It was accepted that there existed an objective profit-making intention or purpose held by Mr Greig when he purchased the Nexus shares, although whether that came to fruition depended upon movements in the prices of the shares and he was generally prepared to hold onto them for as long as possible to allow them to increase in value. Nevertheless, they were not acquired in a “business operation or commercial transaction” within the Myer Emporium principle.

(i)    Nor were the losses and legal fees “necessarily incurred” in carrying on a business and so deductible under subsection 8-1(1)(b) of the ITAA97. The alleged business was dealing in Nexus shares in the phase 2 period, even though shares were only purchased during this period rather than sold.

(j)    Whether a person is carrying on a business is a matter of fact and degree and to be answered based on a wide survey and overall impression of the taxpayer’s activities. Here, a number of matters indicated Mr Greig was not carrying on a business: he was in full time employment which required him to travel from his home for a substantial part of each year and, particularly, overseas; he had no written business plans or methodologies and nor did he seek to tender accounts or records of the particular business; he did not treat the shares as trading stock; and the records of trading were of his advisors and they did not distinguish between Nexus shares and remainder of the share portfolio.

(k)    To the extent intention was relevant, Mr Greig did not have a subjective intention of carrying on a business of dealing in Nexus shares when he acquired them as opposed to making investments in them. He made no claim to be engaged in a business of dealing in Nexus shares contemporaneously with the activities associated with them. It was only after the shares were compulsorily acquired that it was raised with him that he was carrying on a business, and from then he adopted the position that he had been engaged in a business of dealing in those shares albeit no others.

(l)    The number of purchases was substantial, as was the amount invested, though there was no evidence of the relative size of the investment in comparison to his personal wealth and he made large capital investments in other shares as well. Regardless of the substantial size of the investment, the acquisitions were not in the nature of a commercial dealing.

(m)    Although Mr Greig made a number of transactions, he did so on the advice of Mr Foot, who carried out research and advised him in relation to shares across the portfolio. The engagement of Mr Foot was for advice and recommendations in relation to shares generally and not only in relation to Nexus shares. The fees charged were based on the totality of the portfolio and not only the size of Mr Greig’s holdings in Nexus.

(n)    The activities in relation to the shares on which Mr Greig relies as affording his dealings a commercial character were consistent with the protection of a large capital investment.

(o)    Mr Greig did not, himself, conduct any of the significant record-keeping or accounting functions in relation to his dealings in Nexus shares or any of the other shares. He did not arrange his transactions in relation to Nexus shares in a particularly businesslike manner and did not treat the Nexus shares as trading stock. They were treated in the same manner as his other shareholdings and managed by FSS Advisory together with those other shareholdings in his portfolio.

(p)    Although Mr Greig had a profit motive in acquiring the shares, that was equally consistent with him being an investor.

(q)    The acquisition of the Nexus shares did not have a commercial character and were consistent with investment activity. Mr Greig did not tender any contemporaneous document to suggest that the Nexus shares were held on revenue account in a business of dealing in them in a way one might ordinarily be expected if a separate business was being carried on. Indeed, the records disclosed that all share transactions were treated the same and as being held on capital account.

(r)    The records kept by FSS Advisory and Mr Greig’s accountant were business records of those entities, but they did not constitute evidence of Mr Greig carrying on a business in relation to his dealings in Nexus shares. Relevantly, they disclosed that the Nexus shares were treated as being held on capital account.

71    The result of his Honour’s analysis was that the Nexus shares were not acquired in a business or commercial transaction and nor were they acquired by Mr Greig in carrying on a business of dealing in Nexus shares.

Issues arising in the appeal

72    The appellant’s written submissions contend that the loss sustained on the compulsory acquisition of his shares in the sum of $11,851,762, and the expenditure of approximately $500,000 in seeking to prevent the acquisition, were deductible under s 8-1 of the ITAA97 on either of two bases being:

(a)    that the loss and the legal fees were deductible pursuant to subsection 8-1(1)(a) because they were incurred in a “business operation or commercial transaction” entered into for the purpose of making a profit, such as to fall within the principle recognised in Myer Emporium; or

(b)    the amounts were losses or outgoings “necessarily incurred in carrying on a business” for the purposes of subsection 8-1(1)(b).

73    Section 8-1 of ITAA97 is concerned with general deductions and makes provision for taxpayers to deduct from the amount of their assessable income certain amounts:

8‑1    General deductions

(1)    You can deduct from your assessable income any loss or outgoing to the extent that:

(a)    it is incurred in gaining or producing your assessable income; or

(b)    it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note:    Division 35 prevents losses from non‑commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2)    However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)    it is a loss or outgoing of capital, or of a capital nature; or

(b)    it is a loss or outgoing of a private or domestic nature; or

(c)    it is incurred in relation to gaining or producing your *exempt income or your *non‑assessable non‑exempt income; or

(d)    a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12‑5.

(3)    A loss or outgoing that you can deduct under this section is called a general deduction.

For the effect of the GST in working out deductions, see Division 27.

Note    If you receive an amount as insurance, indemnity or other recoupment of a loss or outgoing that you can deduct under this section, the amount may be included in your assessable income: see Subdivision 20‑A.

74    In this Court the appellant submitted that, in order to come within s 8-1(1)(a), it was only necessary to show the claimed losses were sustained as a result of a transaction entered into with the intention to make a profit. It was said that it was not necessary to show the loss was sustained in the course of a “business operation or commercial transaction”. On that basis, the appellant claimed that, as it was accepted by the primary judge that he had entered into the share acquisitions with the intention of making a profit, it ought to have been concluded the losses were deductable under s 8-1(1)(a). It was alternatively submitted that the Profit Target Strategy executed in relation to Nexus shares was, in any event, a “business operation or commercial transaction” because it was pursued with a profit motive such that it satisfied the requirements of the Myer Emporium principle.

75    Conversely, the Commissioner submitted that s 8-1(a) and the Myer Emporium principle require that a loss arising from an “isolated transaction” can only be claimed as a general deduction if sustained in a “business operation or commercial transaction” entered into with the purpose of deriving a profit. He submitted the appellant bore the onus of establishing both elements and, in this case, the first had not been established.

76    The conflicting submissions raise for consideration the nature of the requirements of the Myer Emporium principle. Second, if the appellant’s initial submissions in this respect cannot be sustained, the next question is whether his actions relating to Nexus shares had the necessary business or commercial character.

The Myer Emporium principle

77    Each party made extensive submissions in relation to the authorities concerning the principle now referred to as the “Myer Emporium principle”. However, before considering the appellant’s central submission on this issue it is appropriate to consider the eponymous decision in detail, as well as the more recent decision in Visy Packaging Holdings Pty Ltd v Federal Commissioner of Taxation (2012) 91 ATR 810 (Visy Packaging).

78    In Myer Emporium, the Myer group of companies undertook a corporate restructure and, in doing so and as an essential part of it, established a company to conduct its financing activities. The holding company, Myer Emporium, lent the new company, Myer Finance, $80,000,000 and assigned the right to receive the interest on the loan to a third party, Citicorp Canberra Pty Ltd (Citicorp). When the loan to Myer Finance was made it was not intended that Myer Emporium would ever receive the interest on it. The assignment was always intended to be part of the overall transaction involving Citicorp. The consideration for the assignment was $45,370,000 which was paid on the date it took effect. The Commissioner assessed the amount of consideration as income in the hands of Myer Emporium. That conclusion was overturned on an objection hearing in the Supreme Court of Victoria and upheld by the Full Court of the Federal Court where the amount was held to be a capital receipt.

79    Before the High Court the Commissioner submitted that “a gain made by a taxpayer as the result of a business deal or a venture in the nature of trade is income of the taxpayer, even if the transaction that yields the gain is outside the ordinary course of business”: Myer Emporium at 209. Myer Emporium argued to the contrary on the basis that a gain was not income unless it was made “in the ordinary course of business”. The Court (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ) observed at 209-210:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

(footnotes omitted)

80    The last two sentences capture the essence of the decision, being that revenue derived from an isolated transaction entered into with the intention to make a profit will be income where the transaction has the character of a business operation or commercial transaction. They were relied upon by the Commissioner in this Court for the proposition that the acquisition of an asset for resale with a profit-making intention was insufficient to characterize any gain on the resale as income. The gain needed to be acquired in the course of a business operation or commercial transaction.

81    By reference to the decision in Californian Copper Syndicate v Harris (l904) 5 TC 159 (Californian Copper Syndicate v Harris), the High Court then observed the distinction between mere realization or change of investment leading to receipt on capital account on the one hand and an act done in the carrying on or carrying out of a business. In the latter respect, a receipt may constitute income where it arises from an isolated business or commercial transaction when it has been entered into with the intention or purpose of making a relevant profit or gain: at 211. The Court rejected the proposition that a mere profit-making intention was sufficient to stamp the receipt of gains with the character of income. In doing so, it noted that mere realization of an asset was a matter of capital and not income, that otherwise windfall gains and gains from games of chance would constitute income, and generally gains from recurrent acts or activities are income whereas gains from isolated transactions are capital. These observations were also heavily relied upon by the Commissioner.

82    The Court further considered (at 211-213) that gains made in the course of an adventure in the nature of trade which has the character of a commercial enterprise, can be distinguished from those made on the realisation of a capital asset which is in the nature of a private endeavour. The mere fact the commercial enterprise is limited in duration and scope does not prevent it from being an adventure in the nature of trade. It was observed that the mere holding of a profit motive at the time of acquisition of the asset was insufficient to render any gains on the subsequent sale income. It is necessary that the profit motive was held in the context of carrying on a business or carrying out a business operation or commercial transaction: at 213.

83    The Court concluded that the consideration received by Myer Emporium from the transaction was income. It was of some importance to the Court that the gains were made in the course of the carrying on of the Myer business even though the transaction was not one of its ordinary day-to-day dealings. At 215-216, the Court said:

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.

84    In that case the transactions, whilst novel, were entered into in the course of Myer’s existing profit-making business and, it might be said, for business purposes. Additionally, the assignment of the right to recover interest was not independent of or isolated from the loan agreement. They were part of the same transaction or scheme. It follows that, where the transaction is an “isolated” one in the sense that it is made in the course of a business but not the ordinary course of that business, the fact that it was entered into in the course of a business goes a long way to impressing it with the commercial or business character.

Visy Packaging

85    The appellant also relied upon the decision in Visy Packaging at 845 [185] where Middleton J said:

The principle of law which is at the centre of this case is clear: if the intention or purpose of the relevant entity in entering into a transaction or upon acquiring an asset was to make a profit or gain, that profit or gain will be income, even if the transaction was extraordinary by reference to the ordinary course of that entity’s business: see Westfield Ltd v FCT (1991) 28 FCR 333; 21 ATR 1398; 91 ATC 4234; 99 ALR 510; FCT v Cooling (1990) 22 FCR 42; 21 ATR 13; 90 ATC 4472; 94 ALR 121; FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 61 ALJR 270; 87 ATC 4363; 71 ALR 28; FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692; 56 ALJR 240; 82 ATC 4031; 39 ALR 521; FCT v Visy Industries USA Pty Ltd (2012) 205 FCR 317; 2012 ATC 20-340; 90 ATR 148. Similarly, if the intention or purpose was to make a profit or gain but a loss was ultimately in fact sustained, then a deduction in the amount of that loss would be permitted.

86    In that case the Visy group, of which a main holding company was Visy Industries Australia Ltd, sought to acquire a primary packaging business to supplement its secondary packaging business. It identified an appropriate business operation owned by Southcorp Ltd. That latter company was willing to sell, but only on condition the Visy group acquired all of its businesses in Australia and South-East Asia. The sale of the additional businesses was said to be at a discount to the Visy group on the basis that they were buying them “in-a-line”. The Visy group made an assessment of the value of the additional businesses and concluded it could on-sell them at a substantial profit and, on that basis, it determined to proceed with the acquisition. Visy Packaging Holdings Pty Ltd was incorporated to acquire the Southcorp businesses with the intention of divesting some of them (the divestment businesses) in the near future. It advertised that it intended to sell certain of the businesses and received offers which would have secured a profit in respect of them. It chose not to accept those offers in the belief that it might acquire a higher price in the future. Unfortunately, it was wrong. The Southcorp business subsequently suffered a significant decline in results and value. This led to increased acquisition costs for the Southcorp businesses consequent upon higher financing costs. The acquisition of the Southcorp businesses went ahead despite the fact that at the date of completion of the contract there was no realistic possibility of Visy Packaging Holdings being able to profit on the resale of the divestment businesses. Consequent upon the disposition of the divestment businesses, Visy Packaging Holdings suffered a loss of approximately $86,000,000 and Visy Industries Australia suffered a loss of approximately $300,000,000. The Commissioner took the view that these core losses on the sale of the businesses were not allowable deductions for the purposes of s 8-1 of ITAA97 and, therefore, not able to be accounted for as tax losses of Visy Packaging Holdings and Visypak Operations. The Visy companies objected to the disallowance on the basis that the entire scheme under which the Southcorp businesses were acquired and the divestment businesses disposed of, was a business transaction or commercial operation with the intention of profit-making. The appeal was allowed and Middleton J found that the losses sustained should be accounted for on income account.

87    The appellant in the present case relied upon the above cited extract from his Honour’s reasons in support of the submission that the central factor in determining whether the gain or loss ought to be accounted for on revenue or capital account was the profit intention with which the asset was acquired. However, his Honour’s comments must be read in context, keeping in mind the reference to Myer Emporium, such that it should not be thought that his Honour considered the mere intention to profit as a result of a transaction was sufficient to stamp any gains with the character of income. It was axiomatic that the losses were sustained in “a business operation or commercial transaction” as that expression is used in Myer Emporium. The purchase and sale of the divestment businesses occurred in the course of the carrying on of the Visy business even though it was not one of the ordinary business transactions in which it engaged on a daily basis. In other words, that the transaction was engaged in by the Visy Group, which was carrying on businesses, went a long way to giving it the character of a commercial transaction. However, it might also be said that Middleton J’s comments (at 847 [197]-[198]) can be seen as invoking the second limb in Myer Emporium:

[197]    From a practical and business point of view, the purchase of the businesses that were ultimately divested, whilst facilitating the purchase of all the Southcorp businesses, also enabled the opportunity for profit upon divestment.

[198]    I say opportunity for profit, because when considering various options, an entity may not know which one will ultimately be to its commercial advantage. A participant in business can only rely upon his or her own judgment, sometimes based upon external advice. It may be, as is the nature of business, the plan of action set in motion does not achieve the desired result. This does not mean, however, that the entity putting in place that plan of action did not have an intention to achieve that desired result. The various witnesses called by the taxpayers in these proceedings were experienced businessmen, and gave evidence as to their opinions and views over the relevant period, and explained the opportunity for profit they sought to take advantage of at the time.

88    Yet, even in those words it is apparent that his Honour had in mind the context in which the transaction was entered into, being one of the carrying on of the Visy business. It is hardly likely that his Honour intended to suggest that the mere holding of a motive to sell the asset acquired at some time in the future at a profit would suffice to treat the gain on the sale as income. That is especially so given his reference (at 852 [232]) to the observations of Gordon J in the earlier decision in Visy Industries USA Pty Ltd v Federal Commissioner of Taxation (2011) 284 ALR 455 (Visy Industries USA) at [78]:

It is well-established that a gain from a transaction will be assessable as ordinary income under s 6-5 of the ITAA 1997 if it was realised in an isolated business operation or commercial transaction in circumstances in which the taxpayer, at the time it engaged in the transaction, had the intention or purpose of making the gain: Westfield Ltd v FCT (1991) 28 FCR 333; 21 ATR 1398; 91 ATC 4234; 99 ALR 510, FCT v Cooling (1990) 22 FCR 42; 21 ATR 13; 90 ATC 4472; 94 ALR 121, FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 61 ALJR 270; 87 ATC 4363; 71 ALR 28 and FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692; 56 ALJR 240; 82 ATC 4031; 39 ALR 521.

89    At [79] of her Honour’s reasons it was also said:

In order for an isolated transaction to constitute ordinary income, two criteria must be satisfied:

1.    the transaction must be a commercial transaction or an adventure in the nature of trade; and

2.    the transaction must be entered into for the purpose of making a profit.

Federal Commissioner of Taxation v Montgomery 99 ATC 4749 (1999) 198 CLR 639 at 672-677; Westfield at 342; Myer Emporium at 211.

