Capital gain versus revenue gain, again

17 December 2018

For people from NSW, any case that involves former Resources Minister Ian Macdonald, the ICAC and a coal mine in Doyles Creek will come with a lot of baggage. The ICAC’s Operation Acacia led to Macdonald and union official John Maitland both being jailed. Two businessmen were referred to the DPP for possible criminal charges; both were later acquitted. A recent decision, Ransley and Commissioner of Taxation [2018] AATA 4359, adds a tax dimension to the saga. While the colourful background no doubt adds an all-too-rare frisson to a tax practitioner’s day, the case should not be dismissed too quickly; it reveals some serious challenges for taxpayers wanting to claim the benefits of a rollover, utilise losses or enjoy a CGT discount.

So far as tax is concerned, the facts of the case were relatively simple:

  • The taxpayer acquired several parcels of shares in Doyles Creek Mining Pty Ltd between February 2007 and October 2009.
  • During 2009, the taxpayer sold some of her shares in Doyles Creek Mining Pty Ltd for a gain and some shares were transferred for nil consideration to the trustee of the family SMSF triggering a commercial loss.
  • In February 2010, the taxpayer transferred all her remaining shares in Doyles Creek Mining Pty Ltd (about 148,000 shares) to NuCoal Resources NL in exchange for 46.5m shares in NuCoal.
  • Between March and September 2010 the taxpayer sold the NuCoal shares in small parcels for proceeds totalling about $10m.

In her 2009-10 and 2010-11 tax returns the taxpayer took the position that:

  • the exchange of shares in Doyles Creek Mining for shares in NuCoal qualified for scrip-for-scrip rollover and so no tax was payable in respect of that transaction;
  • gains made on the sale of the shares in Doyles Creek in 2009 and the shares in NuCoal in 2010 were capital gains, and so:
    • she was entitled to apply a capital loss of $4m against the capital gains made in the 2009-10 year; and
    • she was entitled to enjoy the 50% CGT discount on the gain on the sale of the remaining shares in Doyles Creek and NuCoal.

The ATO took the rather different view that the net profits should be treated as ordinary income and this meant:

  • the share exchange triggered ordinary income, and tax on this income was not deferred because scrip-for-scrip rollover only eliminates a liability to CGT;
  • the gratuitous transfer of some of the shares which triggered a loss generated a capital loss (as she had reported), not a revenue loss;
  • that capital loss could not be applied to reduce the amount of the revenue gain and had to be carried forward to future years; and
  • the positions taken in her tax return was not only not reasonably arguable, it was actually "reckless" exposing her to a penalty of 50% of the tax shortfall.

The ATO’s positions were upheld on the basis that the taxpayer "failed to discharge her burden of proof…" Jagot J commented on the taxpayer’s credibility with her evidence being described as "evasive and unbelievable… unreliable… in many respects, untrue, inaccurate and incomplete… unconvincing… unpersuasive…" leading to a finding that, "evidence… about their intentions at the time they acquired and disposed of the shares in question cannot be accepted." Evidence given by the taxpayer’s husband was viewed in the same light. Their behaviour appears to have coloured almost every aspect of the case.

But if one ignores the colourful background and the judge’s obvious dissatisfaction with the evidence, there are nevertheless some troubling implications arising from this case.

First, the case continues the trend we have seen in cases such as Greig (discussed in our Riposte available here) for the ATO to challenge classification of a gain as a capital gain. Any investor with a penchant for investing in start-up companies, small cap firms, IT projects or any speculative type of investment should be concerned if they are expecting to enjoy capital treatment. And taxpayers who are hoping to defer tax on the big pay-off when their small speculative minnow is bought by the industry giant and they are paid in shares may find themselves disappointed.

Secondly, the ATO’s enthusiasm for capital treatment may not always be even-handed. The ATO won its argument that the loss on the shares given away was capital in nature, a conclusion which seems more than a little at odds with the treatment of the rest of the shares in the same company: if the taxpayer really did have the intention of buying and selling the shares at a profit, why was the loss on these shares not dealt with on the same basis? The reasoning for this conclusion is mystifying. The judge says the transaction in these shares was different because, "the acquisition of these shares was made to capitalise [the company] in circumstances where Westpac indicated that it would not meet [the company’s] expenses and would liquidate the company."  The logic of the passage is, if a shareholder subscribes for shares because the company desperately needs money, the shareholder is now making a capital transaction. This position is curious to say the least. And it is interesting that the ATO accepted the loss for tax purposes – this was a gift to an entity associated with the taxpayer – but there is no explanation about why the transaction was not repriced to market value.

Thirdly, for companies, which typically are not especially bothered to interrogate capital or revenue classification, the case is a reminder that the ATO will be interested in the classification since it is the means to defeat the benefit of rollovers and the ability to utilise capital losses.

Finally, the ATO’s win on the level of penalty is most surprising. The idea that any capital v revenue dispute is so clear that only someone who is ‘reckless’ will not get the right answer is demonstrably wrong. Capital v revenue classification is right up there, alongside the same business test and "dominant purpose" in Part IVA, in the pantheon of unpredictable rules. But the approach of Jagot J was to focus on the taxpayer’s failure to provide her tax agent with complete and accurate information: "her failure lies somewhere between deliberate dishonesty and gross carelessness." No doubt her instructions were inadequate but her offence depends upon her tax position, not in whether she gave adequate instructions. To put this the other way, there is no penalty for a taxpayer who gives inadequate instructions but happens to pay the right amount of tax. However much she concealed from her tax agent, her substantive position was not, with respect, so obviously wrong that to take it was being reckless.

The Ransley case is a reminder that taxpayers cannot always safely assume the capital gains discount applies even where an asset is held for 12 months. There is always a chance that the ATO may challenge that the asset is held on revenue account and thus deny access to all capital gains tax concessions.



Andrew White



Michael Moschner

Special Counsel


Professor Graeme Cooper