The ongoing debate of capital vs revenue was raised recently in a Full Federal Court case - Greig v FCT [2020] FCAFC 25.
Greig’s case - background facts
Mr Greig invested heavily in Nexus Energy over a two-year period between 2012-2014 where he purchased shares in 64 tranches worth $11.8 million, with a view to realising gains in the short term as part of his retirement plan.
He had significant expertise in mining having worked within the industry for numerous years, and during the period of the acquisitions:
-
He kept himself informed of matters pertaining to the value of Nexus shares and the prospects of the value increasing.
-
He received research from his advisors including ASX announcements, articles from newspapers and reports from brokerage firms and banks.
-
Research generally suggested that the shares had the potential to increase in value when the company became a viable takeover target.
-
His advisors occasionally met with the CEO of Nexus and others in the company in relation to its activities and reported any new information to him.
-
He 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.
As a result of the company going into administration, he realised a significant loss in relation to the disposal of these shares.
The issue
Was the loss revenue or capital in nature? Why does it matter? Very simply put – revenue losses are deductible against all types of assessable income whereas capital losses can only be used to offset capital gains. Therefore, to get any benefit of capital losses, the taxpayer must make capital gains.
The case considered the principles established in Myer Emporium, i.e. a gain from a commercial transaction entered into by a taxpayer with the intention of making a profit may constitute ordinary income. Additionally, a one-off profit or gain as a result of an isolated transaction does not prevent the transaction being on revenue account.
Whilst nearly all taxpayers would always argue that you would only ever purchase an asset with the intention of making a profit, indicators of an asset being held on capital account include holding it long term for capital appreciation and for a return on investment each year (e.g. dividends from shares).
The decision
The Court held that he had acquired these shares as part of a commercial transaction and the loss was on revenue account. The Court’s rationale for arriving at this conclusion was that he had a sophisticated retirement plan and his intention at the time of each acquisition was to dispose of them in the short term at a profit. Furthermore, he acquired the shares in a systematic fashion on numerous occasions and used his business acumen coupled with the knowledge of his external advisors to make his acquisitions.
ATO reaction
The ATO issued a decision impact statement following the decision and their view is that the case does not change their understanding of the principles established in Myer Emporium and the “finely balanced” conclusion was based on the particular facts of this case.
Our comments
The case highlights the continuing difficulty in the capital vs revenue distinction. This area of law falls within a grey zone where the outcome very much turns on the facts of each situation.
It is important to remember that the principles set out in this case (and in other capital vs revenue situations) apply across all classes of assets, including property. Therefore, the case highlights the importance of documenting and having a position on the rationale for treating a transaction one way or the other.
Whilst this is a great outcome for Mr Greig, we do wonder whether he would have argued these shares were held on capital account had there been a gain, meaning the gain would be eligible for the 50% CGT discount. If that was the case though, it is likely the ATO would be arguing the other way – such is the fine line between capital and revenue.
If you would like to discuss these issues in relation to your personal situation, please contact your Moore Australia advisor today.