90    In Visy Packaging the losses were obviously sustained in the course of an adventure in the nature of trade which had the character of a commercial enterprise. The scheme of the acquisition and sale of the divestment businesses for profit, which included the attempted on-sale before completion, was clearly one of that character. Before this Court the Commissioner submitted that Gordon J’s use of the expression “adventure in the nature of trade” was an appropriate descriptor of the characteristic required of the transaction, being one of a commercial transaction or a business operation.

A commercial transaction or business operation

91    The appellant’s principal submission to this Court was that his acquisition of Nexus shares had the necessary commercial purpose, and the primary judge erred in not identifying it. It was submitted that, when ascertaining whether the commercial purpose existed, the focus should be on the “profit-making purpose and the pursuit of the profit-making purpose”. In this respect it was submitted the primary judge’s determination that Mr Greig had acquired the Nexus shares with a view to making a profit ought to have led to a conclusion that their acquisition was a commercial transaction or an adventure in the nature of trade. In advancing this argument, the appellant placed reliance upon the observations of Gordon J in Visy Industries USA at [80]-[81], that whilst a commercial transaction can be contrasted with a private, recreational or other non-business activity, a singular, profit motivated transaction entered into by a taxpayer otherwise than in the ordinary course of business may still be of the commercial character. So the submission went, that applies even if the profit-making objective is not the sole purpose of the transaction and it is sufficient if, at the time the transaction was entered into, a not insignificant purpose was to generate a profit. This submission did not accurately identify the relevant principles which were, with respect, correctly identified by Gordon J.

92    There was no real controversy before the primary judge — nor before this Court — that the Myer Emporium principle was not solely applicable to a taxpayer who engaged in the relevant transaction in the course of carrying on a business. Indeed, at [130] the primary judge accepted that where there is a sufficient profit-making purpose in a business operation or commercial transaction, the gain on disposal may well be ordinary income irrespective of whether the acquisition was in the ordinary course of business.

93    In the course of his address, Mr Sullivan SC for Mr Greig, submitted that the authorities establish that it is the existence of the profit-making purpose of the taxpayer and their conduct in pursuit of it which has caused courts to characterise transactions as commercial transactions. It was submitted that the “commerciality was in the pursuit of the profit-making purpose”. In effect, the submission sought to draw a distinction between a passive investment on the one hand and, on the other, an expenditure of money which involved additional activity in an attempt to ensure that its subsequent sale would produce financial gains.

Some general principles concerning the character of gains made on isolated transactions

94    As the Commissioner submitted, in Ransley v Deputy Commissioner of Taxation [2018] FCA 1796 (Ransley), Deputy President Jagot J (exercising this Court’s and the Tribunal’s jurisdictions concurrently), assayed a number of authorities predating the High Court’s decision in Myer Emporium, together with some subsequent ones. Her Honour’s careful examination makes it unnecessary to repeat that exercise. It suffices to observe that those cases identify that, in order for the gains made on the sale of an asset to be treated as assessable income, the gains must be income within the “ordinary uses and concepts of mankind” in that they arise in what is truly the carrying on, or carrying out, of a business: Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 (Whitfords Beach) at 360-361. Gains made are not ordinary income where what is done is the mere realisation or change of an investment or an enhancement of value by realisation: Californian Copper Syndicate v Harris, 166. Prima facie, the accretion to the capital value of a security between purchase and realisation is a capital gain: Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604 at 614. The making of a profit on an isolated transaction of purchase and resale does not become income merely because the asset was acquired with the intention of selling at an increased value: Jones v Leeming [1930] AC 415. Such a gain is ordinarily regarded as a capital gain even though acquired with the intention of making a profit: Whitfords Beach at 361.

95    Gains made on an isolated transaction may amount to income where the transaction is in the nature of a trading adventure: Californian Copper Syndicate v Harris; Edwards v Bairstow. More recently that principle has been restated in these terms: gains made from an isolated transaction will be assessable as ordinary income if “realised in an isolated business operation or commercial transaction in circumstances in which the taxpayer, at the time it engaged in the transaction, had the intention or purpose of making the gain”: Visy Industries USA at [78], referred to in Visy Packaging at [234]; Resource Capital Fund IV LP v Commissioner of Taxation (2018) 355 ALR 273 (Resource Capital Fund) at [50].

96    The determination of whether the gains are income or capital is ascertained by a factual inquiry into all of the circumstances so as to identify the character of the receipt in the taxpayer’s hands: Californian Copper Syndicate v Harris at 166. The test is objective rather than subjective: Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42.

97    A distinction is drawn in the authorities between where the gain made on the sale of an asset is by an entity which is otherwise engaged in business and where the sale is by an entity not so engaged. However, the distinction is not as to the principles which apply to characterize a gain as either capital or income, but as to the application of the test. Where a realisation of an asset occurs in the course of an entity’s business, as a matter of fact, it is easier to discern it as clothed with the characteristics of a business deal or venture in the nature of trade, even where the sale did not occur as part of the entity’s ordinary course of business. However, it does not follow that such a profit is automatically to be regarded as income and much depends on ascertaining the existence of an intention or purpose of profit-making at the time of the asset’s acquisition: Westfield Ltd v Commissioner of Taxation (1991) 28 FCR 333 at 342; Moana Sand Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 4897. Sales of assets by an entity undertaking a business, where the sale occurs as part of that business, are more readily identifiable as a business deal or commercial transaction because the sale and receipt of a gain is “an incident of the business”: Resource Capital Fund at [50] per Pagone J; London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 138 CLR 106 (London Australia Investment) at 117-118, 128, 130.

98    The nature of the asset the subject of the transaction can be relevant to determining whether the necessary commercial character exists, but it is not determinative. Where the sale of assets such as shares is an integral part of a taxpayer’s ordinary business and the sale takes place in the course of that business, profits made are income within the ordinary meaning: London Australia Investment.

The authorities specifically relied upon in submissions

99    Several authorities were relied upon by the parties in the course of oral submissions. It is convenient to deal with them in the order in which they were cited by the appellant.

Californian Copper Syndicate v Harris

100    In Californian Copper Syndicate v Harris a UK company was established for the purposes of acquiring copper-rich land, establishing a mining operation on it and on-selling the business. It did so and the proceeds of sale were assessed as income. It appealed that assessment. The Court of Exchequer concluded the Commissioners were right to regard the gains as income. Lord Justice Clerk, at 166, accepted that gains on the ordinary realisation of an investment were not income, though went on to add:

But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable [as income], 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.

101    The usual case arose where assets generally regarded as capital, such as land or shares, are the subject of speculation in the course of a business. His Lordship said:

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 the operation business in carrying out a scheme for profit-making?

102    The Court concluded that the taxpayer company had been formed for the purpose of endeavouring to make profit by a trade or business and the profitable sale was not merely a substitution of one form of investment for another.

103    In the present case, Mr Sullivan SC for the appellant submitted “the profit-making purpose there was the feature that made it a commercial transaction”. Respectfully, that was not so. As the observations of Lord Justice Clerk reveal, the distinction was that the profit was made in the operation of a business or the carrying on or out of a business. The pursuit of a profit was a necessary, albeit not sufficient, characteristic of the generation of the gains. The distinguishing element was the business or commercial conduct engaged in to obtain the profit.

Ducker v Rees Roturbo Development Syndicate Ltd

104    The next authority relied upon was Ducker v Rees Roturbo Development Syndicate Ltd [1928] AC 132. There, the taxpayer was incorporated with the specific purpose of, inter alia, acquiring patents, patent rights and associated intellectual property rights in relation to centrifugal turbines and similar pumps and to licence or grant privileges with respect to the same and, in particular, patents, and:

(f) To improve, manage, develop, exchange, let on lease or otherwise, mortgage, sell, dispose of, turn to account, grant rights and privileges in respect of, or otherwise deal with all or any part of the property and rights of the company.

105    The taxpayer acquired the identified patent rights in relation to the turbine pumps and rights in foreign patents in relation to them. Whilst developing the domestic patents was the main object of the company, the possibility of sale of the foreign rights had always been contemplated by it. Subsequently it granted patents registered in the USA to an American company which also acquired an option to purchase them. The American company exercised the option and paid the purchase price under it. The taxpayer claimed to write off the gain made against its capital losses on the sale of the patents. The question before the Court was whether the gains made were assessable as income. In the House of Lords, Lord Buckmaster (with whose speech Viscount Sumner, Lord Wrenbury, Lord Carson and Lord Warrington agreed) identified that the test which emanated from Californian Copper Syndicate v Harris was whether the amount in dispute was “a gain made in an operation of business in carrying out a scheme for profit-making”, being a test which received the approval of the Privy Council in Commissioner of Taxes v Melbourne Trust Ltd (1914) 18 CLR 413. His Lordship noted that, in the case before the House, the sale occurred as part of the business of the taxpayer even though it was not part of its main business activities, and that the dealing in the patent rights was something which was always contemplated by the company.

106    Mr Sullivan SC submitted that the essence of this case was that the “patents were acquired with a view, in part, to their later profitable disposal” and this profit-making purpose was the feature which made it a commercial transaction. Again, that is not the effect of the decision. It is plain that the commercial nature of the transaction arose, not only because the sale was effected in the course of a business which was carried on, but because it was always contemplated as being part of the company’s business activities.

Edwards v Bairstow

107    Next, the appellant relied upon the decision of the House of Lords in Edwards v Bairstow [1956] AC 14. There, the respondent taxpayers, Mr Bairstow and Mr Harrison, entered into a joint venture in the nature of a partnership to purchase for £12,000 a complete spinning plant for the purpose of immediately selling it at a profit. They had no experience in spinning and nor did they intend to operate the plant. After about two years they had managed to sell all parts of the plant and equipment and had incurred various expenses along the way including in renovating the plant, insuring it, rent and selling it. The respondents sought to claim the expenses as deductions on revenue account. The Commissioners asserted that the acquisition and sale was not an adventure in the nature of trade. Before the House of Lords the question was whether the acquisition and sale of the spinning plant was within the meaning of the expression “trade, manufacture, adventure or concern in the nature of trade” and whether there was profit arising from it. It was accepted by all members of the House that the question was one of fact upon which reasonable minds might differ. In that latter respect much of their Lordships’ speeches are concerned with the extent to which an appeal might lie from the decision of the Tax Commissioners on that question of fact. On the substantive issue, Lord Radcliffe opined that the venture was in the nature of trade because the plant was acquired for the purposes of resale and not for use as an income producing asset. It was not consumed nor enjoyed. The taxpayers intended to sell the asset even prior to its acquisition and they did so in due course. It was, his Lordship said, “inescapably, a commercial deal in second-hand plant”. The business had organisation as much as that was required, and the plant was sold in a market in which it was sought after. The replacement of parts and renovation as required were undertaken in order to resell the plant even though not a large amount of work was necessary. The mere fact that the transaction was an isolated one did not have the consequence that it could not be an adventure in the nature of trade.

108    Here, the appellant contended that the effect of Lord Radcliffe’s speech was that, because the transaction was a dealing, it was an adventure in the nature of trade and that all the expression “dealing” meant was “dealing for a profit”. However, what his Lordship actually said was:

There remains the fact which was avowedly the original ground of the commissioners’ decision — “this was an isolated case.” But, as we know, 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.

109    The characteristic which rendered the gain one arising in an adventure in the nature of trade was that it bore the “badges of trade” which appeared from those factors which his Lordship had referred to as are identified above. They gave it the colour of a commercial activity rather than a mere investment. It is apparent that a number of the elements mentioned by his Lordship were important, including the immediacy of the proposed sale, the seeking of purchasers prior to acquisition and the work undertaken to secure the sales. In relation to the timing of the sale, the case stated identified that the taxpayers’ plan was for a quick purchase and re-sale. Indeed, the pre-purchase negotiations by the partners had the consequence that, only one week after the purchase, they were able to sell a portion of the plant for substantially more than they paid for the whole of it. It is also to be kept in mind that the gain came about through the operation of a joint venture partnership which was established for the purpose of pursuing the undertaking. In these circumstances, where substantial activity was contemplated in order to effect the acquisition and sale of the plant, it is difficult to say that the commercial character of the activity arose merely because it involved a profit-making purpose.

110    In Myer Emporium, the High Court recognised the limited utility of Edwards v Bairstow in the context of the statutory wording of the relevant Australian taxation legislation and, as the primary judge recognised, the High Court referred to it for the proposition that a singular and isolated transaction may still amount to a “business operation or commercial transaction”. To the extent to which the decision may be used for comparison purposes, if such an approach is appropriate, it was a case where the joint venturers or partners engaged in significant activity both prior to and consequent upon the purchase in order to secure the subsequent resale such that the totality of the activities constituted a trading adventure.

111    With respect to the appellant’s submission, this decision does not support the proposition that the mere pursuit of profit in a transaction is sufficient to give it a commercial character so as to warrant gains derived from it being regarded as income.

Ransley v Deputy Commissioner of Taxation

112    The appellant next relied upon the decision of Jagot J in Ransley, where the Commissioner had assessed the taxpayer on the basis that certain gains made on share transactions in a company called Doyles Creek Mining Pty Ltd (DCM) were ordinary income rather than capital gains. An appeal was brought by Ms Ransley from the disallowance of her objection to that assessment. A central issue was the degree of precision required of a person as to the manner in which a profit might be made in ascertaining whether the gains made on the transactions resulted in income. The findings from the extensive evidence in that case were that Ms Ransley was a party to a scheme to establish a company in which she was a shareholder and her husband, Mr Ransley, was a director and manager. A third person, Mr Poole, was also a party to the scheme. The company’s purpose was to acquire certain allocated exploration licences so that a mine could be established to function as a commercial mine whilst also funding a training mine. This would have the effect of increasing the value of Ms Ransley’s shares and enabling them to be sold for a profit when it was most opportune. She subsequently sold them and made significant gains. Ms Ransley submitted that she was in a position of an ordinary shareholder and, as she was not a director, she did not have control of the company or its operations. However Jagot J found Ms Ransley’s gains were correctly assessed as income and not capital.

113    The appellant submitted this was a case of a shareholder merely acquiring shares and selling them at a profit with the gain properly being assessed as income. However Jagot J had found that Ms Ransley was no mere shareholder. She was in a team with her husband in relation to the business ventures into which they entered and her role included holding the shares in the relevant companies. She was not merely passively holding shares in the hope of selling them at a profit. Mr and Ms Ransley were engaged in the conduct of a business or an overarching commercial transaction or dealing, or a series of commercial transactions or dealings, one of which was to build up the DCM business venture and to sell their interest in it for a profit when an opportune time arose. It was also accepted that the relationship between “Mr and Ms Ransley was not limited to that of a director and a shareholder at arm’s length”. Ms Ransley was privy to many conversations with Mr Ransley in the course of which they made decisions together in relation to the business ventures with which they were concerned. She was identified by Jagot J as a “joint decision maker” with Mr Ransley about the business venture. She undertook activities in conjunction with her husband as the director of DCM with the purpose of divesting her interest in it when it acquired an exploration licence. Her position was in no way similar to the holder of shares in a publicly listed company. In the result it was, with respect, correctly held that the acquisition of the shares by Ms Ransley was on revenue (not capital) account and the profits made on the sale of the shares were assessable as ordinary income.

114    The submission made by Mr Sullivan SC in respect of the result reached in Ransley was that “[a]ll the taxpayer did was subscribe for shares and sell them”, that “so far as one can see, the only thing that made it a commercial transaction was the existence of the profit-making purpose”, and that “all that’s necessary is a profit-making purpose”. It was later put that Jagot J had appeared to “take the view that .....acquiring those shares with the relevant profit-making purpose was sufficient to constitute a commercial transaction” and found that “the purpose of making a profit on selling those shares was sufficient to constitute a commercial transaction”. Those submissions, none of which has any foundation in Jagot J’s reasons, should be rejected. As the above discussion of her Honour’s reasons palpably discloses, Ms Ransley was actively involved in the undertaking of a business or venture which had as its objective the increasing of the value of her shares in DCM which she might sell at a profit. It was her extensive involvement in the development of the business in which she held shares that characterised her investment as being a commercial operation and the gains as income.

115    The appellant’s reliance on the decision of Jagot J in Ransley was to suggest that her Honour’s judgment represented the lowest hurdle to be overcome for a gain to be on revenue account and that, conversely, the appellant’s conduct involved much more in the nature of a commercial enterprise than required of that hurdle. That approach was founded upon a mischaracterisation of Jagot J’s reasons. Indeed, the overall scheme adopted by Ms Ransley as part of the enterprise pursued by her and her husband displayed substantially more indicia of a commercial enterprise than did the activities of Mr Greig in acquiring the publicly listed Nexus shares.

