Capital vs Revenue Distinction – Greig v FCT

Home>All>Capital vs Revenue Distinction – Greig v FCT

The capital vs revenue distinction remains a murky area to navigate, however the recent decisions in Greig v FCT provides some guidance on the factors relevant in determining this distinction.

In Greig v FCT [2020] FCAFC 25, the Full Federal Court allowed the taxpayer’s appeal allowing the taxpayer to a deduction under s 8-1 of the ITAA 1997 for share losses of $11.85 million and legal fees of $507,198.

The Facts of the Case

The taxpayer invested substantially in the share market, often based on the advice of stockbrokers and financial advisors. The taxpayer’s investment approach was to generate profits over a short-term period from investments in the mining, energy, and resource sectors.

Between March 2012 and May 2014, the taxpayer made 64 separate purchases shares in Nexus Energy Ltd (Nexus) for a total sum of $11,851,762.

In 2014, Nexus appointed voluntary administrators. The taxpayer incurred a loss of $11,851,762, when the Nexus shares he had acquired were acquired by the administrators of Nexus.

The taxpayer incurred a further $507,198 in legal fees incurred arising out of Nexus’ voluntary administration.

The taxpayer contended that the Nexus share losses and legal fees were of revenue character and deductible under both limbs of s 8-1 of the ITAA 1997.

While the taxpayer accepted that he was not generally engaged in a business of trading in shares, he relied on the Myer Emporium principle and argued that his trading in the Nexus share losses were incurred in a ‘business operation or commercial transaction’ of a kind contemplated in this principle.

In Myer Emporium, it was held that a loss or outgoing incurred in gaining or producing assessable income is deductible if that loss or outgoing is incurred in a ‘business operation or commercial transaction’ entered into with the purpose of deriving profit or gain.

The Federal Court Decision

The primary judge held that the losses and legal expenses were not of a revenue nature and as such, were not deductible.

While the Court agreed that the taxpayer had a profit-making intention when buying the Nexus shares, the Court found that the taxpayer’s acquisition of the Nexus shares was a private investment in listed shares and was not part of a ‘business operation or commercial transaction’.

The taxpayer appealed this decision to the Full Federal Court.

The Full Federal Court Decision

A majority of the Full Federal Court allowed the taxpayer’s appeal.

The majority found that the taxpayer acted as a person who would seek to obtain a profit on their sale and therefore, the taxpayer acquired these shares in a ‘business operation or commercial transaction.

The factors relevant were that the taxpayer:

  • engaged professional help;
  • researched and monitored the value of his shares;
  • used his own business knowledge to acquire more shares;
  • pursued a plan to exploit the unrealised value of Nexus’ interest; and
  • took steps to defend the value of his investment in court.

It was held that the taxpayer’s activities in share trading were ‘entirely commercial and business-like’. The judges held that the Myer Emporium principle was satisfied and that the share losses and legal fees were deductible under s 8-1.

It will be interesting to see if the Commissioner seeks special leave to the High Court to overturn the Full Federal Court decision.

Should you have any questions in relation to the above, please contact Gaurav Chitnis.

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