Early in March 2020, the Full Federal Court handed down a decision in Greig v Commissioner of Taxation  FCAFC25 (Greig’s Case), which was a reversal of the Federal Court decision made during July 2018 where the taxpayer was unsuccessful in arguing the loss on selling shares was deductible on the basis he was in the business of dealing in shares.
These contrasting decisions highlight the need for critical comparison when attempting to rely on well-known case law principles, in this instance FCT v Myer Emporium Ltd  (Myer Emporium).
With the Full Federal Court decision not unanimous, it seems certain that the Commissioner of Taxation will appeal to the High Court for a final verdict.
The Myer principle, which was established based on the High Court in FCT v Myer Emporium Ltd (1987) 18 ATR 693 case, has been critical in determining whether income or expense amounts related to isolated transactions should be treated on revenue or capital account.
We summarise this principle in its simplest form:
A profit or gain 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.
Before this principle, any profit or gain from an isolated transaction may potentially be deemed to be on capital and not revenue, with the same being said for any losses or outgoings incurred in relation to such isolated transactions. This tended to turn out favourably for the ATO as losses of this nature would lead to capital losses, which are generally harder to recoup.
The decisions handed down via the Federal Court, and the Full Federal Court, ultimately relied on this principle.
Greig’s Case – The facts
In Greig’s case, the individual taxpayer was denied a deduction under ordinary deduction principles for losses incurred while trading in a single listed security. It was claimed that the trading undertaken was in accordance with a “Profit Target Strategy” that constituted a “business operation or commercial transaction”, and therefore aligned with the Myer principle.
The Commissioner rejected the taxpayer’s argument and contended that the losses were non-deductible, using the principle established in Myer as:
- the relevant transactions giving rise to those losses were not incurred in a business operation or commercial transaction; and
- the necessary “profit-making purpose” was absent.
Mr. Greig did not agree with this decision and consequently decided to take the matter to Court.
Federal Court verdict
The Federal Court ruled in favour of the Commissioner and disallowed the deduction. The Court accepted that even though a profit-making purpose was present, the hope or expectation that the shares would increase in value did not make the purchase of the shares a business operation or commercial transaction.
The Court noted that:
“Mr. Greig did not tender any contemporaneous documentation demonstrating that the Nexus shares were held on revenue account in a business of dealing in Nexus shares”.
Further, the shares held in Nexus were handled in identical fashion to other shares Mr. Greig had in his possession, which were managed through his advisors. Though “business records” were maintained by the advisors, these third-party records were for Mr. Greig’s tax accountants for preparation of his tax return and were not indications of Mr. Greig’s “existence of a business of his dealing in Nexus shares” but rather “the records were created by advisors in their business of providing services to Mr. Greig”.
The conclusion: “the Nexus shares were not acquired in a business operation or commercial transaction within the Myer principle, and a win for the Commissioner.”
Full Federal Court verdict
The Full Federal Court reached a decidedly different decision by the majority of the judges.
The frequency and repetition with which Mr. Greig made his share acquisitions were considered when applying the Myer principle. Not only did Mr. Greig make 64 separate acquisitions of Nexus shares, but he also acquired shares in other companies on 218 separate occasions. These other shares Mr. Greig generally held for a short period of time and “there appears to be no material difference between Mr. Grieg’s objective in acquiring Nexus shares” compared to these other shares.
Regarding the profit-making purpose, it was noted that: if Mr. Greig had realised a gain on the Nexus shares, as had been his intention from the beginning, “that gain could not have been properly characterised as a realisation of a capital asset”, and that “this would indicate that the loss that Mr. Greig in fact suffered was not on capital account”.
After consideration of the above, the ultimate verdict noted that Mr. Greig acted as a business person seeking a profit in acquiring his Nexus shares, and the activities undertaken were in the nature of a business operation or commercial transaction. Consequently, the principle laid down in Myer was adhered to, and the deduction on revenue be allowed.
The contrasting decision from each Court clearly demonstrates the uncertainty that surrounds whether a loss or outgoing is considered on revenue or capital account.
As the Full Federal Court was a majority decision, we believe that the Commissioner will seek to leave to appeal the case to the High Court, we eagerly anticipate what the final outcome may be.
For more information
If you have any questions or require further information, please contact your local RSM adviser today.