Commissioner of Taxation v Haass

116    The appellant also relied upon the decision of Heerey J in Commissioner of Taxation v Haass (1999) 91 FCR 132. There, the Commissioner appealed from a decision of the Administrative Appeals Tribunal which had held that an amount paid by an insurer under a life policy was not assessable income. The policy was taken out over the life of the taxpayer’s daughter and the taxpayer intended to surrender the policy when it came time to fund his daughter’s tertiary education. It is apparent the policy had a number of unusual aspects to it. Although, on its face, the policy purported to be for a term of 35 years, the death cover was reduced to zero in return for a reduced premium of $100,000. The benefit payable under the policy was cash, which was payable after two years of the premium having been paid and on the policy’s surrender. After two years of paying the premium the holder was entitled to borrow up to 92.5% of the cash value of the policy. If the principal and interest owing to the insurer exceeded the policy’s cash value, it was treated as having been surrendered and the debt forgiven. In the negotiations for the policy it was agreed that the insurer’s agent would pay all but $8,833.50 of the annual premium.

117    Perhaps unsurprisingly, the insurer recognised that the policies and the manner in which they were being used could lead to it suffering substantial losses and it took action to remove them from its books. It identified to the policy holders the ability to borrow against the cash value of the policies which would be cancelled when the amount of indebtedness reached that cash value. The taxpayer, Mr Haass, did so with the result that he made a gain of $18,009.03.

118    Heerey J held that the gain was in the nature of revenue. The policy was acquired for the purpose of obtaining cash in return for its surrender and the actions of the insurer only encouraged Mr Haass to pursue that course sooner rather than later. His Honour observed (at 136 [15]):

If a taxpayer were to acquire land intending to resell it at a profit in 10 years time, but as a result of unexpected circumstances resold after three years, profit from the resale would be assessable. What happened in the present case was essentially no different.

119    With respect, to the extent to which that observation seemed to suggest that a gain on a passive investment, if realised earlier than anticipated, would result in assessable income, it is not consistent with the Myer Emporium principle. It takes no account of the requirement that there must be a commercial or business aspect to the transaction. His Honour may have recognised this in the following paragraph (at 136 [16]):

For the sake of completeness I should note that there was some discussion of the fact that in Myer Emporium and Westfield the taxpayer was clearly carrying on a business. In the present case, the respondent carried on the business of a real estate agent but the policy was obtained for private and domestic purposes, unconnected with his business, although of course it was a commercial transaction from the point of view of National Mutual.

120    The fact that the person engaged in selling investments has a commercial purpose does not characterize the asset in the hands of the purchaser with the same objective. It is the nature of the taxpayer’s activities which are determinative of whether, in their hands, any gain on sale is income or capital. However, in his reasons (at 136-137 [17]-[18]) Heerey J, in reliance on AAT Case 12,258 (1997) 37 ATR 1045 (Case 12,258), accepted that the nature of the policy in question was not truly a life policy but rather an investment which was acquired for realisation for gain after a short period. In that sense it was a commercial transaction and any gain as a result was assessable income.

121    The reliance by Heerey J on the decision in Case 12,258 was neither sufficiently explained nor clear from his Honour’s reasons. In the first instance there is a strong impression, from the reasons in Case 12,258 at 1053, that the Deputy President may have misapplied the Myer Emporium decision. At lines 5-23 on that page, it seems that the principle relating to the occasion when a gain made in the course of business — albeit not in the ordinary course of business — will be treated as income was applied to an isolated transaction outside of a business context. That is to say, the Deputy President suggested that the principle that, in the usual course a gain made from a transaction entered into with a view to profit in the course of a business will be treated as income, was applicable in the non-business context. However, it is also important to recognise that the Deputy President did go on to identify that the nature of the policy in question was such that its acquisition was in the nature of a commercial transaction. That was, presumably, because of the requirement to make on-going contributions by way of premiums, and subsequent steps were required for the purposes of securing a profit such as by entering into a loan and allowing interest to accrue. In this way, from the beginning the undertaking surrounding the entry into the policy was substantially more than the mere acquisition of an investment. To that extent the decision in its result represents a correct application of the second limb of the Myer Emporium principle. Further, it indicates that the true basis of the conclusion reached was that the arrangements around the policy were in the nature of a commercial transaction.

122    Again, the appellant submitted that this case demonstrates that a profit-making motive is sufficient to render a transaction a commercial transaction such that any gain is properly treated as income. However, the decision of Heerey J was grounded upon the conclusion that the entry into the life policy was in the nature of a commercial venture. The mere fact that the applicant intended to derive a profit from entering into that commercial arrangement was necessary but not sufficient. The appellant submitted that the decision in Haass was referred to with approval in Visy Industries USA (at [80]). Whilst that particular submission is accurate, the decision was approved of as being illustrative of the proposition that the concept of a commercial activity stands in contradistinction to a private or recreational or other non-business activity. Gordon J did not suggest that it stood as authority for the proposition that the existence of a profit-making purpose was sufficient to characterize the transaction as a commercial one. The circumstances of that case were that the transaction was substantially more than the acquisition and sale of an asset.

123    If, as the Commissioner submitted, the decision supports the appellant’s proposition, it is wrong and inconsistent with the Myer Emporium principle.

Commissioner of Taxation v Glennan

124    The appellant then relied on the decision in Commissioner of Taxation v Glennan (1999) 90 FCR 538 (Glennan), in which an unsuccessful barrister had set about restoring his financial fortunes by researching and selecting the optimum engineering method for constructing a vehicular tunnel beneath Sydney Harbour. He entered into a joint venture with an engineer and a building consultant to pursue the proposal. Other parties entered upon the venture but a dispute brought about litigation which, in 1988, resulted in a settlement in which the erstwhile barrister received a substantial sum. The Commissioner assessed the barrister to pay income tax on the settlement amount. Objection proceedings were commenced and the matter proceeded to the Federal Court and back to the Administrative Appeals Tribunal. The taxpayer sought a declaration that the settlement proceeds were a windfall gain and not assessable. The matter again made its way to the Full Court, this time for determination of the question of whether it was open to the Tribunal to consider that the settlement proceeds were, in fact, income.

125    The Full Court (Hill, Sackville and Hely JJ) identified that the characterization of the payments fell to be determined by reference to the identity of that in return for which the payments were made. Before this Court the appellant relied upon certain statements of the Full Court which, when taken out of context, might suggest that the mere pursuit of profit as the reason for entering into a transaction was sufficient to render it a commercial transaction. That was not the conclusion of the Full Court and, indeed, the matter before it was quintessentially one where profit was made in the course of a commercial activity. The taxpayer had sought to pursue a commercial enterprise to exploit his idea of a tunnel under the harbour. He researched it, developed the concept with others and entered into business arrangements in order to pursue it. To the extent to which the Myer Emporium principles were relevant, the gain derived by the taxpayer was received in the course of a commercial enterprise. Further, those parts of the Full Court’s decision relied upon by the appellant were not concerned with assessable income derived from carrying out any profit-making undertaking or scheme. The Court was concerned with whether it was open to the Tribunal to hold the profit was income under the ordinary concepts in s 25(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA36). In this respect the Court identified the amount received by the taxpayer as consideration for the services which he had rendered to the joint venture. At 556 [74] of its reasons, the Court said:

In our view, there is no substance to the criticism by the taxpayer of the way in which the AAT treated the JVA. It must be remembered that the AAT was responding to the appellant’s argument that the JVA was nothing more than a sale of property and that, therefore, the Sum was a capital receipt. It was in that context that the AAT analysed the terms of the JVA and concluded that the Sum was paid in relation to the provision of services. The taxpayer no longer maintains the submission that the JVA was in substance a sale of property. Accordingly, the treatment of the issue by the AAT does not give rise to any error of law.

There is nothing in the reasons of the Court in Glennan which supports the principle advanced by the appellant.

McCurry v Federal Commissioner of Taxation

126    The appellant also relied on McCurry v Federal Commissioner of Taxation (1998) 39 ATR 121. There, two brothers acquired land in 1986 and constructed three townhouses upon it. The townhouses were advertised for sale in May 1987, although at that time they were not fully completed. Some interest was shown in them but none were sold. However, later in that year, the taxpayers’ families purchased a nearby newsagency and moved into two of the townhouses as their residences. The third remained unoccupied. In December 1988, all three townhouses were sold, with the taxpayers receiving a profit of $75,811 each. The taxpayers were assessed on the profit on the basis that it was income or otherwise taxable as a capital gain. It was noted by Davies J that, in 1990, the brothers acquired a further piece of land, constructed townhouses on it, and sold them. His Honour identified that it was well established that property may be acquired as an investment either to provide potential investment returns, or as a hedge against the effect of inflation on the value of currency. The retention of property in the hope or expectation that it will increase in value is a legitimate form of investment: Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640 at 686. However, as his Honour said (at 123):

If a property is acquired in the course of a business or commercial dealing with a view to obtaining a profit from its development and sale, that venture is not regarded as an investment and the profit derived therefrom will be income for the purposes of s 25(1) of the ITAA 1936.

127    His Honour further relied upon the observations of Mason J in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 383-384:

As we have seen, it is enough to answer the statutory description [of income] that there was a profit-making undertaking or scheme which exhibited the characteristics of a business deal, even though it did not amount to the carrying on of a business. If what has happened amounted to no more than the mere realization of an asset then it was not a profit-making undertaking or scheme.

128    After considering the High Court’s decision in Myer Emporium, his Honour identified the relevant principle in the following terms (at 124):

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. A profit making undertaking or scheme is such a dealing. In Steinberg at CLR 699 … Gibbs J expressed his view as to the nature of a relevant scheme or undertaking:

A profit-making scheme within s 26(a) is a plan, design or programme of action devised and put into effect for the purpose of making a profit. It must be a scheme carried out by the taxpayer himself or on his behalf. It appears that it should - at least where the transaction is one of acquisition and resale, exhibit features which give it the character of a business deal. The mere realization of a capital asset, albeit in an enterprising way, would not amount to the carrying out of a profit-making scheme.

129    His Honour also referred to the observations of Barwick CJ in Steinberg at 687, to the effect that a gain made in the course of the acquisition and re-sale of an asset can be regarded as income when it was made in the course of a commercial dealing. That, it was noted was something with which Mason J in Whitfords Beach agreed. His Honour then noted, that the plan or scheme carried out by the brothers — which involved acquiring the land, clearing it and constructing townhouses on it — was a businesslike venture so as to be an “undertaking or scheme”. It followed that the gains made from the undertaking or scheme were income and correctly assessed as such.

130    Mr Sullivan SC for the appellant also relied on the decision of Davies J to submit that the significant matter which characterises a transaction as a commercial one is the profit-making purpose. He did so by reference to the first sentence in the passage cited above from page 124 of his Honour’s reasons. However, as the remainder of the passage cited discloses, the mere profit-making motive was not sufficient. In order for the transaction to be a commercial one it had to exhibit the characteristics of a “business deal”. Mr Sullivan went further and submitted that, in order to succeed on the appeal, his client did not need to bring himself within the principle he says is contained in that case. He submitted that the transactions in question were not merely profit-making transactions, but transactions where there was profit-making intention with activity surrounding it in an attempt to generate the profit. This argument is considered in more detail below.

The appellant’s case in reliance on the above submissions

131    After addressing each of the above authorities the appellant advanced two main submissions with respect to the Myer Emporium principle. Firstly, he submitted that “the pursuit of a profit-making objective is the most important feature in the courts characterising transactions as commercial transactions” and that, as the only purpose of Mr Greig in acquiring the Nexus shares was to realise them at a profit, the acquisitions were purely profit-making transactions. On that basis alone it was submitted the acquisitions of Nexus shares had the requisite character of a commercial transaction or business operation.

132    Second, it was submitted that when one takes into account the course of conduct from March 2012 to August 2014, which was directed to advancing the profit-making purpose, the share purchases must constitute a “commercial transaction”. In this respect it was said that all that was needed was the existence of the profit-making intention and there was no requirement that it be intended that there be particular acts pursued or for matters to unfold in a particular way in the pursuit of that profit. In that sense, so the appellant submitted, it was not necessary for there to be intended any commercial activity or particular commercial activities.

The requirements of the Myer Emporium principle

133    The Commissioner submitted that the appellant’s first proposition was somewhat novel and that no case had been identified where the mere acquisition and resale of listed shares has been found to satisfy the test in Myer Emporium. The principle from that case, so it was said, is relevantly only applicable where an individual operates a share-trading business which is demonstrated by the existence of contemporaneous business plans, regularity and repetition of transactions, the holding of the shares as trading stock, and the treating of the shares on revenue account, not on capital account. In this way the acquisition and sale of shares in a single listed company could not display the characteristics of a business deal or have a commercial flavour.

134    The Commissioner also submitted that the appellant’s first argument failed to pay sufficient regard to the requirement that, in order to give the gains made on the isolated sale of an asset the character of income, the sale must have taken place as part of or in a commercial transaction or business operation entered into for the purposes of making a profit. Mr Thomas SC for the Commissioner submitted that the appellant’s submissions erroneously placed exclusive emphasis on the existence of a profit-making motive, and that there is no suggestion in the authorities for that approach.

135    Despite the protracted submissions on behalf of the appellant in relation to the authorities referred to above, the principle sought to be derived from them by him does not emerge. As the above discussion reveals, they support the proposition so succinctly stated by Gordon J in Visy Industries USA (quoted at [89]), that for gains on an isolated transaction to constitute income, they must be derived from a commercial transaction or business dealing (such as an adventure in the nature of trade) entered into for the purpose of making a profit. When properly examined, none of the authorities relied on by the appellant indicated that it was sufficient to characterise gains from a transaction as income merely because it had been entered into for profit. The existence of a profit motive is essential but it is not adequate. The gains (or losses) must be derived from a transaction which has the necessary commercial or business character. Here the totality of the intended transaction was to purchase shares, hold them until the market price increased and then sell them. That transaction had none of the commercial or business qualities identified in the authorities discussed above.

Profit motive and subsequent conduct

136    Mr Greig’s secondary argument was that he did not merely acquire an asset or assets with a profit motive, but he was also “an investor who engaged in conduct by which he actively pursued his profit-making purpose in relation to the Nexus shares”. By this, the submission appeared to be that a person who acquires an asset with the intention to sell it at a profit will be engaged in a commercial transaction or business operation if they take steps to improve or retain its value. It was not made clear whether the principle asserted by the appellant required the existence of that intention at or prior to the time of the asset’s acquisition. This was somewhat crucial in the circumstances of the present case. As the evidence showed, Mr Greig’s intention was to be a share market investor. He acquired Nexus shares because he believed they were undervalued and he perceived the company would improve its commercial position, thereby increasing the quoted price of the shares. The increase may have occurred through the eventual market awareness of others or by the making of a takeover offer by a third party. However, Mr Greig’s intended conduct was to buy Nexus shares and sell them when their price increased. His avowed strategy involved no more than that and it was a strategy which was said to apply to all of the share purchases from March 2012 to May 2014. It is true that in the latter part of that period some of his acquisitions had a secondary purpose of allowing him to receive information which, so it was said, would have been unavailable to smaller shareholders, or to be able to exercise his voting power against certain proposed takeover schemes. Nevertheless, he did not advance any case that the separate acquisitions ought to be treated differently.

137    Faced with these circumstances, Mr Greig’s submission was that so long as he had an intention to sell the shares at a profit, anything which he did to improve or retain the value of the shares was within the broad and general scope of his commercial endeavour. So the argument went, the actions taken by him after he had acquired a substantial shareholding to increase or to preserve the share price were actions of a commercial or business nature, giving his purchases that character. In advancing this argument he relied on the proposition that in order for a gain on a profit-making commercial transaction or business operation to be income it was not necessary that the precise steps taken to secure that profit be contemplated at the time the asset is acquired.

138    On the appellant’s case it is not clear what the position would have been had the price of the Nexus shares increased and he sold them at a profit without him having taken any steps. If none were taken it would appear that the purchases would not then have the character of a commercial transaction or business operation. In this way, on the appellant’s analysis, the taking of steps subsequent to the acquisition of an asset can, ex post facto, give the purchase of an asset a commercial character. That is, an investment can become a commercial transaction if circumstances arise whereby steps need to be taken to protect or enhance its value.

139    In response to this second ground, the Commissioner submitted that the commercial quality of the transaction was a necessary characteristic if gains derived from it might be characterised as income. That commercial quality exists where the transaction can be characterised as a commercial venture, a business venture, a business-like venture, an adventure in the nature of trade or have the characteristics of the nature of a business deal. Here, so the Commissioner submitted, the intended transaction was merely the purchase and sale of Nexus shares by Mr Greig and there were no other elements to it. As such, it was a purely private transaction or non-business activity such that it stands in contradistinction to transactions which have the character of a business deal or commercial transaction.

