Australia: Tax, ongoing revenue v capital issues – share "traders"

The recent AAT decision Hartley and Commissioner of Taxation [2013] AATA 601 ('Hartley') found that the taxpayer was not in the "business" of share trading and supported the Commissioners postulate that he was an "investor". As a consequence, the taxpayer was denied revenue deductions for the losses incurred.

Was this the right question?

In the decision of August v Commissioner of Taxation [2013] FCAFC 85 ('August') it was clearly confirmed that assets that may ordinarily be investments could derive some income, not be trading stock, yet still be on "revenue" account. There would also be a need to have the requisite intention to sell for a gain – however this is conceded as being present in Hartley.

The decision - on matters noted by Deputy President Deutsch to be finely balanced - may be accepted as correct on the facts & arguments presented. Certainly as to the question of whether the taxpayer was in the "business" of being a "share trader" - and consequently able to treat the shares as trading stock - the question was correctly addressed. Access to the trading stock provisions is driven and required by Section 70-10(1) of the Income Tax Assessment Act 1997 ('ITAA97') that relevant items be held "....for sale or exchange in the ordinary course of business".

In our recent article in August (click here to read), we highlighted what may be considered a significant shift along the revenue v capital continuum in circumstances where the taxpayer may otherwise be considered an investor and not perhaps in business. It seems reasonably clear that both the ATO would accept and the Courts be bound to accept this where there is an intention to profit from that activity, whether or not it is a "business".

Regardless of the significant difference in factual circumstances between August and Hartley, they are almost completely on foot in respect of objective intention - to make a profit or gain from resale of the assets acquired. Hartley is perhaps more advanced on this as the intent to make a gain was not argued amongst the parties.

So where does that leave us?

The thornier question would appear to be what the approach should be where a loss is realised. It was noted in our earlier article in August that Section 25A of the Income Tax Assessment Act 1936 ('ITAA36') and its mirror provision Section 52 both have no function "in respect of the sale of property on or after 20 September 1985" and the far more limited Section 15-15 of ITAA contains itself similarly to sale of property acquired after the commencement of CGT.

There are some who would argue that shares in a company are not "property" and accordingly Sections 25A & 52 should still be in play. Although on the face of it this argument has some appeal, following the decision in August I do not consider we need to explore it further in respect of Hartley.

The critical question is whether the activity or series of activities puts you within the ambit of Section 6-5 of ITAA as ordinary income - as was found in August. If it does, then it follows that the receipts on sale are ordinary income and the outgoings deductible against that income. In simple terms, the purchase of shares and any related outgoings are ordinarily deductible and the receipts from sale ordinarily assessable, leaving only the issue of the non-commercial loss provisions to hamper an offset to other assessable income.

The only key difference from how you would be treated if in the business of being a share trader being the inability to access the trading stock provisions.

It seems quite clear that if arguments were raised either under the principals espoused in August a different decision may have been reached. It remains to be seen whether the taxpayer in Hartley can or will go on to the Federal Court.

Regardless of whether this occurs or not, we will no doubt see cases on shares and other assets emerge over time. We are all now bound by the Full Federal Court decision in August and the wider impact of that decision cannot be underestimated.

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