In its decision, the Federal Court found that the losses were on capital account, noting that although the taxpayer had a profit-making intention when acquiring the shares, they were not acquired in a “business operation or commercial transaction”.

Further, the majority of the Full Federal Court, “after much hesitation”, allowed the taxpayer’s appeal, finding that the losses were on revenue account.

Mr Heinemann said the gains from the mere realisation or change of an investment are not ordinary income; however, a profit derived (or loss incurred) by a taxpayer in carrying out a business or profit-making undertaking will be on revenue account, with a gain or loss arising from a profit-making undertaking if:

1. the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain; and
2. the transaction was entered into in carrying out a “business operation or commercial transaction”.

Even though the court acknowledged that an ordinary private investor may not have the same knowledge and experience as the taxpayer in this case, Mr Heinemann said less sophisticated taxpayers who acquire investments such as shares or property in a systematic and business-like manner are at greater risk of having any gains from the investment taxed on revenue account.

“The risk is heightened where the shares are expected to be sold for a profit, without any intention of dividend yields or long-term capital growth,” Mr Heinemann said.

“Taxpayers and advisers should remember that the mere realisation of an asset to the best advantage does not constitute a profit-making undertaking. In each case, the question is whether the taxpayer had a profit-making intention and whether the taxpayer’s activities were the kinds of things a ‘business person’ would do in acquiring assets to obtain a profit on their sale.”