140    It was further submitted that in order for a gain on an isolated transaction involving the purchase of an asset to be income, the transaction had to be a commercial transaction or business operation involving the asset’s purchase when entered into. The private non-commercial acquisition of an asset did not develop a commercial character merely because, subsequent to the purchase, the owner engaged in activities in an attempt to increase its value

Consideration of the appellant’s secondary argument

141    Central to the appellant’s secondary submission was the proposition that where a gain is made on the sale of an asset in the course of a commercial transaction or business dealing and, as such, is to be treated as income, the exact or precise steps by which the gain is achieved do not have to be within contemplation when the transaction or dealing is commenced. Whilst that proposition is accurate enough, the effect of the appellant’s case is that no steps or conduct which may be part of a commercial transaction or business dealing need be within contemplation when the transaction is entered into. If, so the argument goes, the purchaser of an asset has a profit-making intention when the asset is acquired, any step which is subsequently taken to maintain or improve the asset’s value (or to minimise any loss) will give the purchase of the asset the character of a commercial transaction or business dealing. So analysed, this submission conflates the two limbs of the Myer Emporium test as identified by Gordon J in Visy Industries USA. It assumes the requirement that the transaction be a commercial one or a business operation is inherent in the requirement that it was entered into with the intention of making a profit. That is because it proceeds on the basis that the existence of a profit motive is, itself, enough to make something a commercial transaction or business operation, and that any step taken in an attempt to secure a profit is a step taken in that transaction or operation. There is no justification for that assumption. The above discussion of the authorities concerning the Myer Emporium principle identifies that the existence of a profit motive when entering a transaction is not sufficient.

142    However, despite the dual requirements of the Myer Emporium principle being separate, they necessarily have an operational confluence, in that the relevant profit-making intention must exist at the time at which the commercial transaction or business operation is entered into. Necessarily, the transaction or business operation must involve contemplated or anticipated steps or actions even if they are only identifiable in broad terms. It is the nature and quality of those steps or actions which give the transaction its commercial or business character. In Visy Packaging, Middleton J identified this convergence as follows (at 852 [232]):

The time for determining the existence of a profit-making purpose is when the relevant transaction or transactions were entered into, which in these proceedings was 31 January 2001. As Gordon J said in Visy Industries USA Pty Ltd v FCT (2011) 2011 ATC 20-279 at 12,796 [78]; 284 ALR 455 at 471 [78]; 85 ATR 232 at 251 [78]:

It is well-established that a gain from a transaction will be assessable as ordinary income under s 6-5 of the ITAA 1997 if it was realised in an isolated business operation or commercial transaction in circumstances in which the taxpayer, at the time it engaged in the transaction, had the intention or purpose of making the gain: Westfield Ltd v FCT (1991) 28 FCR 333; 21 ATR 1398; 91 ATC 4234; 99 ALR 510, FCT v Cooling (1990) 22 FCR 42; 21 ATR 13; 90 ATC 4472; 94 ALR 121, FCT v Myer Emporium Ltd (1987) 163 CLR 199; 18 ATR 693; 61 ALJR 270; 87 ATC 4363; 71 ALR 28 and FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 12 ATR 692; 56 ALJR 240; 82 ATC 4031; 39 ALR 521.

143    There is no suggestion the intention or purpose in making a profit can develop after the transaction has been entered into. For gains made in an isolated business transaction to be treated as income, there must be a commercial transaction or business operation which is entered into with the relevant intention.

144    The operational confluence of the two criteria is not only temporal. The gain on the property acquired must be intended to be made or contemplated in or as part of the business operation or commercial transaction. In Westfield Ltd v Commissioner of Taxation (1991) 28 FCR 333 (Westfield) at 344-345, consideration was given to the level of detail which the profit-making scheme under s 25(1) of ITAA36 had to display when entered into:

While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in Steinberg. But, even if that go too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of the scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property which generates the gain must be acquired in an operation of business or commercial transaction “for the purpose of profit-making by the means giving rise to the profit”. [Emphasis added.]

145    Nevertheless, it is not necessary that every step which culminates in the generating of a profit has to be planned, foreseen or in contemplation at the time of entering into the transaction: Westfield at 344. The precise manner in which the gain is made does not have to be known in all its detail from the beginning. It is sufficient if there is a general plan, scheme, expectation or intention as to the deriving of profit. In Steinberg v Federal Commissioner of Taxation (1973) 134 CLR 640 at 700, Gibbs CJ accepted that:

I am in agreement with the view expressed by Mason J. that “it is not an essential element of a profit-making scheme in s. 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation”. Schemes may be precise or vague; every detail may be arranged in advance, or the working out of the plan may be left for decision in the light of circumstances as they arise. It is no objection to a plan that it allows room for manoeuvre. When property is bought with the purpose of making a profit in the easiest or most advantageous way that may present itself, and the taxpayer adopts “one of the many alternatives” that his plan leaves open, thereby returning himself a profit, he will rightly be said to be carrying out a profit-making scheme.

(citation omitted)

146    There reference to “scheme” was to a “profit making scheme” as that term was used in relation to s 26(a) of ITAA36 as it then was. Applied to the present legislation it is the commercial transaction or business operation which is entered into with the intention of making a profit. In this way, a gain on the sale of an asset in an isolated transaction will be income where it is made broadly in one of the ways contemplated by the profit-making commercial transaction or business transaction which was entered into.

147    It follows that an isolated transaction must be both a commercial transaction or business operation and entered into with a view to profit. Further, the method by which the profit is to be made must be one contemplated by the taxpayer as one of the alternatives which might arise in the commercial transaction or business operation by which the profit could be realised: Westfield at 334-335. The point was stated by Mason J in his decision at first instance in Steinberg at 670:

But in my view it is not an essential element of a profit-making scheme in s. 26(a) that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation. In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that the particular means by which the profit is to be made are left for subsequent decision.

When was the “transaction” entered into by Mr Greig?

148    At least initially, Mr Greig’s case was that all of his transactions in the Nexus shares, including those in 2011, were part of his commercial transaction or business operation on the one hand or, constituted a “dealing in Nexus shares” (the third ground) on the other. Whilst it is true that he did not seek to alter his return from 2011 to assert that the losses in that year were on account of income, his case was that his business commenced when he first started acquiring those shares. These proceedings, however, only concerned the taxation treatment of the losses sustained on the shares in the 2015 year, which related to those acquired from 28 March 2012 to 9 May 2014.

149    It is not unfair to say that the precise case advanced by the appellant as to when the alleged commercial venture commenced was somewhat fluid. On occasion, it was said that the commercial venture included the acquisition and sale of Nexus shares in 2011 but, for the purposes of this application the taxpayer was inclined to “let that loss go and just focus on phase 2, from 2012 onwards”. In the written submissions it was suggested that Mr Greig decided to pursue a strategy of buying and selling shares on the stock market for the purposes of realising short term gains. It was next said that, “Mr Greig engaged a stockbroker, Mr Warwick Foot, to assist him in carrying out his profit-making objective” and that Mr Greig first acquired shares in Nexus in 2011, being the so-called Phase One stage of the profit-making objective. All that tends to suggest the alleged venture commenced in 2011. The juxtaposition in the appellant’s written submissions of the assertion that Mr Greig decided to pursue the identified strategy with the following assertion that he engaged Mr Foot to assist him in carrying out the strategy is apt to give the misleading impression that the engagement of Mr Foot was for the purposes of the claimed venture. In fact, as the affidavit of Mr Greig reveals, Mr Foot and FSS Advisory were engaged in around January 2008, and the alleged plan of acquiring shares to sell after they increased in value was allegedly put into place around that time. Later in his affidavit Mr Greig asserts that he put his alleged Profit Target Strategy into effect in 2011. Although from that time he acquired shares in several different companies, he claimed that only the Nexus shares were those which were the subject of the strategy.

150    Ultimately, the precise commencement of the alleged venture is difficult to identify. This seems to be because Mr Greig was not aware that he was engaging in such a strategy until after he had consulted his accountants following the sustaining of significant losses in the 2015 income tax year.

151    On the other hand, the appellant by his Counsel said before the primary judge that:

Our submission, your Honour, is that the venture was embarked upon in March 2012.

And:

It would have been impossible at that time to predict what precise things would have to occur in the course of realisation profitably of the shares, but as it turned out, a number of things had to be done that we say, taken together, constitute the commercial transaction. Our submission is that the venture was a venture in relation to the acquisition and profitable exploitation of shares in Nexus Energy and therefore all of the share acquisitions were part of the venture and the venture embraced all of the events that occurred from March 2012 to December 2014.

152    In the course of submissions to this court it was said that the case being advanced was that the venture commenced in March 2012, which is referred to as Phase Two of the strategy.

153    In some respects, the appellant’s formulation of his case is somewhat artificial and not consistent with his affidavit evidence. In his affidavit of 24 October 2017, Mr Greig identifies his intention in 2008 on engaging Mr Foot of acquiring shares which he perceives are undervalued and are likely “outperform” over the next 12 months and increase in value. He remitted to Mr Foot $1.2 million for this process to begin. Mr Greig also said that in 2011 he was making plans for his retirement and wanted to have a large amount of cash when he did so. He said that his plan to achieve this was through buying and selling shares in relatively large volumes which his substantial cash reserves would enable him to do. His strategy was to “select stocks whose market value was likely to increase in short spaces of time”. He identified the apparent causes of the increase in value as being the company being undervalued in the market, the potential of the company’s business to experience rapid growth, the company becoming a target for a corporate takeover, investors taking a favourable view of the performance of a particular industry or sector of the market, or some combination of these matters. At paragraph 25 of his affidavit he said:

25    In selecting shares to purchase, my aim was to find stock that I could acquire and then sell at a profit within period of several months, or even shorter period, depending on the circumstances of the individual company. I wanted to be able to purchase shares, sell them quickly at a profit upon the happening of a liquidity event (such as the announcement of a takeover bid), and then use the proceeds to make other trades. The high degree of liquidity in the stock market appealed to me, because it meant that I could react quickly to changing circumstances and sell out of positions if it appeared to me that more money could be made by purchasing different stock.

154    Again, his affidavit evidence suggested the Profit Target Strategy, to the extent to which it actually existed, commenced as early as, at least, March 2011.

155    In any event, and despite the fluidity of his case, for the purposes of the appeal it has been assumed in Mr Greig’s favour that the transaction in question commenced on 28 March 2012. However, it ought to be kept in mind that the appellant expressly rejected the proposition that the numerous purchases of Nexus shares from 28 March 2012 to 9 May 2014 could be separated or isolated into several groups of purchases. The case advanced to the primary judge and to this Court was “that the venture was embarked upon in March 2012” and that it constituted each and every transaction in which Nexus shares were acquired.

The activities which are relied upon as constituting the venture

156    Before this Court Mr Sullivan SC identified the activities which Mr Greig undertook in the period from 2012 to 2014 as demonstrating he was engaged in a commercial transaction or business deal. It was submitted that these activities, including his acquisition of a large shareholding, show that Mr Greig was “not a passive investor but was a significant player in relation to the potential takeover of Nexus”. There was no attempt to define the expression “player” as it was used in that context. Certainly, given his large shareholding, he had much to gain or lose depending on the nature of any takeover offer made, although that only put him in the position of a large investor. He was not, himself, involved in any activities surrounding Nexus securing a takeover offer for its shares save until he acquired shares for the purposes opposing the SGH scheme. However, in essence, the case theory advanced was that he had engaged Mr Foot who, on his behalf, also engaged in a number of the activities on which he relied as establishing the existence of business activities.

157    The activities specifically relied upon as supporting the assertion that Mr Greig was involved in business activities were, in summary:

(a)    Firstly, that there were 64 acquisitions of shares in Nexus over a period of two and a half years which involved the expenditure of $11.85 million and that at the end of those transactions Mr Greig held approximately 10% of the issued capital.

(b)    Second, that Mr Greig monitored the price of Nexus shares, its public announcements and read research reports and broker analyses of the company.

(c)    Third, Mr Greig engaged Mr Foot as a professional advisor to assist him in his plan. The submission was that he made use of Mr Foot “as an intermediary to attend Nexus meetings and to deal, on his behalf, with Nexus management”. Other activities relied upon included telephone discussions between Mr Foot and Nexus’s CEO, Mr Martina, in relation to proposed takeovers, which commenced in around June 2012; Mr Foot being asked to attend the annual general meeting of Nexus in November 2012; sending information to Mr Greig; attending a Nexus investment presentation on behalf of Mr Greig; having discussions and meetings with a prospective bidder for the company; and attempting to secure Mr Greig as a substantial shareholder.

(d)    Fourth, that from about May 2014, Mr Greig attempted to fend off the takeover attempt by Seven Group Holdings by criticising the bid in the media and the valuation on which the offer was made. He also publicly criticized the Nexus management in relation to the proposed takeover and, in particular, the CEO of Seven Group Holdings, who had also been the Chairman of Nexus’s board of directors. Mr Greig promotion of the opposition to the bid had the consequence that it was voted down on 12 June 2014.

(e)    Fifth, that in late 2014, Mr Greig opposed the DOCA in which he expended in excess of $500,000 in a failed court bid to prevent the bid being accepted.

158    It was submitted that these activities disclosed his intention when he entered into the transactions to do whatever was necessary to advance his profit-making purpose. It was submitted that this was evident from an early stage, being June 2012, when Mr Greig asked Mr Foot to speak to Mr Martina.

159    However, the appellant’s attempt to create, ex post facto, a commercial transaction or business operation from conduct engaged by him as an investor who sought to protect his investment, cannot succeed. Firstly, other than the acquisition of shares, none of the other steps relied upon were identified by Mr Greig as being in contemplation in any way whatsoever at the commencement of the strategy. Indeed, even the first step cannot be easily identified as one within the contemplation of Mr Greig as at 28 March 2012. Although there were a number of purchases of Nexus shares involving a significant amount of money, that was equally the act of a private investor, albeit one who was investing on a large scale. Moreover, the fact that Mr Greig would make 64 purchases of Nexus shares was not even generally contemplated from the start. The investment strategy was said to be applicable to shares in any company which appeared to have short term growth even though, ultimately, the appellant claimed it was only applicable to Nexus shares.

160    Similarly, the monitoring of the share price and consideration of ASX announcements do not stamp the purchases with a commercial or business character. Such acts are consistent with those of an investor who seeks to acquire property at the best price so as not to make a loss. As Mr Greig acknowledged in his evidence, he acquired all shares in his portfolio because he “saw value” in them. He also agreed that he read reports and research relating to all the shares in his portfolio.

161    The reliance on the engagement of Mr Foot to advise on shares was also not a relevant part of any commercial transaction or business operation. He had been engaged in 2008 and from that time provided advice and assistance to Mr Greig across the whole of Mr Greig’s portfolio. After Mr Greig had spent approximately $4 million on acquiring Nexus shares, Mr Foot had a number of discussions with directors and executive officers at Nexus attempting to ascertain information about Nexus’ proposed course of action. Needless to say, such information would impact Mr Greig’s decision to sell or retain his shares. On occasion, he attended some meetings, including shareholder meetings. However, having established a sizeable stake in the company, it was appropriate for Mr Greig to ascertain what he could about its future conduct so as to determine whether to invest further or to dispose of the shares. None of that would turn the information gathering exercise into a commercial venture. They were the acts of an investor who was interested to know when to sell. Moreover, they were not suggested as being acts which were contemplated when the “transaction” was entered into. The evidence shows that the Profit Target Strategy was to purchase shares and sell them in the short term when the share price increased. It was not said that Mr Greig intended or contemplated active involvement in the affairs of companies in which he held shares so as to increase the value of the shares.

162    Equally, the conduct of Mr Greig in 2014 in fending off what he thought was an inadequate takeover bid and or voting to defeat the DOCA did not suggest he was engaged in a commercial or business activity. Voting is a right of all shareholders who are entitled to exercise it when the opportunity arises. In any event, engaging in activities such as these were not part of any scheme, plan transaction or operation which Mr Greig had intended to pursue.

163    In the course of address before the primary judge, Mr Sullivan SC acknowledged that these activities were not anticipated or contemplated when the alleged strategy was commenced, and that was obviously so. The following part of the transcript is relevant:

MR SULLIVAN: The profit-making purpose, we would say, stands independently of that, and that’s clear.

HIS HONOUR:     Yes.

MR SULLIVAN: The matters that I’m averting to here are the matters that go to make up - - -

HIS HONOUR: The business operation.

