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

CGT and Restrictive Covenants

• CGT

- CGT Event D1

- CGT Event H2

• Nb: Trades Practices Act