Why you need solid evidence to claim tax losses

The AAT said the taxpayer’s claim was based on his having been involved in a profit-making scheme which would have rendered assessable any profit he would have made on the sale of his shares. He claimed that he did not make a passive long-term investment in the company; rather, he undertook a scheme which involved the purchase of shares with a view to selling them at a profit.

In order to claim his deduction for the losses, the taxpayer had to satisfy a threshold issue that his intention or purpose in making the contributions to the company was to make a profit or gain. The AAT, however, said he failed to do this.

While the taxpayer asserted in an affidavit that he made the contributions so that he could make a profit or gain on the sale of the shares, the AAT said “that does not make it so”. This is because, even if the AAT was to accept the genuineness of the taxpayer’s assertion, a taxpayer’s subjective intention or purpose is not determinative of the issue. The intention or purpose of the taxpayer is to be measured objectively, by reference to the surrounding facts and circumstances. That is where the taxpayer’s case failed in the eyes of the AAT.

The AAT said the evidence in support of the taxpayer’s characterisation of the contributions was “unconvincing, and in many respects vague and unspecific”. The Tribunal considered there was a “distinct lack of commerciality” in the arrangements. It considered that several factors indicated the taxpayer was not involved in a profit-making scheme. For example:

• the contribution of the share advances was made over 16 months and there was no evidence that the company’s prospects started to improve after the first contribution, so as to justify some reasonable expectation of profit or gain from the later contributions;
• the circumstances, viewed overall, seemed to have a haphazard nature about them rather than the methodical, focused approach one would expect to see in a profit-making undertaking;
• there was no clearly articulated explanation of what the taxpayer might have expected to achieve from the undertaking.

The Tribunal’s view was that the evidence did not support the taxpayer’s claim that the contributions were made as part of a profit-making scheme or undertaking.

There is no doubt the losses were made, but the tax law provides that certain requirements have to be met before such losses can be properly claimed. The AAT’s decision is valuable in pointing that out.

Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.