MR SULLIVAN: - - - the — yes, the business operation. The commercial transaction. So if they’re matters that might not have been anticipated at the outset but they become what was the Nexus venture over a period of two and a-half years, finishing with the applicant having to reach into his pocket and spend $500,000 on participating in Supreme Court proceedings to try and keep his shares, the whole sequence of activity from March 2012 to December 2014 became the activities that made it a commercial transaction, and it doesn’t matter if they were not contemplated at the outset.

What was contemplated was that the shares would be acquired and that they would be sold hopefully pursuant to some takeover transaction, and takeover would result from entitles in the oil and gas market being interested in buying Nexus because of its interest in the Crux asset, and the venture was really, from Mr Greig’s point of view, an attempt to utilise Nexus for the purpose of accessing the underlying value of the Crux asset, which a lot of the documents indicate Mr Greig thought was inadequately reflected in the share trading price on the exchange of Nexus. He kept — adhered to the view that it was undervalued because the value of the Crus resource wasn’t reflected.

(emphasis added)

The steps taken were not part of a commercial transaction or business operation

164    One matter conspicuously absent from any statement by Mr Greig as to the substance of his Profit Target Strategy is the suggestion that he would engage in any activity other than the buying and selling of shares. As at 28 March 2012, it was not part of his intended strategy to undertake any activity to cause the value of the shares he acquired to increase in value or to not decline in value. The plan simply involved acquiring shares in companies which, by the companies’ positions in the market or by their operations, would, independently of any action on his behalf, increase in value. The strategy as described by Mr Greig was nothing more than the investment in shares which he anticipated would increase in value even if that anticipation involved elements of speculation or informed assessment on his part. As his affidavits disclose, he purchased shares in Nexus when he believed that the circumstances pertaining to it evidenced that the value of the shares would increase in the near term. That was true even when the value of the shares had declined significantly. His plan, to the extent to which there was one, was merely to acquire them at an opportune time and sell them when they increased in value. As a passive investor, his intention was to allow market forces to increase the price of the Nexus shares such that when it reached an appropriate level he would sell. This is expressed in paragraphs [43] and [44] of his affidavit of 24 October 2017 where he said:

43.    In paragraphs 46 to 169 below, I depose to the circumstances in which I purchased a total of 134,893,686 shares in Nexus in the course of 64 individual transactions that were made between March 2012 and May 2014.

44.    As I explain below, on each occasion that I purchased Nexus shares, I did so with the intention of making a profit from the sale of those shares in the short term, in line with my Profit Target Strategy.

165    The affidavit material reveals that, in relation to several of the Nexus shares purchases in the period from 2012, Mr Greig spent some time considering research and information about Nexus, its business operations and the potential for an increase in the value of its share price. By mid-2013, the motivation for the acquisitions of Nexus shares included a desire to be more informed than a less substantial shareholder might be as to the intentions of the company and negotiations with potential takeover bidders and to have some influence on the decisions of the board. Nevertheless, Mr Greig claims that his primary motivation in acquiring them was to sell them in the short term for a profit.

166    The consequence of the above is that, at the time the transaction was entered into, being the first acquisition of shares, no commercial transaction or business operation existed. The mere intention to sell the shares when a sufficiently higher price was offered was not such a transaction, as has been identified above.

167    In an attempt to colour Mr Greig’s acquisition of shares with some characteristic of commerciality or business dealing it was submitted that he had contemplated the selling of his shares in a number of different ways. It was said that he may have sold on the market, to an acquirer through on a takeover bid or by private placement such that:

the Nexus operation or transaction was sufficiently broad in scope to encompass the steps which Mr Greig took towards the latter part of phase two, including communicating with Nexus’ management about a takeover, becoming a substantial shareholder and incurring legal fees in connection with the Supreme Court proceedings.

168    In this way, it was submitted that the subsequent steps taken by Mr Greig in relation to the prevention of the acquisition of the shares through a scheme of arrangement or a compulsory acquisition on the passing of a DOCA were part of a strategy which Mr Greig would achieve “by taking all steps available to him to bring about the mechanism by which he intended to make a profit by selling his shares, being a takeover of Nexus.”

169    That submission is not tenable, least of all because it fails to accord with the facts. Mr Greig acquired the shares with the intention that he would sell them at a profit. Whilst he may well have contemplated that his disposition of the shares would occur in one of the identified scenarios, there was nothing in the evidence to suggest that he intended to be anything more than a passive investor in a company whose shares were undervalued and that, eventually, a third party would be prepared to acquire them at a higher price. Although the shares might be sold through alternative avenues, that did not elevate a mere passive investment into a commercial transaction or business operation. None of the activities involving speaking to persons in influential positions in Nexus, the opposition to schemes of arrangement or DOCAs or acquiring an influential portion of the company’s shares were contemplated by him as part of the alleged Profit Target Strategy when he first started acquiring Nexus shares, and there is no cogent evidence to the contrary. They were not part of any contemplated or intended commercial transaction or business dealing by him.

170    There is no doubt that the circumstance surrounding the purchase of Nexus shares evolved subsequent to the initial acquisitions. Before May 2012, when the first action in fulfilment of the alleged plan is said to have occurred, being Mr Foot speaking to Mr Martina, Mr Greig had expended in excess of $4 million in the purchase of Nexus shares. From the trading halt in July 2011 there occurred a series of unfortunate events for Nexus as the company spiralled down and its share price worsened. These were not negatively perceived by Mr Greig, who spent further substantial sums on increasing his holding. Although he took action in March 2014 to prevent the SGH takeover, that reactive step was not something contemplated at the time the transaction was entered into and was a response to an event which would have caused him substantial loss. Whilst the worsening circumstances surrounding Nexus had the consequence that Mr Greig became more active in attempting to protect his investment, those activities were nothing more than the actions of a person seeking to prevent a loss occurring.

Mr Greig’s actions were not part of any commercial transaction or business operation

171    Ultimately, the insurmountable hurdle for Mr Greig is that, when the transaction was first entered into, it was not a commercial transaction or a business operation and, whilst he may have intended to profit from it, that neither gave it the necessary commercial or business quality nor had the consequence that anything he did subsequently retrospectively clothed it with that quality. The attempts to influence the decisions of the Nexus board of directors, the opposition to the schemes of arrangements or the DOCA, or any of the other activities now relied upon by Mr Greig, were not part of, nor contemplated by, the “transaction” entered into merely because Mr Greig intended to make a profit from the purchase of the shares.

172    The primary judge took the view that, whilst Mr Greig involved himself in a number of activities in relation to the Nexus shares, he did so to protect the value of his investment, and that the evidence did not establish that the taking of these steps was perceived as likely when the earlier substantial purchases were made. His Honour observed (at [147]) that “[w]hilst later events might be probative of the existence of an earlier intention, they cannot supply an intention which did not exist”. That conclusion has not been shown to be in error in any way. Indeed, it is plainly correct. Consequently, the second ground of appeal must also fail.

173    As this case can be determined upon the objective facts, there is no need to reach any conclusion as to the primary judge’s finding that Mr Greig tended to exaggerate the idea that he was engaged in a business operation with respect to Nexus shares. That charitable finding was the subject of criticism by the appellant although it was obviously correct. In order to bring the circumstances of this case within s 8-1(1) or s 8-1(2), some reconstruction of the known facts was required and Mr Greig sought to do that.

Did Mr Greig carry on a business of dealing in Nexus shares?

174    The appellant also claimed the activities engaged in by him were sufficient to establish that he was carrying on a business of dealing in Nexus shares. Although the appeal against the primary judge’s finding in this regard was only lightly touched upon at the hearing, it is necessary to deal with it.

175    Importantly, it was not alleged that Mr Greig was carrying on a business of dealing in shares generally or in those shares which he acquired in the period between 2012 and 2014. It was alleged that he was only dealing in Nexus shares. The limited nature of the asserted business is important in the context of Mr Greig’s other activities and share acquisitions He was employed on a full time basis as a senior engineering executive with Bechtel and his position necessitated that he spend significant time away from his home. During the relevant period he spent more than 200 days of the year absent from his home. However, the mere fact that he spent time away did not weigh heavily against the proposition that he was engaged in the business in which he claimed to be. Given the nature of modern communications and the ability to send and access large amounts of information instantaneously, his absence from his usual place of residence is somewhat neutral in terms of his physical ability to carry on business. Perhaps the more relevant point is that the requirement to travel for significant periods was indicative of the intensity of his employment obligations. It suggests the proportion of each day he was required to devote to his employment was somewhat more than eight hours between 9.00 am and 5.00 pm. Whilst it was obviously not necessary for Mr Greig to devote all his time, or even substantial time, to the alleged business, the requirements of his employment suggest that, at best, the business could only have been conducted on a part-time basis. Again, that is by no means determinative, but it is relevant, as it diminishes the relevance of actions which were taken by Mr Greig or by Mr Foot on his behalf.

176    To the same effect is the fact that he was an investor in a number of other companies at the same time. He received advice in relation to those shares from his advisor, Mr Foot, and he read market information in relation to those companies as well. To the extent to which he had spare time from his work commitments, it was not solely devoted to his claimed business of dealing in Nexus shares. His investment with other companies in respect of which he researched and considered reports about, tends to diminish the importance he now attaches to his consideration of the financial position of Nexus, in the sense that it was something which he did in relation to other companies in which the was apparently a passive investor. Again, the artificiality of this ground starts to emerge.

177    In relation to this ground, both parties relied on Mr Greig having engaged FSS Advisory to provide advice in relation to the acquisition and sale of shares in support of their respective cases. The Commissioner pointed to the statement by FSS Advisory that the nature of its business is to provide “stockbroking and financial planning services to high net worth individuals and self-managed superannuation funds”. In essence, it provides services which are of a domestic or personal nature rather than services to those engaged in a business enterprise. The engagement of FSS Advisory is neither more nor less than any other private individual might do in the management of their investments. Relevantly, the engagement of FSS Advisory was not solely for the provision of advice and assistance in relation to Nexus shares, but related to the acquisition of shares in a range of companies. It may be that, as matters transpired, more attention was devoted by Mr Foot to Nexus shares, however, that was not planned or foreseen as at the date of his engagement.

178    The only real submission advanced by the appellant in respect of ground three was that the primary judge erred in finding that the effort, repetition and regularity of Mr Greig’s conduct was consistent with investment activity rather than with carrying on a business. However, as the above reasons show, whilst the investment in Nexus was large and involved a substantial amount of money, and the actions taken by Mr Greig to protect it in 2013 and 2014 were far from imprudent, it did not disclose conduct in the nature of business activity.

179    Additionally, as the learned primary judge observed, there is difficulty in concluding Mr Greig was engaged in the business of dealing in Nexus shares when he did not sell any in the relevant period. In any event, the primary judge identified a range of matters which he correctly decided were indicia of whether a business was being carried on: Ferguson v Federal Commissioner of Taxation (1979) 9 ATR 873 at 876-7. The “regularity, effort and repetition of conduct” is one of them.

180    The primary judge concluded that there was no evidence of the usual activities which one would associated with the carrying on of a business. At [168] his Honour said:

Mr Greig did not rely in the proceedings on any written business plans, methodologies or similar documents or seek to tender transactional accounts or records said to have been kept by him (personally) as records of his business of dealing in Nexus shares. There was no evidence he treated the Nexus shares as trading stock. Rather, such as they were, the records with respect to the transactions or dealings in Nexus shares were those of his advisors, maintained in their businesses, and these records did not relevantly distinguish the Nexus shares from the rest of Mr Greig’s portfolio which they also managed.

181    In a similar way it was held that Mr Greig did not carry out his alleged “dealings” in an especially business-like manner. At [182] it was said:

[Mr Greig] did not register as a business for the purposes of conducting his dealing activities and nor did he form an entity to conduct the activities, not that either of these is a prerequisite. He did not keep separate records. Rather, the Nexus shares were dealt with or managed by FSS Advisory together with the remainder of Mr Greig’s portfolio. That Mr Greig took an increasing interest in Nexus because of his increasing exposure to that particular shareholding does not create a business of dealing in Nexus shares.

182    The primary judge noted that the transactions entered into by Mr Greig involved a large amount of money and 64 transactions, but also correctly observed that size and scale are relative matters, that Mr Greig had considerable resources at his disposal, and there was no evidence of his relative financial position to the investment made. In that respect, the quantum of capital alone did not turn the acquisitions into a business. His Honour also identified that the transaction was not in the nature of a “commercial transaction or business operation”, as has been discussed above. Indeed, as has been shown, the activities were in the nature of the making of a substantial investment followed by the taking of steps to protect it.

183    It was open to his Honour to conclude that, in the circumstances, those other considerations characterised Mr Greig as an investor rather than as a person carrying on a business, and the appellant advanced no argument to the effect that conclusion was wrong. It follows that, even if the criterion of “effort, repetition and regularity” were determined in favour of the appellant, as Mr Sullivan SC submitted it should be, the array of other factors indicating the absence of a business would, nevertheless, have resulted in the same conclusion. In addition, the factors considered by his Honour as pointing towards investment activity rather than business dealing give colour to the criterion of “effort, repetition and regularity” and, in the circumstances, his Honour’s finding that this too was consistent with investment has not been demonstrated to be in error.

184    It follows that there was no error in the conclusion that the appellant was not carrying on a business of dealing in Nexus shares and this ground of appeal must also be dismissed.

Conclusion

185    None of the grounds agitated on appeal can succeed. The appeal must be dismissed and the appellant must pay the respondent’s costs.

Associate:    

Dated:    2 March 2020

REASONS FOR JUDGMENT

STEWARD J:

186    The appellant (“Mr Greig”) purchased shares in Nexus Energy Limited (“Nexus”) on 64 occasions over a 25-month period at a cost of $11.85 million. He also spent $507,198 on legal expenses in court proceedings in which, along with others, he sought to contest a “Deed of Company Arrangement” which provided for the transfer of all Nexus shares to a third party for nil consideration. Mr Greig lost that case. Upon the transfer of his shares in the 2015 financial year, Mr Greig incurred a loss of $11.85 million. The character of that share loss and the legal expenses for income tax purposes is disputed. Mr Greig claims that the aforementioned amounts are of a revenue character and that he is entitled to a deduction pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the “1997 Act”). The respondent (the “Commissioner”) disagrees with that characterisation. He contends that both the share loss and the legal expenses are affairs of a capital nature. The primary judge found for the Commissioner. The taxpayer appeals that decision to this Full Court.

Deductibility under s 8-1 of the 1997 Act

187    Section 8-1 of the 1997 Act relevantly provides as follows:

General deductions

(1)    You can deduct from your assessable income any loss or outgoing to the extent that:

(a)    it is incurred in gaining or producing your assessable income; or

(b)    it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note:    Division 35 prevents losses from non‑commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2)    However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)    it is a loss or outgoing of capital, or of a capital nature; or

(b)    it is a loss or outgoing of a private or domestic nature; or

(c)    it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d)    a provision of this Act prevents you from deducting it.

…

188    Mr Greig contends that the share loss and the legal expenses are deductible under s 8-1 on one of two bases:

(1)    first, those amounts are deductible because they were incurred in a “business operation or commercial transaction” entered into for the purpose of making a profit, such as to fall within the principle recognised by the High Court in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 209-210:

… a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income … the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction [does not] preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. [(1982) 150 C.L.R. 355, at pp. 366-367, 376]. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

(2)    secondly, and alternatively, those amounts are deductible because the amounts were losses or outgoings “necessarily incurred in carrying on a business” of dealing in Nexus shares.

189    The Commissioner contends that Mr Greig’s acquisition of Nexus shares did not have the “characteristics of a business operation or commercial transaction, but were instead redolent of private investments on capital account” and therefore did not engage the principle enunciated in Myer Emporium. Further, the Commissioner denies that Mr Greig was carrying on a business of dealing in Nexus shares. As already mentioned, he also contends that both the share loss and the legal expenses were outgoings of capital, or of a capital nature (s 8-1(2)(a)). He does not rely on s 8-1(2)(b).

190    It appeared to be agreed that if the Myer Emporium principle applied here, the share loss and legal expenses would be deductible pursuant to s 8-1. The parties also agreed that the deductibility of the legal expenses would turn upon the characterisation of Mr Greig’s share loss.

Facts

191    During the relevant period in which Mr Greig acquired his shares in Nexus, he held very senior executive roles within the Bechtel group of companies from which he ultimately retired in 2015. As the learned primary judge observed, he was extremely busy in performing his duties at Bechtel. In 2008, Mr Greig retained Mr Foot of FSS Advisory, a firm of stockbrokers and financial advisers, to provide advice and to buy and sell shares on his behalf. From that time onwards, Mr Foot made recommendations to Mr Greig to buy and sell listed shares. Mr Greig spent millions of dollars trading in shares (other than the shares in Nexus). The shares were held for periods ranging from days to a number of years. Mr Greig treated and still treats, for income tax purposes, the gains and losses he has made on these shares as being on capital account.

