Family taxable on share trading activity
Decision date: 21 October 2005
Case: Dowell & Ors as trustee for Estate Frank King Brenda King & Ann King v The Commissioner of Inland Revenue
Act(s): Income Tax Act 1976
Keywords: Business, share trading, dealing, purpose of re-sale, agency
Summary
A family was taxable on the gains on share transactions undertaken by their stockbroker on their behalf. Such activity was to meet a set monetary rate of return demanded by the family.
Facts
This was an appeal from the TRA. The TRA case is Case W43 (2004) 21 NZTC 11,403.
The taxpayers are a family with off-shore investments, the management of which was left entirely to their broker in England. The only instruction the broker had was to achieve a return of £1,800 per month to the family (£600 each). The taxpayers had no interest or regard in how this was achieved.
In late 1984 the investments were placed into a company based in Jersey. The family purportedly sold their investments to the company and advanced a loan to the company to pay for the investments, which was to be repaid at £1,800 per month. The investments were held in three accounts which were never to be mingled and the expenses of which could only be paid from the account to which it related. There was an administration agreement which effectively retained control of the funds in the hands of the family.
Considerable buying and selling of shares occurred in the relevant period (1989 to 1990 income tax years) but there was no change in the arrangements before and after the investments were moved into the company.
The TRA concluded that there was no taxable income from the share activity as there was no agency between the sharebroker and the family, the broker was not in business and the onus was on the Commissioner to prove the broker's intentions at each transaction. The TRA did conclude that the company held the shares as bare trustee for the family.
The Commissioner appealed the TRA decision regarding the share business or trading and the onus of proof issue. The taxpayers appealed the finding that there was a bare trust.
Decision
Justice Hansen allowed the Commissioner's appeal and dismissed the taxpayers' cross appeal.
He quickly rejected the TRA's conclusion that the Commissioner had any onus of proof upon him saying:
"In the first sentence cited [of paragraph 133] it appears the Authority is acknowledging there is an onus on the taxpayer. But the judge then immediately transfers the onus on the Commissioner to identify the individual share parcels that the Commissioner maintains were purchased with the object of resale. That onus is on the Kings, and not the Commissioner...."[paragraph 89]
He also quickly affirmed that the share broker was the agent for the taxpayers. He derived particular assistance from A M Bisley & Co v The Commissioner of Inland Revenue (1985) 7 NZTC 5,082 at 5,088 and then went on to say:
"the fact they themselves [the taxpayers] did not carry on the business of share trading cannot in my view allow them to avoid the consequences of the actions of their agent….The appellants chose to effect and manage their investment portfolio in its entirety through the agency of [the share broker]. The fact the Kings did not give express instructions... to buy and sell shares does not in my view make it legally impossible for him to be in the business of buying and selling investments"[paragraph 94]
Of relevance was the fact the only instruction (to earn £1,800 per month) was only possible if there was profitable sharetrading: interest and investments alone would not achieve this level of return. Justice Hansen saw this case as akin to the earlier decision in Piers v The Commissioner of Inland Revenue (1995) 17 NZTC 12,283.
Turning to the basis of assessment, Justice Hansen first considered section 65(2)(a) and whether the taxpayers were in business. Citing Grieve v The Commissioner of Inland Revenue [1984] 1 NZLR 101, he considered the facts surrounding the share activity and, in particular, its continuity and extent. He also criticised the TRA for failing to make an objective consideration of the circumstances (at paragraph [123]) and concluded there taxpayers were engaged in a business [paragraph 125].
Looking at section 65(2)(e) first limb (business of dealing), Justice Hansen reiterated the similarity of this case to Piers and noted there was a two-fold test to the section application: was the taxpayer conducting a business of dealing in personal property and secondly whether the property in question was part of that business [paragraph 129]. He noted that this section and section 65(2)(a) did overlap but section 65(2)(e) was more objective with the focus on the extent and frequency of the activity more than the purpose or motive for the activity [paragraph 137 and 141].
Justice Hansen then considered section 65(2)(e) second limb (property purchased for the purpose of resale) and again rejected any suggestion that there was an onus of proof on the Commissioner. Citing National Insurance (1999) 19 NZTC 15,135 and National Distributors (1989) 11 NZTC 6,346 it was concluded that in the circumstances the necessary inference on the subjective and dominant purpose of the sharebroker in trading the shares was that the shares were purchased with the purpose of re-sale [paragraph 153].
Dealing with the cross appeal upon whether or not the company was a bare trustee for the taxpayers, Justice Hansen considered the evidence was clear that the investments remained beneficially owned by the taxpayers and that the TRA was correct in this conclusion [paragraph 159 to 162].
Justice Hansen did note the taxpayers relied upon professional advice in structuring their affairs and asked the Commissioner to bear this in mind when considering penalties [paragraph 173].
Date published: 10 Oct 2006
Back to top