Taxpayers like to return gains on assets held for longer than 12 months on capital account because of the 50 per cent CGT discount, but they want losses on the income account to offset against other income. This is highlighted in the case Executor of the estate of Osborne v FC of T [2014] AATA 128.
The facts
- In September 2000, at age 82, Mrs Osborne appointed her nephew, Mr Prentice, under a general power of attorney, to manage her portfolio of shares. The value of the portfolio at that time was $1.3 million.
- Mr Prentice managed the portfolio until about July 2007, when a company he incorporated began managing the portfolio. By 30 June 2008, the portfolio had grown in value to $4 million. For all years up to 30 June 2008, the gains and losses from the sale of shares were returned on capital account.
- In 2009, significant losses were incurred, and by the time of Mrs Osborne’s death on 16 July 2010, the portfolio was valued at $1.75 million.
- The 2009 tax return disclosed a loss trading in shares of $790,000, along with franked and unfranked dividends of approximately $103,000.
- Although there was some dispute about whether the 2010 tax return had been authorised for lodgement, sales of shares were returned on capital account.
The issue
Simply put, the issue was whether the loss on share sale transactions in 2009 was deductible under Section 8-1 of the ITAA 1997. To determine this question, the taxpayer has to pass the threshold issue: was there a business of share trading?
Decision
The Administrative Appeals Tribunal found that the taxpayer did not carry on a share trading business and the losses were on the capital account.
Of critical importance was the intention of Mrs Osborne and the agency created by the power of attorney. Mrs Osborne had granted the power of attorney while in a nursing home. There was no sign that the elderly Mrs Osborne intended to carry on a share trading business or that she intended Mr Prentice to carry on such a business as her agent. Despite the wide authority held by Mr Prentice, it had to be viewed in the context in which it was given. It was given by an elderly lady relying on the capital and income to meet her needs in the nursing home.
The other facts of the case did not point to a business being carried on when viewed in light of the indicia of a business. These indicia included:
- The interposing of the company incorporated by Mr Prentice was irrelevant to the issue to be decided.
- Historically, the tax returns were prepared treating the share transactions on capital account.
- There was little difference to the activities undertaken in the 2009 year, when compared with earlier years.
- A substantial amount of dividend income was received in the 2009 year.
The bottom line
Advisers should be very careful and wary with clients attempting to characterise an investment activity as a business activity in order to obtain a tax advantage, especially when the recharacterisation is made with hindsight.