192    Mr Greig had also originally treated his shareholding in Nexus as being on capital account. Following the making of his loss in the 2015 financial year, and after seeking advice, he contended for the first time that the Nexus shares had instead been held on revenue account.

193    It is important to note that Mr Greig did not contend that he was generally engaged in a business of trading in shares. Rather, he contended that his trading in the Nexus shares either constituted a discrete business, or a discrete business operation whereby the shares were purchased for the purposes of profit-making by sale. Whilst detailed evidence concerning the trading in other shares was not before the Court, it seems artificial to divorce, in terms of function and purpose, Mr Greig’s trading in shares in the way he contended. On the material before the Court, to which I shall return, the distinction appears to be illusory.

194    Subject to one important matter, the facts found in detail by the learned primary judge at [20]-[91] were not in dispute, as distinct from their characterisation. I gratefully adopt them.

195    For the moment, it will suffice to give a more generalised account of what happened. Later in these reasons, when it is relevant to do so, I consider dispositive aspects of the evidence and the findings made below in more detail.

196    Mr Greig initially told Mr Foot in 2008 that he wanted him to find undervalued stocks to be purchased and then sold quickly. In 2011, he adopted what was called the “Profit Target Strategy”. This is discussed in more detail below. It was a key feature of the taxpayer’s case that this strategy was only ever used to purchase Nexus shares.

197    Nexus shares were acquired in two phases.

Phase 1

198    Mr Foot first told Mr Greig about this stock in January 2011. Nexus had recently acquired an option giving the company time to extract “liquids” from the “Crux resource”. That resource comprises a gas field in the Browse Basin held, at the relevant time, by Nexus together with Royal Dutch Shell (“Shell”) and Osaka Gas (“Osaka”). Mr Foot told Mr Greig that the shares were trading below their real value. Mr Greig, after looking at some research, decided to purchase Nexus shares, with the intent of selling them within a period of some months upon a material increase in their value. That did not happen. Their share price declined. Mr Greig sold his shares at a loss. For income tax purposes the loss was reported as an affair of capital.

Phase 2

199    In the second phase, from 28 March 2012 to 9 May 2014, Mr Greig purchased Nexus shares on 64 occasions for $11,851,762 in total. He monitored the price of Nexus shares on a daily basis; read all Nexus announcements; reviewed the press about Nexus; read research reports about Nexus; and spoke to Mr Foot every couple of weeks or after the issue of Nexus announcements. This second phase commenced when Mr Foot told Mr Greig in March 2012 that Nexus had entered into a non-binding agreement with Shell and Osaka to develop the Crux resource. Mr Greig read the announcement concerning this and an Australian Financial Review article and decided to buy Nexus shares once again. As was the case with the first phase, he wanted to make a profit by selling the shares within a period of several months.

200    Thereafter, the Nexus share price dropped. Mr Greig, however, bought more shares. He and Mr Foot remained confident. In their view, the joint venture with Shell and Osaka, if finalised, would be a “strong catalyst” for driving growth in Nexus’ share price in the ensuing 12-month period. Consequently, they chose to “tough it out”. Mr Greig’s confidence was also partly based upon the appointment of a new Chief Executive Officer (the “CEO”) at Nexus.

201    In July 2012, Nexus shares were placed in a trading halt. An announcement about the proposed joint venture was expected soon. In August 2012, Mr Foot attended a presentation for Nexus shareholders and then gave Mr Greig a copy of the “slide deck” that had been used in briefing the shareholders. Mr Greig read the slides and remained confident. The appointment of a new chairman for Nexus in September 2012 gave Mr Greig further confidence.

202    In October 2012, the CEO of Nexus called Mr Greig because he was a “large shareholder” and told him about a Thai company that had been offering to buy Nexus shares. He urged him to refuse any such offer as it was too low. Mr Greig continued to hold onto his shares.

203    Mr Foot attended the Nexus Annual General Meeting in November 2012. Nexus announced that it had received expressions of interest in relation to a sale of its interest in the Crux resource. Once these discussions with potential bidders were confirmed by Mr Foot, Mr Greig told him to buy more Nexus shares on his behalf. More shares were purchased in March 2013 in the belief that the market was finally appreciating the value of Nexus shares.

204    With the possibility of a further sale of the Crux interest, or Nexus itself, in June 2013, Mr Greig decided to buy more shares so that he would thereby become a substantial shareholder. This would give him, he thought, a greater say over any future sale process. More shares were accordingly purchased.

205    Thereafter, with the “sale process” being conducted by Nexus’ management “continuing”, even more Nexus shares were purchased.

206    In February 2014, the chairman of Nexus resigned. Production at Nexus’ Longtom gas processing facility was stopped. There was an immediate trading halt on Nexus shares. Mr Greig, nonetheless, again remained confident about the prospects for Nexus’ share price. He thought that a takeover of Nexus was imminent, and that the price of his shares would increase upon the announcement of any takeover bid. An offer was then made, by a company called Seven Group Holdings (“SGH”), but it was for only 2 cents per share.

207    In May 2014, Mr Greig instructed Mr Foot to purchase even more shares upon the lifting of the trading halt. Shortly after this, a scheme of arrangement was announced pursuant to which SGH would acquire all of the shares in Nexus. According to the Scheme Booklet, if the scheme was not approved and absent an alternative proposal that provided adequate funding, Nexus would be placed into voluntary administration. SGH was a secured creditor. Mr Greig bought more shares. His plan was to block the SGH bid and find an alternative buyer.

208    In June 2014, the scheme was voted down at a meeting of Nexus shareholders. Mr Foot attended on behalf of Mr Greig. The board of Nexus resolved to appoint voluntary administrators. In August 2014, Nexus’ creditors commenced proceedings in the Supreme Court of New South Wales to effect the transfer of all Nexus shares for nil consideration pursuant to a Deed of Company Arrangement. Mr Greig was a party to those proceedings. He incurred legal expenses of $507,198, fighting the proposed Deed. In December 2014, the Supreme Court approved the Deed.

209    Mr Greig’s shares were compulsorily transferred for nil consideration, and in the year ended 30 June 2015 he claimed a revenue loss of $11,851,762.

The taxpayer’s intentions and purpose in acquiring Nexus shares

210    Two further matters should be mentioned.

211    First, the taxpayer gave evidence below and was cross-examined. The learned primary judge had the benefit of seeing and hearing him, and using that advantage, found that the taxpayer had a tendency “to exaggerate the idea that there was a business operation” in relation to the Nexus shares. This finding was not itself challenged. Rather, it was submitted that the taxpayer’s answers were not directly relevant to the objective ascertainment of whether there was here a “business operation or commercial transaction”. Subject to the following qualification that submission should be accepted.

212    The qualification is that, answers given by an individual taxpayer about his or her purpose in entering into and carrying out a transaction, and about the scope and nature of an activity, may in a given case, form part of the “wide survey and an exact scrutiny” of a taxpayer’s activities needed to determine the correct characterisation of receipts and outgoings: Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 per Dixon and Evatt JJ. cited in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [69] and Federal Commissioner of Taxation v Stone (2005) 222 CLR 289 at 297 [19]. See also Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 370 per Gibbs C.J.

213    In Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1, the principal issue before the Court was whether a taxpayer company had acquired property for a profit-making purpose. The controlling directors had been called to give evidence about the issue of purpose. In that respect, Hunt J. observed at 6:

… I have taken [the directors’] evidence into account as well in determining whether or not the property was acquired by the taxpayer for the relevant dominant purpose. The inquiry is thus into the state of mind of these men at the time the land was acquired. The state of a man’s mind is as much a fact as his state of digestion … So far as these men are concerned, their state of mind may therefore be established by their direct statements as to what their state of mind was and by evidence of their words and acts which point to or identify that state of mind …

…

Such evidence is admissible even though self-serving and whether or not the statements and acts are substantially contemporaneous with the time when the state of mind is relevant …

(Citations omitted.)

214    A trier of fact in these types of cases must nonetheless treat a taxpayer’s evidence, especially as to intention and purpose, with some caution. As Fullagar J. said in Pascoe v Federal Commissioner of Taxation (1956) 30 ALJ 402 at 403:

Where a person’s purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the “best” evidence, but, for obvious reasons, they must, as Cussen, J., observed in Cox v. Smail ((1912) V.L.R. 274, at p. 283), “be tested most closely, and received with the greatest caution”.

In my view, the learned primary judge’s observation about the taxpayer’s tendency to exaggerate demonstrated that his Honour did approach Mr Greig’s evidence with appropriate caution. His Honour did not otherwise expressly reject or accept the taxpayer’s evidence. Inferentially, that is because, in general terms, that evidence did not address the issue which was dispositive of the case below. That dispositive issue was whether the acquisition of Nexus shares constituted a “business operation or commercial transaction”. Resolution of that issue did not really turn upon the acceptance or rejection of primary facts, or upon answers given in cross-examination. Rather, it turned upon the characterisation of those primary facts.

215    Secondly, there was a submission made by the Commissioner that we should find that the taxpayer’s intention was not to hold Nexus shares for the purpose of short-term profit-making. Leaving aside the evidence of the taxpayer, and the primary judge’s finding at [20], there was ample evidence before his Honour which supported a finding that the taxpayer’s purpose in acquiring the shares in Nexus was for profit-making by sale, whether in the short term or long term. In that respect, Mr Foot, who was not required for cross-examination and whose evidence was not challenged, gave detailed evidence of the taxpayer’s plans, purposes and expectations when he was instructed to buy listed shares generally, and Nexus shares in particular. In relation to the acquisition of listed shares generally, Mr Foot’s evidence was that the taxpayer wanted him to find undervalued stock that he could acquire at decent volumes and then sell quickly in order to make a profit. This can be seen as follows at [14] and [34] of Mr Foot’s affidavit:

In around January 2008 I met with Mr Greig at his offices in Brisbane. We had a discussion in words to the following effect:

Greig:    “I want to find undervalued stocks that I can buy at decent volumes and then sell quickly in order to make a profit. I’m not looking for shares to hold in the long term.

….

I know quite a bit about mining and commodities and there are a lot of opportunities there. Have a look and tell me which stocks you like. I’m happy to start by putting in $1,200,000 and we can see how we go.”

Me:    “Ok, we can open up an account for you and get started right away.”

…

On or around 23 January 2012, I attended a meeting with Mr Greig and Mr Kretschmer at Bechtel’s offices in Brisbane. During the meeting, Mr Greig said words to the following effect:

Greig:    “I have received some decent bonuses from Bechtel and I expect the size of those bonuses to increase over the next few years, so I have quite a lot of cash available. I want to use those funds to buy shares that I can then sell at a profit within a couple of months or a year. Later on I can use some of those profits to invest in the managed funds that David [Kretschmer] is looking after for me.

[Mr Foot], I want you to look for stocks that I can make a profit on in the short term, so that I have more cash available to me when I eventually retire from Bechtel in the next couple of years.”

216    It would appear that the taxpayer’s intentions and purpose in acquiring Nexus shares was not materially different. Thus, Mr Foot deposed as follows at [28] of his affidavit in relation to Phase 1 of the acquisition of Nexus shares:

On or about 8 February 2011, I received a telephone call from Mr Greig, who said words to me to the following effect:

Greig:    “I want to buy shares in Nexus. The company looks to me to be worth a lot more than the current share price. If things continue to go well between Nexus and Shell, Nexus’ shares will probably go up in the next couple of months, and I could make some real money by selling at that point. Let’s buy a million shares.”

217    When the time came for the taxpayer to reacquire shares in Nexus (in Phase 2), his short-term profit-making purpose was again present. Thus, Mr Foot deposed at [40] of his affidavit as follows:

On 14 March 2012, I met with Mr Greig at his offices in Brisbane to discuss the results of my further research regarding Nexus. We had a conversation in words to the following effect:

Me:    “Everything that I have read confirms my opinion that Nexus’ shares are undervalued. Nexus could exercise the option to sell part of Crux within the next couple of months. If that happens, the shares will be worth a lot more than their current price of 22 cents.”

Greig:    “I agree. There will be people interested in buying the company now and if someone makes an offer, we could make a decent profit by selling the shares at that point. Let me have a think about it over the next couple of days and I will let you know when I have made a final decision.”

(Emphasis added.)

218    Thereafter, the taxpayer bought more shares in Nexus with a view to selling them at a profit, perhaps arising from a takeover of Nexus. Mr Foot gave the following evidence about those acquisitions (at [50], [73] and [77]):

On 11 May 2012, I attended a meeting with Mr Greig and Mr Kretschmer at the offices of Bechtel in Brisbane. During the meeting, Mr Greig said words to the following effect:

Greig:    “I’ve now got just under 15 million shares in Nexus. I think the shares are going to go up, and when they do, I’ll sell. That will hopefully give me a decent pile of cash for when I retire from Bechtel.”

…

On 16 and 31 October 2012, I attended meetings with Mr Greig and Mr Kretschmer at Mr Greig’s offices in Brisbane. During one of those meetings (I cannot presently recall which), we had a discussion in words to the following effect:

Greig:    “There is still a possibility that PTTEP will make an offer to buy my shares in Nexus. [The CEO] told me not to accept any offer around 25 cents, because I’ll get a better price if I let management conduct the sale process. I think he’s probably right about that. What do you think?”

Me:    “I tend to agree. It’s more likely they’ll get a better price if they sell all of the shares in the company at the same time.”

…

A short time after [23 November 2012], Mr Greig telephoned me and we had a conversation in words to the following effect:

Greig:    “What happened at the AGM yesterday?”

Me:    “The main takeaway was that Nexus is still in discussions with interested parties regarding the sale of the whole company, or the sale of Nexus’ interest in Crux.”

Greig:    “If that’s the case, then an offer will probably be announced pretty soon. Why don’t we buy another $1 million worth of shares.”

Me:    “OK, I will do that.”

219    In the face of a declining share price, the taxpayer’s purpose and intention remained unshaken. Mr Foot’s evidence was as follows (at [94], [109] and [122]):

On or about 13 June 2013, I met with Mr Greig at his offices in Brisbane. We had a discussion in words to the following effect:

Greig:    “I think it would make strategic sense for me to buy more shares in Nexus so that I become a substantial shareholder. That way, I can have more input on important decisions regarding the sale process. I’m a bit concerned that the management of the company may not be conducting the negotiations in a way that will maximise the immediate return to shareholders.”

Me:    “I agree. As I mentioned the other day, you will need to acquire just under 12 million more shares in order to be a substantial shareholder.”

Greig:    “OK, let’s do it. Go out and buy for me the number that I need.”

…

On or about 9 December 2013, I received a telephone call from Mr Greig, during which he said words to me to the following effect:

Greig:     “I still think there is going to be a takeover and that Nexus’ share price will go up. I want you to go out and buy another $1 million worth of shares for me.”

…

On 7 April 2014, I sent an email to Mr Greig asking him to call me to discuss Nexus … A short time after I sent the email to Mr Greig, he telephoned me and we had a discussion in words to the following effect:

Me:    “I think there is a lot of pressure on the ASX to lift the trading halt on Nexus’ shares, because people know about the SGH bid and the trading halt is stopping them from being able to buy a strategic stake in the company. I suspect that the trading halt will be lifted very soon.”

Greig:    “I want to buy more shares as soon as the trading halt is lifted.”

220    The taxpayer did not sell his Nexus shares in the short term. He held on to them. In my view, he did so in the belief that their value would ultimately be recognised by the market, such that he would then sell the shares at a profit. In other words, his intention to make a profit from sale never changed; however, the period of time required to secure that profit did change, contrary to the expectations of Mr Greig.

221    In my view, a finding that the taxpayer bought shares in Nexus for the purpose of profit-making by sale is also corroborated by the objective circumstance that Nexus did not have retained earnings from which it could pay dividends to its shareholders. If Mr Greig was to profit from holding Nexus shares, and that was his objective, he would have to sell them. The shares were not acquired to be held over time for their dividend yield: c.f. Federal Commissioner of Taxation v Radnor Pty Ltd (1991) 22 ATR 344.

222    The finding is also corroborated, at least in part, by the fact that the taxpayer planned to retire. He proposed to use his cash proceeds from the sale of shares to invest in managed and superannuation funds. Inferentially, and for that purpose, the taxpayer was willing to hold his Nexus shares for so long as it took to realise the profit he wished to earn. However, consistently with the instructions he gave to Mr Foot, both generally in relation to his wider share portfolio and in particular with respect to Nexus, it was his expectation or hope that profits would be realised in the short term or at least before retirement. This is an issue to which I will return.

