Lecture 4

1. Lecture 4 Introduction to Tax Laws Income on Ordinary Concepts

2. 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

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Whitford Beach (1982):- • Mason J • size and scale of project • massive expenditure • Profit emerging basis of assessment - net profit not gross profit

13. Mere realisation cont.. • Statham (1989) • small scale development • no active role of taxpayer • pty not acquired for purposes of resale at a profit • capital

14. Mere realisation cont.. • Limited involvement of taxpayer • Active role of council in disposing of the land

15. 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

16. 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

17. 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

18. Know-how cont.. • Sec 6(1) definition of royalties • royalties are assessable as ordinary income and under Sec.6-5/15-20 ITAA 97

19. 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)

20. 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.

21. 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.

22. Consideration for restrictive covenants and trade ties • Employment Relationships - Higgs v Olivier - FCT v Woite • Business Relationship - Dickenson

23. CGT and Restrictive Covenants • CGT - CGT Event D1 - CGT Event H2 • Nb: Trades Practices Act