Lecture 4 Introduction to Tax Laws Income on Ordinary Concepts.
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Transcript of Lecture 4 Introduction to Tax Laws Income on Ordinary Concepts.
Isolated Transactions
• Myer– ME business - retailer, here financing t/a– sold pty to sub for lump sum to be repaid at
interest– assignment of income stream to Citicorp for
approx. $45M
Isolated Transactions
• Myer - High Court held it was income– Isolated business or commercial transaction– Entered into with the intention or purpose of
making a profit or gain
• Potential Issues– are all receipts of a business ordinary income?
Isolated Transactions
• Post Myer Case– Moana Sands (1988)
• dual purpose of acquisition - sand mining and potential resale at a profit
• compulsory acq’n by Govt
• profit assessable as ordinary income - even though profit realised by a different means to that intended.
• Ct said sufficient fulfillment of the profit making purpose
Post Myer Cases
– Spedley Securities• Merchant bank engaged to raise finance
• cancellation of agreement re finance raising
• capital receipts
• evidence that SS’s reputation (goodwill) may have been damaged.
• Part of receipt may have been for commission- but non-distinguishable portion- McLaurin & Allsops principle applied
Post Myer Cases
– Westfield (important case)• taxpayer’s business “constructing,designing,letting
and managing shopping centres”
• acquired options over certain land - option exercised
• purpose - was to hold land as part of “land bank”
• land sold at a profit
• capital amount
• redefinition of Myer
Post Myer Cases
• Hill J - Where t/a is outside the ordinary course of taxpayer’s bus. - profit not income unless:– transaction of commercial or business nature– at the time of entering into the t/a - taxpayer
had a profit making intention– taxpayer did profit by the means which it
intended to profit
TR 92/3 - Profits from an Isolated Transaction
• TR92/3 -– Para 6 - general rule– para 7 - objective analysis of a subjective
purpose– para 13 - when does a t/a have bus or
commercial character– potential discrepancy - para 14 and Westfield
Mere Realisation vs Carrying on a Business• Property development focus:
– Californian Copper Syndicate (1904) (UK)
• acquisition of copper bearing land
• land sold in exchange for shares in the purchaser
company
• LJ Clerk * comments in study guide
• income - speculative business
Mere Realisation cont..
– Scottish Australian Mining (1950)
• land acquired for a coal mining purpose
• after coal expired - active dev’pt activity
• tp’r constructed roads, a railway station and set side
land for school,church and park
• “mere realisation in an enterprising way”
• Not good authority after Westfield
Mere Realisation cont..
– Whitford Beach (1982)
• land originally acquired for purposes of access to
beach
• new owners - change of M + A -change of purpose
• Gibbs J
– focus on shareholders intentions/purpose re acquisition of
shares
– more than mere realisation
• Whitford Beach (1982):-
• Mason J– size and scale of project– massive expenditure
• Profit emerging basis of assessment - net profit not gross profit
Mere realisation cont..
• Statham (1989)– small scale development– no active role of taxpayer– pty not acquired for purposes of resale at a
profit– capital
Mere realisation cont..
• Limited involvement of taxpayer
• Active role of council in disposing of the land
Trading on Know-how
• General Principles - know how can be a capital
asset of a business
– once for all disposal vs trading on know how.
– Evans Medical
• pharmaceutical business in Burma
• extinguishment of business
• capital
Know-how cont..
– Rolls Royce
• large number of agreements to sell know related to
airplane engines etc.
• amounted to expansion of business of taxpayer
• repetition of activity
• income
Know-how cont..
• Murray– exclusive license arrangements – taxpayer gave up rights to conduct business in
those countries– capital
• Consider Capital Gains Tax (CGT)– CGT Event K1– definition in Div 373
Know-how cont..
• Sec 6(1) definition of royalties
• royalties are assessable as ordinary income and under Sec.6-5/15-20 ITAA 97
Compensation for contractual losses• General Principles - what is the comp’n for?
– Capital assets of business v lost profits– Californian oil products (payment for cessation
of agency business - capital)– Cf: Heavy minerals (payment for cancelling a
trading contract - income)
Compensation for Contractual Losses
• When is a contract part of the business structure?– Van Den Bergh
• contracts formed part of the structure of the business
• “the contracts were not ordinary commercial contracts but related to the fundamental structure of the profit making business”
• Question of Degree - Allied Mills Industries– these contracts had no element of permanence about
them.
Income Substitution Payments
• Phillip’s
– MD of a theatre company for a period of 10 years.
Contract cancelled after 6 years.
• Myer
– The receipt of the interest income would have
been assessable anyway.
Consideration for restrictive covenants and trade ties• Employment Relationships
- Higgs v Olivier
- FCT v Woite
• Business Relationship
- Dickenson