223    Finally, I note that a schedule of the trades in the other shares was before the Court. It showed that from 2007 to 2014 the taxpayer purchased parcels of listed shares on 218 occasions (he purchased Nexus shares on a further 64 occasions). He sold approximately 180 of these. He expended in aggregate about, by my reckoning, $26 million. A great many shares were held for only months; a very great deal were held for less than two years. It would, in my view, and generally speaking, be surprising if such trading, with its scale and periodicity, and with its express purpose of profit-making, could be characterised as an affair of capital.

The Decision Below

224    In a very carefully prepared judgment, the learned primary judge made the following critical findings and conclusions:

(1)    first, that the Nexus shares had been acquired by the taxpayer for the purpose of obtaining a profit or gain from their subsequent sale;

(2)    secondly, that the acquisition of the Nexus shares was nonetheless not made in a “business operation or commercial transaction” or “commercial dealing” within the Myer Emporium principle. The acquisitions went no further than a private investment in listed shares; and

(3)    thirdly, that the purchase of the Nexus shares did not constitute a discrete business of trading in them.

225    The first finding is not disputed. I respectfully disagree with the second conclusion, but only after much hesitation. It raises a difficult issue of characterisation and a question of law as to what is required for a transaction to merit the description of being a “business operation” or “commercial dealing”. Because I have ultimately decided that the acquisition of the Nexus shares here was a “commercial dealing”, I need not consider the third conclusion reached by the learned primary judge. That is because characterising the dealing in the Nexus shares as a “business operation” or “commercial dealing” leads, in the circumstances of this case, to the conclusion that they were held on revenue account.

Business Operation or Commercial Transaction

226    Both sides accepted that the loss incurred here would be deductible if the shares sold had been held by the taxpayer on revenue account.

227    The proposition that a gain will constitute income if the property generating that gain was acquired in a “business operation or commercial transaction” for the purpose of profit-making by the means giving rise to the profit is well established: Myer Emporium at 209-210. Previous authorities, however, have tended to focus on the existence of the required profit-making purpose rather than upon the need for there to be a “business operation or commercial transaction”.

228    The “commercial dealing” requirement, it would appear, is a test derived from English revenue law. According to Parsons’ Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company Limited, 1985), it was introduced into domestic law by the Privy Council in McClelland v Federal Commissioner of Taxation (1970) 120 CLR 487 in the context of former s 26(a) of the Income Tax and Social Services Contribution Assessment Act 1936-1963 (Cth) (the “1936 Act”). In that case, the appellant had inherited land with her brother. She wished to keep the land, but the brother did not. He wanted to sell his half as soon as possible. She needed to sell off part of the land to buy the brother out. She did this and made a profit. The profit was assessed by the Commissioner pursuant to former s 26(a) of the 1936 Act which at the time provided as follows:

26.    The assessable income of a taxpayer shall include –

(a)    profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

229    In advice delivered by Lord Donovan, Viscount Dilhorne and Lord Wilberforce (constituting the majority), their Lordships observed that the relevant test in the United Kingdom at that time would have been whether the transaction was an “adventure in the nature of trade” (at 491). There was, it was observed, no similar test in the 1936 Act. However, for the purposes of s 26(a), their Lordships advised that a gain made from a profit-making scheme, in order to be assessable, must “exhibit features which give it the character of a business deal”. They explained why at 494-495 as follows:

It is clear in the first place that not all such undertakings or schemes are caught by the section. Otherwise every successful wager would be within it. So also would the purchase of investments bought by a private investor as a hedge against inflation and sold—perhaps long afterwards—at more than the purchase price. The participator in a lottery would also be liable if he drew the winning ticket. The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain. What criterion is to be applied to determine whether a single transaction produces assessable income rather than a capital accretion? It seems to their Lordships that an “undertaking or scheme” to produce this result must—at any rate where the transaction is one of acquisition and resale—exhibit features which give it the character of a business deal. It is true that the word “business” does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words “undertaking or scheme”.

The foregoing passage supports the proposition that the purpose of the “business deal” test was to prevent s 26(a) from taxing gains made from waging, from a lottery and from an investment by a “private investor” made as a hedge against inflation. It was not at that time concerned with the notion of income according to ordinary concepts.

230    In this appeal, Senior Counsel for the Commissioner submitted that the acquisition and sale of the Nexus shares did not take place on revenue account because what happened was not an adventure in the nature of trade. This was said to be an expression of the test that the transaction must constitute a “business operation or commercial transaction”. That proposition suffers, with respect, from an immediate difficulty. In Federal Commissioner of Taxation v Visy Industries USA Pty Ltd (2012) 205 FCR 317, Edmonds, Greenwood and Robertson JJ. observed that an important element of the reasoning of the primary judge in that case (Gordon J.) was her Honour’s rejection of the Commissioner’s contention that the transaction in question “was not a commercial transaction or was not an adventure in the nature of trade”. The expression “adventure in the nature of trade” was found by the Court not to be relevant to the concept in Australia of income according to ordinary concepts. Their Honours said at 332-333 [52]:

Finally, by way of general observation, we have to say that we do not find terms such as “profit-making undertaking”, “profit-making scheme” or “adventure in the nature of trade” to be helpful in a case such as this where the taxpayer is carrying on a business and the transaction is entered into in the course of that business albeit not in the ordinary course. As the High Court has warned in a different context, the statute is to be construed and applied according to its terms, not under the influence of “muffled echoes of old arguments” concerning other legislation: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 414 in the plurality judgment. Terms such as “profit-making undertaking”, “profit-making scheme” and “adventure in the nature of trade” have an historical nexus with provisions no longer to be found in the statute. They certainly find no expression in the pivotal passage from the High Court’s judgment in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 209, 210 which lies at the heart of this case:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer’s business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a ‘one-off’ transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

(Emphasis added and emphasis in original quote.)

231    It follows that the outcome of this appeal does not turn upon a characterisation of the share trading as an “adventure in the nature of trade”.

232    It is noteworthy that prior to the decision of the House of Lords in Jones v Leeming [1930] AC 415, which led to the introduction of an earlier version of s 26(a) (now s 25A of the Income Tax Assessment Act 1936 (Cth) and s 15-15 of the 1997 Act), gains made from trades entered into for short-term profit-making were considered in Australia to be on revenue account. To preserve that position and to reverse what was perceived to be the effect of Jones v Leeming, in 1930, the definition of “income” in the Income Tax Assessment Act 1922 (Cth) was amended through the insertion of words which were later to be repeated in s 26(a): Montgomery at 674 [107]. Sections 25A and 15-15 are now expressly and relevantly limited to profits made from property acquired prior to 20 September 1985. Those provisions do not apply here.

233    A good example of a pre-Jones v Leeming authority is the decision of the High Court in Blockey v Federal Commissioner of Taxation (1923) 31 CLR 503. In that case, two individuals entered into an agreement to buy wheat scrip using brokers for the sale of such scrip at a profit. Their intention was not to hold the scrip as an investment. The purchasing of sufficient scrip took two months to complete and the selling of that scrip, a few months later, took place over about a month. The High Court held that the profits were on revenue account because they were the product of a discrete business. Isaacs J. (as his Honour then was) also found that even absent the presence of a business, the profits were still on revenue account. His Honour said at 508-509:

But nothing I have said must be taken as indicating that, if the adventure had not been a “business” and the Commissioner had assessed the profits as income from property, he would have failed. Whatever is “income” is income from property, unless it falls within the statutory definition of “income from personal exertion.” A mere realization of property though producing profit does not, as I have said, produce income. It is a mere enlargement of capital. But if a man, even in a single instance, risks capital in a commercial venture—say, in the purchase of a cargo of sugar or a flock of sheep—for the purpose of profit making by resale and makes profit accordingly, I do not for a moment mean to say he has not received “income” which is taxable. I intimated during the argument that this was possible; and I leave it open.

234    After McClelland, the High Court considered on a number of occasions the need for a transaction to be a business dealing for the purposes of former s 26(a) of the 1936 Act (as amended from time to time). That need, it would appear, was to prevent s 26(a) from being used to tax the mere realisation of a capital asset. For example in Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640, Gibbs J. (as his Honour then was) contrasted the features of a business deal as against “[t]he mere realization of a capital asset” (at 699). Subsequently, in Federal Commissioner of Taxation v Bidencope (1978) 140 CLR 533, his Honour explained the need for the test at 552:

The second proposition which their Lordships asserted in McClelland’s Case—that to come within the second limb of s. 26(a) the scheme should exhibit features giving it the character of a business deal, at least where the transaction is one of acquisition and sale—has been accepted and applied in this Court. The reason for construing the section in that way is no doubt that if some such limitation were not placed on its generality it would include profits which were apparently not intended to come within its scope; for example, a mere realization of capital, carried out in an enterprising way, might then fall within the section. It is unnecessary for present purposes to consider whether there is an exception to the generality of the proposition so stated.

(Emphasis added.)

The perceived role of the “business deal” test in this passage again appears to be to prevent mere realisations of capital from being taxed by s 26(a).

235    In Whitfords Beach, Mason J. (as his Honour then was) again considered the “business deal” test from McClelland. He had “some difficulty” with the conclusion in that case. His Honour said at 378-379:

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. Although the majority in McClelland thought that s. 26(a) was mainly, if not wholly declaratory, of the existing concept of income, they did not by the references to “business deal” and “operation of business”, necessarily mean a transaction entered into in the course of carrying on a business.

It is of importance to note their Lordship’s statement [(1970) 120 CLR 487 at 494-495] that not only are wagers and lottery tickets excluded from profit-making undertakings or schemes, but “also … the purchase of investments bought by a private investor as a hedge against inflation and sold — perhaps long afterwards — at more than the purchase price”, and the further statement [(1970) 120 CLR 487 at 495] that “The undertaking or scheme, if it is to fall within s. 26(a), must be a scheme producing assessable income, not a capital gain.” There are two separate strands of thought embedded in these observations: (1) that the transaction must have about it some business or commercial flavour — the purchase of an investment by a private investor is not enough; and (2) the profit in view must be an income, not a capital, gain, according to ordinary concepts.

Not all that was said in McClelland can now be accepted. The majority judgment fails to differentiate between the United Kingdom and the Australian systems of arriving at taxable incomes and employs expressions derived from the United Kingdom income tax legislation which have no place in our legislation. And there is the possibility that it insufficiently acknowledges that the operation of the second limb of s. 26(a) may extend to some gains of a capital nature according to general revenue law.

I do not doubt that the majority was right to exclude from the second limb of s. 26(a) successful wagers and lottery windfalls. Perhaps the exclusion of private investments originally made as a hedge against inflation was more open to question but there is now a strong body of authority to support its exclusion.

The last sentence in the passage quoted above is perhaps an indication that the requirement that a transaction be a “business deal” or “commercial transaction” involves only a low threshold. It certainly works to exclude gains made from wagers and lotteries from being taxed by s 26(a), however Mason J. doubted whether it also excluded the type of private investment referred to in McClelland. In that respect, the authorities appear to contrast a profit-making scheme from an investment. An investment connotes something to be held over time, which might then be sold “long afterwards”, to use the language of McClelland.

236    An earlier decision of Stephen J. in Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 should also be noted. In that case, Williams was a managing director and shareholder in a certain company which paid him fees and dividends. His Honour characterised the taxpayer as someone who had, until the mineral boom in Australia, been a “very modest and infrequent” trader in shares. However, with the coming of the boom, the taxpayer became a “speculator in mining and oil exploration shares” who, using a broker, indulged in “quite considerable share market speculation” (at 656). The speculation was considered to be “individual forays in particular stocks which [the taxpayer] bought with a view to resale” (at 656). At 657, Stephen J. said:

The taxpayer’s evidence of how he undertook his stock exchange transactions indicated nothing in the nature of a system or method or the carrying on of a business; he simply relied upon his own knowledge of the prospects of particular companies, gained very largely from his contacts with their managements in the course of the export and import business which he managed and which brought him into contact with a number of mining companies.

237    Stephen J. decided that the taxpayer was assessable under s 26(a) (and therefore entitled to a deduction pursuant to former s 77A of the Income Tax Assessment Act 1936-1969 (Cth), thus engaging, for the purposes of that case, s 82(2) and (3)(c) of the Act).

238    There is an evident analogy between the facts here and those in Williams. Stephen J. had to decide whether the taxpayer’s trades in shares were subject to former s 26(a). His Honour decided that s 26(a) applied because the forays into particular stocks were carried out with a view to resale. The need for any feature or attribute which might have given the share trading the character of a “business deal” was not addressed, presumably because it was self-evident that the trading was of such a nature.

239    The applicable principle to be derived from the subsequent decision of the High Court in Myer Emporium is reproduced in the quotation from Visy Industries USA above. In Myer Emporium the Court decided, amongst other things, that the “business deal” test was not just relevant for the purposes of applying s 26(a); it applied equally to gains derived from profit-making undertakings which constituted income according to ordinary concepts for the purposes of former s 25 of the Income Tax Assessment Act 1936 (Cth). The need for it was explained at 211-212 as follows:

Several different strands of thought have combined to deter courts so far from accepting the simple proposition that the existence of an intention or purpose of making a profit or gain is enough in itself to stamp the receipt with the character of income. The first was the notion that the realization of an asset was a matter of capital, not income. The second was the apprehension that windfall gains and gains from games of chance would constitute income unless the concept of income, apart from income from personal exertion and investments, was confined to profits and gains arising from business transactions. And the third notion, itself associated with the idea that the carrying on of a business involves a systematic series of recurrent acts or activities, was that a gain generated by recurrent transactions is income, whereas a gain generated by an isolated transaction is capital.

In the United Kingdom, Schedule D of the Income Tax Act 1918 (U.K.) reinforced these notions. The Schedule seemingly confined the concept of income to (a) profits or gains from any trade, profession, employment or vocation, and (b) annual profits and gains from investments, though “trade” is defined so as to include every “manufacture, adventure or concern in the nature of trade”. These provisions naturally provoked the question: Was a profit made on an isolated transaction of purchase and sale income, if the purchase was made with the intention, or for the purpose, of making the profit, even though the transaction was not one entered into in the course of carrying on a business?

In Jones v. Leeming [[1930] AC 415], the House of Lords answered this question in the negative. There was a finding that the taxpayer never meant to hold the land bought as an investment. Nevertheless it was found that the transaction “was not a concern in the nature of trade”. This led to the conclusion that a profit on an isolated sale, not being an adventure in the nature of trade, was a capital accretion [at 430]. Central to the reasoning was the view that in order to constitute a trading or business transaction, an element of recurrence or repetition is needed and that the intention or purpose of making a profit or gain, is not enough. Viscount Dunedin said [at 423]:

“The fact that a man does not mean to hold an investment may be an item of evidence tending to show whether he is carrying on a trade or concern in the nature of trade in respect of his investments, but per se it leads to no conclusion whatever.”

And Lord Buckmaster [at 420] discounted the suggestion that a profit made on the sale of an asset acquired in the expectation that it would rise in value (and presumably result in a realized gain) is income. To him all that was involved in such a case was the realization of a capital asset.

On the other hand in Edwards (Inspector of Taxes) v. Bairstow [[1956] AC 14] joint venturers who engaged in an isolated transaction of buying and selling a complete spinning plant, with a view to making a profit, having no intention of using the plant or deriving income from it, were held liable to income tax on the profit made on resale. Lord Radcliffe concluded [at 36-37] that it was a profit from an adventure in the nature of a trade because the joint venturers had no intention of using the machinery and therefore did not buy it to hold as an income-producing asset or to consume it or for the pleasure of enjoyment; and, instead of having any intention of holding the plant, they planned to sell it even before they bought it. This they did, making a net profit, as they hoped and expected to do. In his Lordship’s opinion this was “inescapably, a commercial deal in second-hand plant”.

In rejecting the argument that the profit was not income because it arose from an isolated transaction, Lord Radcliffe observed [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.”

240    More recently, the majority in Montgomery, reaffirmed the expression of the test from Myer Emporium at 673 [104] and said the following about singular transactions at 676 [113] which should be noted:

The singularity of a transaction may very well invite close attention to whether it is in business. The singularity of a transaction may suggest that there is a mere realisation of a capital asset or change of investment rather than a transaction on revenue account. The purpose of profit-making may be an important consideration in deciding these questions. But, as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt. And that is why, in Federal Commissioner of Taxation v Cooling, the Full Court of the Federal Court rightly emphasised the fact that, in that case, the receipt was an ordinary incident of part (albeit an extraordinary and unusual part) of the firm’s business activity.

