The AAT has decided that the profit on the sale of shares was assessable income and not, as contended by the taxpayer, a capital gain.
The taxpayer was a shareholder in a company (DCM) which was granted an Exploration Licence in respect of the Doyles Creek tenement.
- The taxpayer was also a shareholder in ResCo, a subsidiary of which was going to conduct a training mine on the site (which sounds reminiscent of a case investigated in the NSW Royal Commission relating to Eddie Obeid).
- In late 2009, the taxpayer sold some of her DCM shares for a total of $5.1m.
- In February 2010, NuCoal exercised options to acquire all the issued shares in DCM and in exchange allotted new shares to those shareholders. The option agreement required NuCoal to raise at least $10m in share capital which was to be used to fund exploration and drilling programs on the Doyles Creek tenement.
- Between March and September 2010, the taxpayer sold her NuCoal shares in various tranches, receiving a total of just over $10.1m.
- For the 2010 and 2011 income years, the taxpayer treated the gains from the sale of shares in DCM and NuCoal as capital gains and applied the 50% CGT discount.
- In addition, the taxpayer contended that the exchange of her shares in DCM for shares in NuCoal satisfied the necessary conditions to allow her to choose scrip-for-scrip roll-over relief under Subdiv 124M of the ITAA97.
- The Commissioner, however, issued amended assessments for 2010 and 2011 on the basis that the profits on the sale of the DCM and NuCoal shares were assessable income and not a capital gain.
- An administrative penalty of 50% for the 2010 year was also imposed for “recklessness … as to the operation of a *taxation law” (under s284-90(1) item 2 of the TAA53).
The AAT concluded on the evidence that
- the taxpayer acquired the relevant shares as part of a business or commercial operation and that her intention at all material times was to realise a profit.
- The essence of the relevant business or commercial operation was a scheme to establish a company in order to obtain an exploration licence, on the basis of a proposal that the mine would function as a commercial mine funding a training mine, thereby increasing the value of the taxpayer’s shares in the company and enabling that profit to be realised by sale.
The Court noted that:
219. As the Commissioner also submitted, Ms Ransley’s avowed purpose of investing in order to ultimately obtain dividends is objectively unbelievable. The companies were all start-ups. DCM had no operating revenue. DCM was not an established coal mining company. Its land adjoined tenements of established coal mining companies. Ms Ransley had no basis to assume that dividends would ever be paid. By contrast, it was obvious that the value of her shares in DCM would substantially increase if DCM obtained the direct allocation of an exploration licence.
The administrative penalty was also upheld, the AAT rejecting the taxpayer’s submission that she had a reasonably arguable position and had not been ‘reckless’. I am devoting some space to this as it seems to me that a finding of ‘recklessness’ in preparing the tax return is found too readily these days (though, not in this case – read on to see why).
- The Taxpayer had correctly warned that “In assessing whether a taxpayer has a reasonably arguable position, a decision maker does so from the standpoint that the taxpayer’s argument has already been found to be wrong and consequently caution must be given to the benefit of hindsight”: citing Walstern Pty Ltd v Commissioner of Taxation  FCA 1428 and Cameron Brae Pty Ltd vCommissioner of Taxation  FCA 918. [para 257]
- She similarly cited Hill and Hely JJ in Hart  FCAFC 105 to establish: ‘Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct’. [para 258]
- The Commissioner submitted that the Taxpayer had not used reasonable care because: ‘…was admitted to practice law and previously worked at ASIC. One would expect her to have a high degree of commercial knowledge. She also used a tax agent to prepare and lodge her returns. If she was not aware of the tax consequences arising from the disposal of the DCM and NuCoal shares she could have consulted with her tax agent or retained professional tax advice. She also could have requested a private ruling from the Commissioner. Given the size of the amounts in dispute one would expect a taxpayer in the position of the Applicant to have been reticent in preparing her returns. The Applicant’s behaviour fell short of the behaviour that would be expected from a reasonable person in similar circumstances.’ [para 263]
- The AAT, however, found that the Taxpayer had been ‘reckless’ saying: ‘The problem for Ms Ransley is that, on my conclusions about her credit and that of Mr Ransley, the relevant spectrum of possibilities is between a worst case of Ms Ransley deliberately concealing her intentions and details of the profit-making commercial operation from Mr Mahoney, her tax agent, and a best case of Ms Ransley being grossly indifferent or grossly careless about the provision of relevant information about her intentions and details of the profit-making commercial operation to Mr Mahoney.‘ [para 270]
- The conclusion to support the 50% penalty was, therefore compounded by the facts in this case, and not just an arguable capital income distinction.
(Ransley v CofT  AATA 4359, AAT, File Nos 2015/5453 and 2015/5454, Jagot DP, 21 November 2018.)
[LTN 229, 27/11/18; Tax Month – November 2018]
CPD question’s (answers available)
- Did the Tribunal find that the taxpayer acquired the shares business or commercial operation was a scheme for the purpose of profit on disposal?
- How did the Tribunal describe the taxpayer’s contention that she acquired the shares for the purposes of receiving dividends?
- Is the gain on such shares assessable as ‘ordinary income’?
- Does the ‘scrip for scrip’ rollover, protect a taxpayer from a gain that is ‘ordinary income’?
- Was the result that the taxpayer was assessed on the gain?
- Was the taxpayer assessed to a penalty, equal to 50% of the shortfall in the tax on the gain, for ‘recklessness’ in preparing the tax return, that she lodged?
- Did the Tribunal uphold that penalty?
- What did the Tribunal say, in para 270, was the ‘problem’ for the Taxpayer, in resisting the argument that she had been ‘reckless’?