(Footnotes omitted.)

241    Finally, I observe that Parsons thought that the test of “business deal” might only require that the transaction be the sort of thing a business person, or person in trade, might do. In his seminal book at [2.498]-[2.500], Parsons wrote the following:

2.498    But the features which are necessary to give a transaction the character of a business deal or of a trade of dealing on a single occasion, include an elusive factor that is more than purpose to profit. This elusive factor may not be capable of any more precise defining than to say that the transaction must be the sort of thing a business man or man in trade does. In this context “business man” or “man in trade” brings in received ideas in the community about how such people behave.

2.499    A taxpayer may acquire and sell land and not engage in trade, provided there is a decent interval between acquisition and disposition so that he does not appear too concerned about his profit, or, if circumstances have required him to sell soon after acquisition, he did not contemplate quick sale when he acquired (Turner v. Last (1965) 42 T.C. 517, Eames v. Stepnell Properties Ltd [1967] 1 W.L.R. 593). A taxpayer may acquire shares and not engage in trade. Indeed as a director of a company he may be required to own some shares. A taxpayer may sell shares and not engage in trade, provided he is not too hasty about it. But a taxpayer does engage in trade if he buys “a large quantity of a commodity like whisky, greatly in excess of what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process or realisation”. The words quoted are from the judgment of Lord Normand, in I.R.C. v. Fraser (1942) 24 T.C. 498 at 502-503. Lord Normand added that he could not consider a person who did this as “other than an adventurer in a transaction in the nature of a trade”. A taxpayer does engage in trade if he buys one million rolls of toilet paper (Rutledge v. I.R.C. (1929) 14 T.C. 490), or if he buys the Government’s surplus stock of aeroplane linen and embarks on its sale to more than one thousand purchasers: Martin v. Lowry [1927] A.C. 312. A taxpayer may engage in trade if he sets up an elaborate selling organisation to effect the sales. He may engage in trade if he carries out some manufacturing process and sells the manufactured goods (I.R.C. v. Livingston (1926) 11 T.C. 538 at 543-544, per Lord Sands).

2.500    The cases may suggest that it is less likely that a conclusion that there is a trade will be reached if the transaction is in shares or land rather than in some other kind of property. Shares and land are traditional subjects of investment activity—activity that is not directed to profit-making in the turning over of the property acquired. An isolated transaction in land or shares does not necessarily yield an objective inference of profit purpose, when the same transaction in another kind of property may yield such an inference. A subjective purpose of profit-making, of which there may be evidence, will not in itself give the character of trade: Jones v. Leeming [1930] A.C. 415.

(Emphasis added.)

242    Six propositions may next be stated:

(1)    first, I doubt whether the taxpayer’s loss arose out of an isolated trade, even though all his shares were disposed of at one time. The Nexus shares were acquired on 64 occasions over approximately a two-year period, and only disposed of following a protracted legal battle in which the taxpayer was a party. Meanwhile, as already mentioned, the taxpayer purchased over 200 parcels of shares in other companies and sold approximately 180 of these. The overwhelming majority of shares were held for only short periods of time;

(2)    secondly, the Commissioner submitted that prima facie shares are held on capital account. That proposition is, with respect, mistaken. Whether shares are held by a taxpayer on capital account or on revenue account will depend on each occasion on the applicable facts. There is no prima facie position; there are no different or special rules for individuals or particular classes of assets;

(3)    thirdly, the way a taxpayer personally characterises transactions as being either on revenue account or on capital account is probably irrelevant to the determination of his or her liability to pay primary tax. That treatment is either right or wrong. It certainly cannot control the objective conclusion which this Court must reach about the issue of characterisation. Such evidence might, nonetheless, be relevant to an attack on credit or be relevant to the issue of penalty for the purposes of Sch 1 to the Taxation Administration Act 1953 (Cth);

(4)    fourthly, expressing, as Parsons did, the applicable test as being that the transaction must be the sort of thing a business person or person in trade does, effectively ensures that windfall gains, and gains from lotteries and hobbies, are not caught by the ordinary concept of income. In my view, this is an adequate expression of the content of the test;

(5)    fifthly, the Court here was urged to accept that a “private” transaction is not one which has the characteristics of a “business deal”. There was a debate about what is and is not “private”. The proposition is rejected. Many truly private transactions may not be capable of being a “business deal” because they are not business-like. The usual example might be a gain encountered in the pursuit of a hobby. However, just because a transaction has been undertaken “privately”, it does not follow that any gain thereby made is necessarily an affair of capital: c.f. Federal Commissioner of Taxation v Anstis (2010) 241 CLR 443 at 458-459 [38] per French CJ, Gummow, Kiefel and Bell JJ. The concept of a “private” transaction, referred to briefly in Whitfords Beach and in McClelland in the context of an “investment”, is not referred to in Myer Emporium or Montgomery. Parsons also does not relevantly refer to it; it does not form part of his eight propositions concerning what is income. Nor is there an equivalent exclusion in s 6-5 of the 1997 Act akin to that found in s 8-1(2)(b) concerning a loss or outgoing of a “private or domestic nature”. In that respect, I observe that s 8-1(2) would appear to assume that expenditure of a capital nature (addressed in s 8-1(2)(a)) is distinct from expenditure of a private nature (s 8-1(2)(b)). Private expenditure, it would appear, is not subsumed within expenditure of a capital nature for the purposes of s 8-1. The Commissioner here otherwise made no attempt to rely upon s 8-1(2)(b); and

(6)    sixthly, where shares are acquired by an individual for the purposes of obtaining a dividend yield and for long-term growth, any gain made on a subsequent to sale of those shares is likely to be an affair of capital, if the sale is a mere realisation or change of investment. No doubt a great many individuals hold shares privately in Australia on this basis. But the gain so made is not ordinary income by reason of the transaction being “private”, rather, it is because the gain is on capital account.

Disposition

243    Here, the learned primary judge accepted that the Nexus shares were purchased for the purpose of profit-making by their sale, although it may be accepted that the taxpayer was prepared to hold those shares for so long as it took for them to increase sufficiently in value. In that respect, the learned primary judge also noted that the taxpayer had not sold shares in companies in which he also had a substantial interest, namely MacPherson Resources and Elementos. In relation to those shares, the taxpayer’s plan was to “hang on” to them until they had grown in value, including “in the long term or any term”. This was in contrast to the many other acquisitions of parcels of shares he had acquired and which he had sold.

244    The learned primary judge was not satisfied that the Nexus shares had been acquired as part of a “business operation or commercial transaction” to use the language from Myer Emporium. His Honour said at [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).

His Honour, in reaching his conclusion, did not overlook the taxpayer’s active participation in litigation to prevent the forced disposal of the Nexus shares. His Honour said at [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.

245    After much hesitation, and with the greatest of respect for the opinion of the learned primary judge, I find I cannot agree with the conclusion that the Nexus shares were not acquired in a “business operation or commercial transaction”. The shares were acquired with a view that they be sold at a profit in the short term; whilst no profit in fact was made, if the taxpayer had realised a gain, in my view, that gain would not have been characterised as windfall in nature or as the product of a game of chance or the pursuit of a hobby. Nor would the gain have been characterised as merely a realisation of a capital asset. That is so for a number of reasons:

(1)    first, it is because the profit would have been the result of the implementation of an intention or purpose existing at the time of the acquisition of each Nexus share of profit-making from their sale;

(2)    secondly, it is because the realisation of profit formed part of the taxpayer’s overall sophisticated plan to generate cash profits prior to his retirement within four to five years;

(3)    thirdly, it is because the shares were acquired in a systematic fashion on 64 occasions;

(4)    fourthly, it is because of the taxpayer’s participation, either personally, or through the agency of Mr Foot, in a plan to crystallise indirectly what the taxpayer perceived was the true value of the Crux asset. It is true that the taxpayer’s level of activity increased over time and that one should not use hindsight to characterise all of the acquisitions of Nexus shares. At the same time, I observe that he acquired those shares progressively over time;

(5)    fifthly, it is because the taxpayer used his business knowledge and experience. That knowledge and experience was applied each time Mr Greig decided to buy shares in Nexus; and

(6)    sixthly, it is because the taxpayer relevantly acted as a “business person” would (as to which see below).

It follows that, in my view, the loss in fact encountered was on revenue account: c.f. Visy Packaging Holdings Pty Ltd v Federal Commissioner of Taxation [2012] FCA 1195; (2012) 91 ATR 810.

246    The fact that the taxpayer intended to hold his Nexus shares until he could secure his profit, whether in the “long term or any term”, does not detract from the conclusion I have reached. The taxpayer’s purpose was not to hold the shares as a long-term investment and to receive dividends over time. His plan was to sell the shares at a profit at least, I infer, up to the time of his retirement. If the profit had emerged quickly, I find that that is when he would have sold the Nexus shares. In that respect, I observe that some profit-making schemes can take many years to complete. In Whitfords Beach, the profit-making plan commenced in late 1967 and assessable profits were made from 1971 over a period of years. It is not antithetical to a profit-making undertaking for a taxpayer to wait for the profit to become realisable, so long as that was the profit the taxpayer planned to secure. Waiting, without more, will not convert the profit eventually realised into an affair of capital.

247    Whether the taxpayer’s purchasing of shares was no more “than an example of an ordinary investment engaged in by innumerable private investors each day”, as the learned primary judge found, I cannot say. It may be doubted whether an ordinary private investor would have the same knowledge and experience as a local managing director of a significant worldwide group of companies. In that respect, the fact that the taxpayer engaged a stockbroker to undertake his share trading, is of no moment. It may be accepted that the taxpayer was enormously busy and relied in large part upon the services of Mr Foot to undertake research, to meet company representatives and to undertake the trades. It is also accepted that much of the taxpayer’s own physical activity was limited to meetings with Mr Foot, monitoring his investments and undertaking some research. But the key point is that Mr Foot acted on behalf of the taxpayer; as agent, his activities were, for present purposes, the activities of the taxpayer, and the profit-making scheme was the taxpayer’s scheme and not that of Mr Foot: c.f. Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209. Relevantly I note that this Court, on a number of occasions, has found a taxpayer to be carrying on a business, even though the taxpayer may personally have done as little as the taxpayer here did, sometimes less. The cases of Ferguson v Federal Commissioner of Taxation [1979] FCA 29; (1979) 9 ATR 873, Federal Commissioner of Taxation v Lau (1984) 6 FCR 202 and Puzey v Commissioner of Taxation (2003) 131 FCR 244 suffice as examples.

248    Applying the test suggested by Parsons, it is also my view that the taxpayer acted in acquiring shares in Nexus as a “business person” would. He engaged professional help; he researched and monitored the value of his shares; he used his own business knowledge as a managing director to acquire more shares; he pursued a plan to exploit the unrealised value of the Crux asset; and he took steps to defend the value of his investment in court. His activities, I find, were entirely commercial and business-like. The evidence demonstrates “system and organization” in relation to the acquisition of Nexus shares, to borrow the language of Bowen C.J. and Franki J. in Ferguson. His share trading was not a hobby; it was not a pastime; it was not private gambling or gaming. And it was more than a “mere” realisation of an asset. I find it constituted a business dealing that would engage the principle in Myer Emporium.

249    The fact that the loss that was incurred was unexpected, and was not intended or planned for, compels no contrary conclusion. Losses are not often sought. In Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344, a taxpayer carried on the business of a departmental store which involved banking each morning the previous day’s takings. One day, on the way to the bank, two employees were robbed at gun point. The High Court said at 350-351:

The “occasion of the loss” in the present case was the course pursued in banking the money. In Commissioner of Taxation (N.S.W.) v. Ash [1938] HCA 68; (1938) 61 CLR 263, Rich J. said: “There is no difficulty in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognized incident of a particular trade or business the profits of which are in question. These are characteristic incidents of the systematic exercise of a trade or the pursuit of a vocation” [(1938) 61 C.L.R., at p. 277]. Even if armed robbery of employees carrying money through the streets had become an anachronism which we no longer knew, these words would apply. For it would remain a risk to which of its very nature the procedure gives rise. But unfortunately it is still a familiar and recognised hazard and there could be little doubt that if it had been insured against the premium would have formed an allowable deduction. Phrases like the foregoing or the phrase “incidental and relevant” when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income.

250    Something should finally be said about the “profit-making strategy” the taxpayer said he pursued. In one of his affidavits, the taxpayer explained this strategy as being the acquisition of undervalued stock to sell at a profit within a period of months. He deposed that the only shares acquired in accordance with this plan were the Nexus shares. His evidence was as follows:

Whilst my intention at the outset in early 2011 was to execute my Profit Target Strategy by acquiring shares in different companies, as events ultimately transpired, the only stock that I purchased in line with that strategy was Nexus. Nexus accordingly became the sole vehicle through which I worked to achieve my objective of making a short-term profit by buying shares and then promptly selling them upon a material increase in their market value.

The foregoing statement is objectively inconsistent with the schedule of trades in evidence. They show, as already mentioned, the acquisition of securities on 218 occasions (in addition to the 64 occasions on which Nexus shares were acquired). The evidence is that during the relevant period the taxpayer held at the same time upwards of 44 different stocks. The schedule of trades also shows that the overwhelming majority of shares were sold within a short period of time. He made gains as well as losses.

251    The taxpayer’s evidence is also inconsistent with that of Mr Foot who deposed that when the taxpayer first instructed him he said he wanted “to find undervalued stock I can buy at decent volumes and then sell quickly in order to make a profit. I’m not looking for shares to hold in the longer term”. That instruction was given in January 2008 before the Nexus stock was first raised with the taxpayer in January 2011. Indeed, in the taxpayer’s own affidavit, he said that he generally wanted to generate “substantial cash profits in the short term and the stock market seems to be a suitable vehicle for achieving that objective”. I am unable to distinguish between the taxpayer’s object and purpose in relation to the acquisition of Nexus shares from his object and purpose in relation to the acquisition of his other shareholdings. There appears to be no material difference between the two. That he may have been less involved in the trading of the other stock, and in such cases was more reliant on Mr Foot, is not a relevant distinction. That is because Mr Foot acted on behalf of the taxpayer.

252    Accepting, as one should, that the testimony of a taxpayer should be cautiously considered, I am not satisfied that the taxpayer has proven that he acquired his Nexus shares in a meaningfully different way from his other share purchases. When one looks at the schedule of trades as distinct from the taxpayer’s evidence set out above, the inference should be drawn that all the shares were acquired for the purpose of profit-making and all bore the character of a business deal. In that respect, I am reminded of the decision in Livock v Federal Commissioner of Taxation (1985) 16 ATR 959. In that case, the taxpayer sought to draw a distinction between “trading shares” and “investment shares” that he had acquired for the purposes of s 26(a). Tadgell J. (as his Honour then was) rejected the existence of the distinction. At 960-961, Tadgell J. said:

When the appellant individually began to buy company shares in 1969 or 1970 or thereabouts he did so, he said, “just to make money out of them ... by selling them at a profit”. He was asked by his counsel in chief whether that intention “carried across in relation to all of your transactions”, to which he replied, “No, that wouldn’t”. Asked to explain “how a difference in view may have developed in your mind, as to different share purchases”, the appellant replied, “I viewed some shares to be purchased for investment, you know, to be held — you know, for dividend purposes, which is what — you know — what’s been cited in our — my returns over a number of years”. That answer should no doubt be taken to refer to the dichotomy mentioned in the appellant’s taxation returns from 1976 onwards between “trading shares” and “investment shares”. After he had said that his purpose in acquiring the trading shares was to sell them at a profit, he was asked what it was that prompted him to have a different purpose for the two categories of shares. He said “I wanted to have some investment ones. I just felt I should have some investments”. The appellant’s case (at least on this aspect of it) of course depended on the dichotomy, which was said to have reflected a state of mind negating an intention to purchase “investment shares” for resale at a profit. The appellant’s oral evidence, however, coupled with the available evidence of what he did with the shares after he had bought them, suggests that the distinction between “trading shares” and “investment shares” was one of words rather than of substance.

(Emphasis added.)

In my view, using the language of Tadgell J., the taxpayer’s distinction between his Nexus shares and other shares was “one of words rather than of substance”.

253    For the foregoing reasons, this appeal must be allowed and the taxpayer is entitled to a deduction pursuant to s 8-1 of the 1997 Act for the loss he made on the Nexus shares. It follows that he is also entitled to a deduction for his legal expenses. It will be a matter for the Commissioner to consider whether to reassess the taxpayer’s other gains from share trading.

Associate:

Dated:    2 March 2020